Will FINRA claims change in the wake of the June 9, 2017 DOL Fiduciary Duty Rule (the New Rule)?
While it does not presently have all of the bells and whistles the securities industry has been bracing itself for, it nonetheless places brokers and their broker-dealer employers servicing regular brokerage IRAs in the role of a fiduciary for these accounts. This changes the rule of law in most jurisdictions which previously only held a broker/broker-dealer to a suitability standard unless there were special circumstances. See De Kwiatkowski v. Bear, Stearns & Co., Inc., 306 F.3d 1293, 1302 (2d. Cir. 2002).
For instance, a broker was a fiduciary in cases where he earned a fee based upon the assets in the account rather than a commission on each trade in the account. It was also the case that a broker was a fiduciary if he had trading authority in an account. In these circumstances the broker, and therefore the broker-dealer, was a fiduciary regardless of the type of account with which they had the relationship. The New Rule now makes brokers, and consequently their broker-dealers, fiduciaries for every retirement account, regardless of the nature of the relationship with the account. It does not matter if the broker does not receive a fee, but only earns a commission on each trade in the account. It does not matter that the broker does not have any trading discretion over the account. The only factor that matters is whether the account is a retirement account.
New Rule in Statement of Claims
The New Rule has only been in place for a short time and has not been judicially tested. It has also not been tested in a FINRA arbitration as no claim alleging a New Rule fiduciary duty claim could have gone to hearing yet. That is not to say that the New Rule has not been quoted. In fact, recent Statements of Claims have not only invoked the New Rule, but have invoked it for every account relationship, not just IRAs.
While that might very well be an abuse of the New Rule, it is, frankly, not that surprising. In FINRA arbitrations, a motion to dismiss may only be brought under very limited circumstances. See FINRA Arbitration Code of Procedure Rule 12504. Therefore, it is not uncommon for FINRA Claims to cite to any, or all, bodies of law that could possibly (and sometimes not possibly) support the Claims.
In fact, from January 2017 through July 2017, 1,961 new cases were filed and 1,281 of those cases were filed by customers (they were not industry disputes). During that same period of time, 1,060 claims alleged breach of fiduciary duty. Clearly, not all were brought after June 9, 2017. As further evidence that the claim for breach of fiduciary duty was alive and well long before the DOL Fiduciary Rule, notwithstanding state law to the contrary, in 2016, 2,147 customer cases were filed and 1,205 alleged breach of fiduciary duty. In 2015, 1,292 customer cases were filed and 928 alleged breach of fiduciary duty.
The claim of breach of fiduciary duty is obviously not a stranger to FINRA arbitration. Therefore, the New Rule does not add an arrow to a claimant’s arsenal of weapons against his/her broker. Even a judicially unviable claim of breach of fiduciary duty would make it at least to the close of a claimant’s case, and possibly further. In fact, legally viable or not, it could possibly be the argument that sways an arbitration panel in the claimant’s favor. As most decisions are rendered without explanations, it is often impossible to say.
Conversely, the New Rule may add a shield to the broker and the broker-dealers’ arsenal. After all, now they can point to a national standard that applies a fiduciary duty to a limited class of accounts (unless or until the SEC imposes a wider spanning fiduciary duty rule). By distinction, arguably all other classes of accounts not otherwise afforded a fiduciary duty standard under case law or statute should not be granted such status.