and the DOL's new Fiduciary rule

The impact of the new DOL fiduciary Rule

MyComplianceOffice presents our guest hosts from Sutherland Asbill and Brennan, LLC as they discuss the DOL's new fiduciary Rule and its potential impact.



Brian Rubin

Brian is the Washington office leader of Sutherland’s Litigation group and the Administrative Partner in charge of the Securities Enforcement and Litigation Team. Brian previously served as Deputy Chief Counsel of Enforcement at NASD (FINRA) and Senior Enforcement Counsel at the SEC.


Andrew McCormick

Andrew McCormick is a Litigation Associate at Sutherland and represents financial firms in investigations, enforcement actions, and civil litigation.


 You can download a full copy of the slides from this webinar.



Full video transcript available below:

We're going to now do a brief overview of the DOL fiduciary rule. Something to note, Sutherland has a lot of brilliant attorneys who are looking at this rule a lot and publishing a lot of articles and guidance about this area. We have a great resource, that the website is, and tons of helpful resources here. The rule itself and all the rule-making comments are tens of thousands [inaudible 00:39:24] we have 17 minutes, so we will do a very light overview of some of the key areas, and then Brian will be talking about some of the potential enforcement and litigation takeaways from that.

Many of you know that just this year, a few months ago, the DOL came out with its expanded investment advice fiduciary rule, and this new rule greatly expands the circumstances under which service providers will be considered ERISA fiduciaries. This is a fundamental change for the industry. Now broker/dealers are becoming subject to ERISA's fiduciary law if they provide what the rule defines is a recommendation to an IRA investor. Here we have tens of thousands of pages of rule-making summed up in a very, very, very basic chart that is looking at existing law and what the law will look like once this law is in effect.

Previously, things were simple. The fiduciary standard did not generally apply to broker/dealers absent very limited circumstances such as exceptions in state law. Investment advisors were fiduciaries under the Investment Advisory Act. Then the fiduciary duty standard applied to advice given with respect to the investments in the account that the advisor manages for a fee. That's kind of the first block where you see 1 out of the 4 options marked fiduciary.

Now, under the new rule that is slated to go in effect next year, both BDs and IAs are ERISA fiduciaries both with respect to the selection of an account, most commonly an IRA rollover, and when providing recommendations or advice regarding the selection of the investments in the account. That sums up you can be a fiduciary in very basic terms in this slide. Then we'll turn to the next slide.

The goal of this slide is just to show all the different ways that potential breach of fiduciary duty issues may come about. There's a lot of colors, a lot of arrows, a lot of things that could potentially go wrong that are detailed in-depth within the rule, and you can find more information, again, at This here is just a colorful graphic of the potential fiduciary duty issues that are out there. If we can go to the next slide.

Again, just to sum up this quickly, the best interest contract exemption is one of the key focus areas of the new rule, and it's probably gotten a lot of attention from all of you at your firm. This rule essentially creates a private right of action which did not exist before under ERISA through the best interest contract exemption for IRA owners against broker/dealers and investment advisors who are relying on that exemption to receive compensation. For a fiduciary to receive compensation under this new rule, it must in many circumstances enter into a best interests contract. This best interests contract is a written contract between a BD or the IA and an ERISA or non-ERISA plan owner, which explicitly, so we have a few specific things that's required. The contract must acknowledge the fiduciary status. It must commit the BD or IA to acting in the best interests of the retirement investor without regard to compensation. It must spell out the compensation received. It must describe any material conflicts of interest, and it must also provide certain express warranties, and it may not contain a class action waiver provision.

The best interest contract exemption is probably subject to thousands of pages of commentary, and here's our 1-page slide kind of trying to sum it up as quickly as possible, and again, we have a lot more resources out there. If you have any questions, please reach out to us. Now, I'll turn it over to Brian to talk about some of the potential litigation and enforcement ramifications of this new rule.

Thank you. Let's go to the next slide. As Andrew said, we're doing sort of a light touch here, so I'll be talking about litigation issues, possible litigation, and possible enforcement issues as well. The reason why we're talking about these now is not only do firms have to figure out how they're going to comply with the rule in terms of disclosures, in terms of procedures, but they should also be thinking about litigation risk and writing their story now about how they are complying with these issues because when there is litigation, there's going to be a lot of discovery. "Why did you say this in the BIC?" for example. "Why did you make this disclosure, or why didn't you make this disclosure?" Firms should be thinking about how that's going to come out in the future, if a class-actions are filed, if folks are deposed, how they're going to end up testifying about what they did. That's part of what firms should be thinking about now, not just how to comply but what their story is if there is litigation.

Now, one of the things that has been mentioned is that one of the key elements to this rule is that it will be enforced through litigation, through arbitrations, and also through class-actions. What we did here is we're sort of focusing on some of those issues and what the litigation may deal with. There is 5 or so areas that the litigation may cover. One is excessive fees. The fees have to be ... There has to be reasonable compensation, so the argument in litigation will be that the investor was placed in a product more expensive than an alternative, for example.

