Although the Labor Department's fiduciary rule
died in court in June, it can still cause litigation risk for firms that changed their policies to comply with the measure.
"As long as institutions leave these policies on the books, you can still find yourself subject to this type of action," said Joshua Lichtenstein, partner at Ropes & Gray, referring to Massachusetts Secretary of the Commonwealth William Galvin's
enforcement action against Scottrade Inc. "If you adopted policies and procedures, you need to make sure you're following them, or, if you decide it is appropriate, change them back."
In February, Mr. Galvin alleged Scottrade violated an internal policy against sales contests for individual retirement account holders that was implemented to comply with the DOL rule, which was
partially in effect for about a year.
Rather than dying along with the DOL rule this summer, Mr. Galvin's case is continuing. There is an Aug. 7 hearing scheduled in Massachusetts federal court to determine whether the case should be heard at that level or in a state court.
In a May 11 brief — after the 5th Circuit Court of Appeals decided to
strike down the DOL rule on March 15 — Scottrade's lawyers accused Mr. Galvin of "overreaching."
"Galvin's action is part of his own personal interpretation of this now-abolished federal rule, attempting unilaterally to substitute his judgment for that of Congress, federal regulators and the federal courts," the lawyers wrote in the brief. "This attempted usurpation of power threatens to undermine the national uniformity that should govern enforcement of a federal rule issue pursuant to a federal statute with broad federal preemptive effect."
The case should be heard in a Massachusetts court because Scottrade violated state laws by ignoring its internal policies and procedures, according to Mr. Galvin.
"It's a dishonest and unethical practice matter," he said. "It's about the facts. It's what they actually did. It's not about the DOL rule."
Although Mr. Galvin's case appears to be the only one in the country linked to policies related to the DOL rule, it serves as a warning to firms that took affirmative steps to comply with the rule.
A lawyer who asked not to be identified said he is advising firms to maintain everything they did for clients during the approximate one-year window when part of the rule was effective, because fiduciary claims could still be brought by those clients.
Looking ahead to future clients, firms need to be cautious about wiping their compliance manuals clean of the DOL rule, according to George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.
"Before you back out of your policies and procedures, you want to make sure you don't create a deficiency in complying with other laws," Mr. Gerstein said.
Now that the Securities and Exchange Commission has taken the lead on advice standards reform with a proposal that's open for
public comment until Aug. 7, Mr. Galvin will be watching.
"The current SEC proposal is weaker than it should be," he said.
Mr. Gerstein doesn't anticipate that will be the prevailing conclusion from the states.
"As part of their ongoing review of the SEC proposal, state legislators and regulators are probably taking a more nuanced view than simply saying they're for or against it," he said.
