The U.S. Department of Labor (DOL) has proposed new rules governing when financial advisors become fiduciaries for certain benefit plans.
Patrick DiCarlo, counsel in Alston & Bird’s ERISA Litigation Group, said that he expects the proposal will keep him busy “for years,” noting that the proposal falls short of factoring in prospective litigation costs, which will be inevitable and significant.
“It’s a no-brainer,” DiCarlo said. “The proposal provides an arena to sue that didn’t exist before.”
At the heart of the proposed rules is a new best interest contract exemption, which would allow for conflicts of interest between the investor and the firm and individual offering advice to remain, as long as the adviser agrees contractually to meet the fundamental obligations of fair dealing and fiduciary conduct.
DiCarlo points out that this exemption could spark class-action claims against broker-dealers who provide fiduciary investment advice to retirement plan participants.
“Like litigation in general, some claims will be more merited than others,” DiCarlo said, adding that he doesn’t fault the DOL for failing to incorporate potential litigation costs into its analysis.
“Even accurately estimating the costs to litigate one case is hard to do. Trying to do so for a whole new potential species of ERISA claims – that’s virtually impossible,” DiCarlo said.