A second issue is improper differential compensation, and that issue deals with looking at the compensation that the BD or the IA or the reps received and how it influenced their recommendation and the plaintiffs will be looking at commissions, trails, 12b-1s, revenue sharing, indirect compensation like award trips, non-cash comp, things like that.

The third issue is conflict of interests. Again, it relates to allegations that the recommendation was driven by a compensation. There could be issues dealing with proprietary products, why they were offered, why they were sold, and policies and procedures should be addressing conflicts of interest.

Fourth is imprudent investment advice, types of investments recommended, and their performance will be focused on, so it's analogous in a lot of ways to what FINRA looks like in terms of suitability now. It's analogous to arbitrations with FINRA, with broker/dealers where the claimants allege a breach of fiduciary duty even though the firms and the registered reps would say, "No, there was no fiduciary duty. We were just acting as reps and as broker/dealers." Then the last issue is a breach of contract. Again, with the BIC, whether you were complying with what you were said you were going to do, whether there were improper disclosures or a failure to meet one of the requirements. We expect that there will be a lot of litigation, both arbitrations and class-actions with the new DOL rule.

Go to the next slide. There's also going to be enforcement implications. The Department of Labor has a fairly aggressive enforcement unit. Last year, they closed 2,400 civil investigations. It's unclear at this point to what extent they will bring enforcement actions under the DOL rule, or whether they'll refer issues to either the IRS because for a lot of these plans, it would really be the IRS that would bring the enforcement actions, or whether they would work with the SEC.

There is a matter of understanding between the Department of Labor and the SEC since July of 2013, and they have referred [inaudible 00:48:03] issues, that we know of, both back and forth. Sometimes SEC exams request information or documents regarding ERISA-prohibited transactions and exemptions, and we've also seen regulated entities examined by the SEC and there have been follow-on exams by the Department of Labor. Last year, there was a fairly significant joint enforcement action. We understand that there is a working group at the SEC and the Department of Labor, so they are trying to coordinate what they're doing.

In terms of FINRA, last week, Rick Ketchum, the outgoing head of FINRA, announced that the SEC will be using the Department of Labor rule, will be examining, and I'm not sure if he said "bring enforcement actions," but that is a natural next step. As we mentioned before with the $20 million replacement variable annuity case, one of the issues there dealt with New York's reg 60, and the question is, how can FINRA regulate and enforce a New York state law? Similarly, how can FINRA regulate and enforce a Department of Labor rule?

The answer is that under their just and equitable principles rule, they often bring enforcement actions that have nothing to do with the federal securities laws or with FINRA rules specifically, so I can easily envision them bringing a case using the Department of Labor rule and citing the just and equitable principles rule that the firm or the rep have violated 2010 because they didn't have adequate disclosures or they had misrepresentations with regard to advice or they didn't comply with the Department of Labor rule. That's something to watch out for.

The other thing that FINRA has done in the past is that they have brought cases under 3110 dealing with inadequate policies and procedures, even though those policies and procedures didn't relate to the broker/dealer or the broker/dealer function. For example, there have been 2 cases where FINRA brought enforcement actions against dually-registered BD/IAs where the underlying conduct dealt with advisory accounts and the fees charged in advisory accounts. There was a glitch, and the firms didn't charge the proper fees in the advisory accounts. FINRA's position is that 3110 applies to dually-registered firms regardless of whether the policies and procedures deal with the broker/dealer. Again, we can envision FINRA bringing cases, saying, "You didn't adequately comply with all of the DOL rules." That's something to watch out for.

Then the states, when there's the proposed rule-making, there's a question as to how it would affect the state's ability to bring cases. In the final rule, the DOL made clear that it wasn't their intention to affect how states and state securities laws would affect IRA and ERISA accounts. I think the states anticipate possibly being able to use the DOL rule or at least using some of the issues that firms are going to need to focus in on.

CFPB, at this point, it doesn't look like they have a hook, but they've been very aggressive, so it's possible that they may see what kind of inroads they can make there. Andrew, is there anything else you want to add on that issue?

Now, that all sounds great.

Okay. Next slide. Again, this is just sort of comparing the ERISA and the IRA with regard to how different litigation issues in those arenas, so we'll go to the next slide. As Andrew said, we have the other website, and there are more materials in terms of presentations, articles, and even some videos on some of these issues. If anybody's interested or if anybody has some specific questions, we do have a team of people who have been studying this more or less around the clock for the past couple months. The last movie quote is, "You can barbecue it, boil it, broil it, bake it, saute it." As we said, this is the end of the quotes. Anybody who wants to try to get a free Sutherland mug, email Andrew. Andrew, is the last slide our contact information?


It is. Email Andrew at, and the first 5 people with all of the correct answers will get the mugs. We often give them to other people as well if you write nice emails to us. If there are any follow-up questions, if you want cases, if you want to know more about any of this stuff, please send us an email, and we'll do the best we can to answer it. If you have more sort of detailed questions, you want to read more about the DOL issues as Andrew said, we have a separate webpage on that,, and that should be able to answer most of your questions, or also we can forward your questions to those who are more knowledgeable than we are about these issues.

Read our blog post, "FINRA Fines 2016 - 7 Key Facts" 

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