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Without Class-Actionability, the DOL Rule Is Toothless

March 20, 2017

If it takes out the “right of private action,” a White House-mandated review could throttle the Department of Labor’s Conflict of Interest rule before it takes force, the Wall Street Journal reports.

The DOL rule, slated to start rolling into effect next month, governs how financial advisors should conduct themselves when dealing with their clients' retirement accounts — IRAs and the like. Boiled down, it says financial agents of all stripes, even brokers, should act as fiduciaries when it comes to investment accounts under DOL oversight.

The so-called right of private action lets investors sue advisors for breaches of the DOL rule in class actions. As things stand now, investors who feel they’ve been mishandled by brokers usually have to hash it out in Finra arbitration.

As the Journal reports, however, the old order may endure. Last month U.S. President Donald Trump told the DOL to review the regulation — “to determine whether the rule would cause an increase in litigation costs” with a view to limiting “the potential impact on the financial-services industry and consumer access to advice,” the newspaper says.

One consultant tells the Journal the DOL review of the rule is likely to show that litigation costs to firms will rise — and that this will lead to agitation for removing the right of private action from the DOL rule.

But another expert, a partisan of the rule, says putting fear into firms is the point, so that “weakening the rule’s enforcement mechanism would potentially allow an advisor to ‘profit off of misplaced trust.’”

In this view, the rule supporter tells the Journal, “Taking away the private right of action would be no mild concession.”

The DOL rule is supposed to go into partial effect next month, but the DOL has suggested that soft launch be delayed.

By Thomas Coyle
  • To read the Wall Street Journal article cited in this story, click here.