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Wednesday, November 13, 2019

Class actions will test DOL's new fiduciary rule, attorney says

By Jessica Karmasek | May 2, 2016


WASHINGTON (Legal Newsline) - The U.S. Department of Labor’s highly anticipated final fiduciary rule, designed to help ensure Americans saving for retirement get sound investment advice, creates an opportunity for plaintiffs attorneys to test the rule's meaning by filing class action lawsuits, a Tennessee defense attorney says.

Chris Thorsen, a partner in the Nashville office of Bradley Arant Boult Cummings and who heads the firm’s Business and Securities Litigation Practice Team, said the DOL’s final rule, while well-intentioned, will more than likely end up hurting investors and attracting plaintiffs attorneys looking for new business.

“I lived through the mortgage crisis and did enough work with mortgage servicers,” Thorsen told Legal Newsline, “and this is, in many ways, very similar.

“In that case, you had so many lawyers filing lawsuits just because there wasn’t any clear guidance, and because it was new, and because they knew banks and mortgage companies were in a real state of flux.

“Here, you have something that’s completely brand new; there’s no case law to look at. So what does that mean? It means it’ll be open season, for a period of years, for lawyers to take on these cases and test the rule’s meaning. [Plaintiffs attorneys] know it’ll be expensive for defendants, and they’ll take advantage of that.”

Last month, the DOL announced its final fiduciary rule, sometimes referred to as the conflicts of interest rule. The rule mandates financial professionals who service individual retirement accounts, including IRAs and 401(k) plans, to serve the “best interest” of the savers and disclose conflicts of interest.

Typically, investment brokers get paid when their customers agree to invest with certain companies.

The rule has been years in the making and was the subject of a DOL press call last month. During the call, Secretary of Labor Thomas Perez called it a win for the middle class.

“At its core, this rule ensures retirement savers get investment advice in their best interest,” Perez said. “If that sounds like it is obviously the right thing to do, that’s because it is.”

The American Association for Justice, formerly the Association of Trial Lawyers of America, praised the rule in a statement by CEO Linda Lipsen.

“Too many working families have lost their hard-earned retirement savings after relying on a financial advisor who deliberately sold them poor investments more geared toward the advisor’s bottom line than the investor’s financial success,” she said.

“The Department of Labor rightly moved to require that financial advisors give clients advice that is in their best interest, not anyone else’s.”

As Thorsen explained, the basic structure of the fiduciary rule is that financial advisors and institutions are not permitted to receive payments creating conflicts of interest with their retail retirement investors without meeting a prohibited transaction exemption.

In other words, without the exemption, firms cannot continue to set their own compensation structures, he said.

This prohibited transaction exemption is referred to as the Best Interest Contract Exemption, or BICE. An advisor or firm who wishes to receive compensation that would otherwise be prohibited must meet the proposed BICE.

“Some argue that some of the smaller to mid-size firms are really going to be hit hard because [the rule] requires so much more compliance, so they’re going to pull out altogether, leaving only the bigger firms and giving investors less to choose from,” he said.

To make matters worse for firms, Thorsen said, an investment contract now cannot have a no-class action provision.

“It used to be, when you went and signed up with an investment advisor, you had to sign an arbitration clause,” he explained. “But now, under this rule, your contract can’t have that provision in it.

“So all of these plaintiffs lawyers who have never been able to aggregate these claims will be able to with the implementation of this rule and that means huge, huge business for them.”

Thorsen, who represents businesses and individual directors and officers in so-called “bet-the-company” litigation and arbitration matters, admitted investors need better protections. But he isn’t sure the new DOL rule is the answer.

“All in all, I can’t say that I like it,” he said of the final rule. “My thoughts are really in line with SIFMA’s (Securities Industry and Financial Markets Association) initial point, which is: I think we all think more needs to be done to protect investors, particularly investors who are saving for retirement and about to reach retirement.

“But the rule and process by which it was proposed, I think, creates a lot of uncertainty and it certainly creates a lot of risk. It certainly could chill the industry and provide investors with fewer options, and, ultimately, we don’t know what the increased litigation risk will be.

“But I assure you, whatever the cost, it will be passed onto the customer. That’s just how capitalism works. With any increased litigation risk, there is an increased litigation expense. And if you’re adding a big expense like that into the system, then it’s going to make it more expensive for customers to get the advice they need.”

SIFMA President and CEO Kenneth E. Bentsen Jr. said last month his group was disturbed by the final rule.

“SIFMA has long supported a best interest standard for all advisors, yet we remain concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done,” he said in a statement.

“While we continue to believe the Department’s methodology is greatly flawed and lacking sufficient empirical basis, a poorly drafted rule could result in unnecessarily raising costs for investors while limiting their choice, a concern shared by many commentators and other regulators.”

A group of U.S. Senate Republicans expressed similar worries.

Sens. Johnny Isakson, R-Ga.; Lamar Alexander, R-Tenn.; and Mike Enzi, R-Wyo., have introduced a resolution to stop the DOL from implementing the final rule, arguing it will have “devastating effects” on retirement planning by families and small businesses.

Isakson, Alexander and Enzi, on April 18, filed a resolution of disapproval under the Congressional Review Act.

“Like so many of this administration’s decisions, their new fiduciary rule harms the very individuals it seeks to protect and prevents those hardworking Americans who are trying to plan for retirement from having the opportunity to access retirement advice,” Isakson said.

Alexander agreed, arguing that retirement planning will be available only to the rich under the rule because many financial advisors won’t risk the new legal liability except for clients with big accounts.

“Congress needs to overturn this rule before it cripples low- and middle-income Tennesseans’ access to affordable retirement advice -- and forces them to work longer and retire with less,” he said.

Enzi said he is concerned the new rule will cut off access to advice.

“This rule is a solution in search of a problem,” he said. “Right now a kid with a paper route, a family with some savings or a small business looking to help their employees can get retirement planning advice from an advisor without much hassle.

“We already have financial literacy problems and this rule could stifle access to the good information already available, hurting the exact people that the rule is supposedly designed to serve.”

If approved, the resolution of disapproval would allow Congress to stop the DOL from implementing the rule.

The final rule will begin to take effect in part by April 2017, with full implementation set for January 2018.

A resolution of disapproval only needs a simple majority to pass and cannot be filibustered or amended, if acted upon during a 60-day window. The resolution of disapproval also must be signed by the president. Congress can overturn a veto with a two-thirds vote in both the Senate and the House.

Isakson is the lead sponsor of the resolution of disapproval.

From Legal Newsline: Reach Jessica Karmasek by email at

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Organizations in this Story

U.S. Department of LaborAmerican Association for JusticeBradley Arant Boult Cummings LLP