State-level litigation against brokers could begin to ramp up next year, if the Department of Labor’s best interest contract exemption rule goes into full effect, reports Ignites.
An increase in lawsuits in all 50 states would be expected, since the new written agreements could lay the grounds for breach-of-contract claims from IRA investors, several lawyers at Goodwin Procter said during a recent presentation.
“We could potentially see these cases brought against anyone relying on BIC since BIC requires a written contract for IRAs (i.e., non-ERISA plans),” says Goodwin partner Jamie Fleckner in an e-mail response, following the panel presentation. “If other types of plan service providers were relying on BIC, they would be potentially subject to such state court breach of contract claims as well.”
At present, advisors working with clients’ retirement assets on a commission basis will be required to start using the contracts on January 1. Complicating the matter is that laws vary by state and some states are even considering their own fiduciary rules for advisors. Nevada is the first to move forward with a such a requirement, which goes into effect July 1.
“There are certainly a number of differences among the state courts which will affect how litigation there proceeds,” Fleckner states. Those differences include better-developed laws in some states, including those that determine what qualifies for class action status. Other factors include whether states have dedicated business litigation sessions and the composition of judges and juries, he states. “I expect that, if the BIC contract requirements go into effect in 2018 and plaintiffs’ lawyers test contract claims, we will also see them test different jurisdictions for their claims.”
In states that put laws on the books overlapping with provisions in the BIC, things could get murky.
“Erisa has a broad preemption clause that precludes the application of certain state laws that relate to employee benefit plans, like retirement plans,” Fleckner states. “But because the BIC is designed to allow private suits as to IRAs, which are not otherwise covered under Erisa’s private enforcement regime, aspects of litigation under Erisa — like preemption and federal court jurisdiction — may not be available.”
Indeed, the BIC exemption does not preclude plaintiffs from pursuing claims under state law, says Jason Roberts, CEO of the Pension Resource Institute, in an e-mail response.
“The plaintiff could allege a breach of [the BICE] contract claim and [simultaneously] allege a breach of fiduciary duty under applicable state law,” he states.
However, for clients with plans covered under Erisa, it could be recommended that service providers draft disclaimers to accompany certain communications, such as responding to a request for proposals, said Goodwin partner Scott Webster during the webcast.
It could be useful for firms to explain in writing that they are not acting as fiduciaries in certain circumstances, he said.
“People should consider doing more disclaimers,” he said. “There are going to be more opportunities … to think about what communications you’re having with Erisa plans and if there is an opportunity to do a broad disclaimer.”
But the future of the fiduciary rule and the accompanying BIC exemption is anything but certain. The Department of Labor is currently evaluating the rule under the directive of President Donald Trump. That process could result in the agency’s potentially revising its provisions or scrapping it altogether.
Further, there have been four lawsuits filed in attempt to block the fiduciary rule, three of which the DOL has won through summary judgment, though those cases are currently in the appeals process. The fourth lawsuit, which was filed by Thrivent Financial, has motions for summary judgment being briefed, Goodwin Procter lawyers noted during the presentation.
The other three lawsuits were brought by the U.S. Chamber of Commerce, Market Strategy Group and the National Association of Fixed Annuities.
“The courts have denied requests for injunctions,” said Dave Rosenberg, Erisa litigation associate at Goodwin. “It’s likely we’ll see a ruling in the Chamber of Commerce case before Jan 1, 2018.”
But even if the BIC exemption takes full effect beginning next year, mandatory arbitration could be baked into contracts.
“Breach of contract claims are typically brought in state court, however, nothing in the rule prevents a financial institution from requiring individual claims (vs. class actions) to be arbitrated,” Roberts says. “That said, there is always the chance that a plaintiff/claimant could file in state court and the defendant/respondent would have to seek to compel the court to send the claim to arbitration.”
Published by Life Annuity Specialist June 26 2017
Written by Emile Hallez