Assuming the Department of Labor's fiduciary rule survives the river of legal and legislative challenges, the brokerage industry should expect to absorb between $70 million and $150 million annually in class-action litigation costs.
The price-tag range, calculated by Morningstar senior equity analyst Michael Wong, is on top of the $1.5 billion annual cost to the industry, as estimated by the DOL's regulatory impact analysis.
Because the rule, which is scheduled to take effect in April, opens the door for class-action lawsuits against firms selling commission-based products in retirement accounts under the best interest contract exemption (BICE), legal experts have been busy debating the full class-action potential.
Currently, brokerage client disputes are settled through arbitration, and the new class-action option has been seen by some as another motivation to nudge the brokerage industry away from commissions.
“Right now people are pretty much bound to arbitration,” Mr. Wong said. “They can still make individuals do arbitration, but they cannot stop class action lawsuits.”
Mr. Wong came up with the estimated annual class-action cost by analyzing related asset management industry litigation, including recent arbitration cases at wealth management firms, monetary rewards from the Employee Benefit Security Administration, and class-action lawsuits related to pension plans.
“Any firm planning to use BICE should be prepared for lawsuits," Mr. Wong said.
Some firms, including Merrill Lynch, Capital One, and Commonwealth Financial Network, have already announced plans to use a streamlined BICE that does not include a contract or variable commission rate, making them exempt from class-action lawsuits.
Other firms will be rolling the dice.
“There's a very creative plaintiff's bar out there and, for better or for worse, this is what they do,” said Jeffrey Lieberman, counsel in the executive compensation and benefits group at Skadden, Arps, Slate, Meagher & Flom.
“There has to be a reason the DOL said you have to be able to participate in a class action,” he added. “Maybe they were assuming it will be the check they were looking for on the industry.”
Marcia Wagner, founder and principal of The Wagner Law Group, agrees that the simple reality of allowing class-action lawsuits will lead to class-action lawsuits.
“If the law stands, as written, the likelihood of class actions, especially with respect to IRAs will increase exponentially,” she said. “But I also think, regardless of the law, because of publicity, the tort bar has woken up to the size of the industry.”
With that in mind, it might be easy to assume Mr. Wong's estimates are too conservative. But, as with any class-action lawsuit, there will be relatively narrow paths to creating a class.
“Commonality and typicality has to be considered because the class has to be made up of like-injured persons,” said Jason Roberts, president of Pension Resource Institute.
“If you can't stitch together similar plaintiffs, then it's an individual claim,” he added. “There's so many misperceptions out there that anybody who screws up is going to get sued. I don't want to down play it, because this is ultra-serious, but it's certainly a much tougher trail to blaze if you're a plaintiff's lawyer.”