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The DOL’s Best Interest Contract Requirement: Effect on Litigation Against Broker-Dealers

The playing field for the financial services industry in general, and broker-dealers and brokers in particular, has changed during this past year.  On June 9, 2017, the Department of Labor (“DOL”) fiduciary advice standard, which is applied to all financial professionals advising retirement (plan and IRA) accounts, became applicable.  As a result, the standard of care required of broker-dealers providing advice to IRA investors has changed, at least in many cases.  This Article describes the effect on litigation against broker-dealers providing advice to IRA investors that would result if firms are required to enter into “Best Interest Contracts” with IRA investors, as the DOL’s Best Interest Contract Exemption currently requires.
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Fiduciary Rules for the Transfer of IRAs

When a financial advisor moves from one broker-dealer to another, both the firm and the advisor want his or her clients to come along.  When those clients have IRAs, any recommendations to the IRA investors are now subject to greater scrutiny.  This is because, under the DOL’s new fiduciary advice rule, a recommendation to move an IRA from another firm is a fiduciary recommendation.  And while this would ordinarily be a prohibited transaction under the Internal Revenue Code – because the broker-dealer and advisor will make money if the account is transferred but won’t if it isn’t – there is an exemption that permits the recommendation and any resulting compensation, if a number of conditions are satisfied.

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