2014 – Brave New Fiduciary World

2014 promises to be a important year for fiduciary liability issues. ERISA advisers, sponsors and attorneys await the Court of Appeals’ decision in Tussey v. ABB,Inc. and its impact on fiduciary issues such as prudence, loyalty and due diligence. If the lower court’s decision is upheld, the pension industry, service providers and plan sponsors alike may be forced to undergo significant changes in its practices.

Both the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) will hopefully enact a much-needed universal fiduciary standard that requires that anyone providing investment advice to the public must always put the customer’s/ client’s best interests ahead of the adviser’s interests.

Even without a DOL/SEC universal standard, it will be interesting to see how the pro-fiduciary positions announce by both FINRA and the courts progress. In several announcements, e.g. Regulatory Announcement 12-25, FINRA has stated that a registered representative always has a duty to put a customer’s interests first. At the same time, there are decisions stating that the decision to impose a fiduciary duty on a financial adviser will be based upon whether a customer had the experience and knowledge/understanding to independently evaluate the adviser’s recommendations. (For further discussion, see our post “Upon Further Review: Do We Already Have a Universal Fiduciary Standard?”)

Another fiduciary issue involves the use of binding arbitrary clauses in fiduciary related contracts. There has already been talk of the SEC considering prohibiting the use of such clauses.

The Financial Industry Regulatory Authority (FINRA) took a significant step in recognizing investors’ rights when it allowed investors to opt for arbitration panels composed entirely of public citizens. FINRA, and its predecessor the National Association of Security Dealers (NASD), had previously required that three member arbitration panels hearing customer grievances had to be made up of one industry representative, one public representative, and one impartial arbitrator. The NASD/FINRA arbitration process was criticized as often being nothing more than a “kangaroo” court, with the “impartial” arbitrator often having ties to the securities industry in one form or another and therefore ruling in favor of the securities industry.

Even with the new all-public arbitration option, the use of binding arbitration clauses by fiduciairies raise serious legal questions. One of a fiduciaries main duties is to be loyal to their client, to always put their client’s best interest first. Requiring a client to waive important legal rights is not only clearly not in a client’s best interests, but it acts to protect the fiduciary at the client’s expense, a clear vioaltion of a fiduciary’s duty of loyalty. For that reason, I advise my RIA clients not to use a binding arbitration clause. Besides, if a fiduciary does their job right, there is no reason to worry about litigation.

There simply is no good faith justification for a fiduciary to require that a client give up their right to seek redress in the courts for tortuous conduct by the fiduciary. The arbitration process is promoted as being less expensive and producing quicker results. Often ignored is the fact that the arbitration process too often produces inequitable results, does not guarantee quick adjudications, and seriously restricts an investor’s right to make effective discovery that might reveal evidence that proves his/her case.

The simple fact is that binding arbitration clauses are put into contracts to protect the broker-dealer and stockbrokers from having to confront the public and face serious financial retribution for their wrongdoing. The limited discovery rights provided to investors in the arbitration process also protect fiduciaries from clients uncovering and exposing other potential abusive practices.

A recent study concluded that only 22 percent of the public trusts the financial services. Both Congress and the regulatory bodies that oversee the financial services industry can do a lot to improve the image of themselves and the financial services industry by passing meaningful rules and regulations that protect the public and demonstrate a true commitment to investors’ rights to a fair and equitable investment system.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors and investment fiduciaries on sound, proven investment strategies that will help them protect their financial security and/or avoid unnecessary fiduciary liability exposure.
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