Launch of Stradley Ronon Fiduciary Governance Group Reflects Litigation Trends

Amid a glut of retirement plan industry litigation and regulatory change, advisers are asking the twin questions of whether one owes a fiduciary duty to their client, and if so, what exactly those fiduciary duties entail.  

Stradley Ronon announced the formation of a new fiduciary governance group, which the firm is billing as a “multi-disciplinary practice,” to be led by co-chairs Lawrence Stadulis and George Michael Gerstein.

According to the firm, the fiduciary governance group includes 15 members. It will support financial institutions that “may be subject to multiple and conflicting sets of fiduciary or best interest obligations arising under federal and state law as a result of the nature of the different yet interrelated services they provide to their customers.”

“The fiduciary governance group is designed to counsel investment committees and intermediaries, such as investment advisers, banks, broker/dealers, retirement plan/IRA service providers, insurance providers and mutual fund directors, by identifying and making sense of this regulatory patchwork and helping clients understand the interplay of these federal and state rules,” the firm states.

Beyond helping advisers and financial intuitions prevent and respond to the wide sweep of Employee Retirement Income Security Act fiduciary breach claims filed by participants today—from excessive fee suits and self-dealing challenges to stock drop litigation and debates over the use of various capital preservation vehicles—the new governance group will track developments and emerging trends in the investing landscape, such as broader use of the environmental, social and governance (ESG) investing theme.

The group also pledges to “actively track the burgeoning state legislative efforts to impose fiduciary or comparable investment advice standards of care.” Such efforts are well under way in Nevada and New York, just to name two of many venues.

Industry watchers will not be surprised by this move from Stradley Ronon. As laid out in a very expansive class action litigation analysis published recently by another law firm specializing in ERISA, Seyfarth Shaw, plaintiffs found some significant success in 2017 when it came to winning class certification. Looking across all 12 U.S. federal appellate court circuits, in total 17 groups of plaintiffs earned class action certification in an ERISA challenge during 2017, whereas just five groups of plaintiffs formally saw their appeals for class certification denied. Obviously, class certification is still an early procedural step in any litigation, but the overwhelming success of ERISA plaintiffs’ attorneys in earning class certification across a wide variety of cases is an important trend and may speak to the validity of at least some of their broad claims, attorneys warn.

Early commentary from the new fiduciary governance group

In announcing the launch of the fiduciary governance group, the firm also released detailed analysis of its take on the uncertain future of the Department of Labor (DOL) fiduciary rule, among other topics.

As the firm states, “in one fell swoop, the 5th Circuit Court of Appeals dropped the hammer on the DOL Fiduciary Rule, tossing out the expanded scope of fiduciary ‘investment advice’ and the related exemptions, including the Best Interest Contract Exemption. Barring a petition for rehearing or appeal, the court’s ruling will go into effect in early May, at which point the 1975 DOL regulation defining investment advice via a five-part test would reemerge. Nevertheless, until there is certainty that there will be no rehearing or appeal, we caution against any major changes to compliance, even though the DOL has told the press that it will not enforce the rule until further notice.”

The firm says now might be a good time to consider a post DOL fiduciary rule world by taking some concrete steps. These include but are by no means limited to the following: “Inventorying the type and nature of typical communications with retirement investors (e.g., other fiduciaries, plan participants, IRAs, etc.) and tagging those that might satisfy all five prongs of the 1975 regulation; identifying any representations, disclosures or statements regarding fiduciary status that were made in light of the fiduciary rule’s scope, which may at some point need correction; reexamining what changes were made to internal policies and procedures to account for the DOL fiduciary rule, and considering whether to retain such changes even if no longer legally required, particularly in light of the fact that federal and state regulators could seek enforcement against institutions for failing to follow these policies and procedures; reconsidering any revisions to contracts in order to satisfy the DOL’s guidance on 408(b)(2) disclosures that it issued last August; and reevaluating whether to continue excluding small plans and IRAs from investing in private funds, if that determination had been made to prevent a fund manager from inadvertently becoming an investment advice fiduciary to an IRA investor or small plan during the sales and subscription process.”

Ultimately, the firm argues it is “still not a foregone conclusion that the 1975 five-part test of what it means to be an investment advice fiduciary under ERISA will be reinstated and that the DOL fiduciary rule has begun its ride into the sunset.”

“We do believe, however, it is reasonable to begin considering tasks that will be necessary to transition to a post-DOL fiduciary rule world,” the firm concludes.

On the related matter of whether the Securities and Exchange Commission will step into the fiduciary rule fray, Stradley Ronon argues this is quite likely. One anticipated aspect of the SEC proposal is “a requirement to deliver a summary disclosure document that will describe services, fees, conflicts, product offerings and other pertinent information.”

“Such a document has been in the wings since the SEC staff’s 2012 study on financial literacy among investors, which found that investors prefer, wherever possible, the use of a summary document containing key information about an investment product or service,” the firm explains. “The proposal may not expressly use the term ‘fiduciary,’ but will most likely impose a uniform duty to act in the ‘best interests’ of clients and prohibit, or at least limit, the use by broker/dealers of certain titles, such as ‘financial adviser,’ in marketing and sales materials. As a general principle, we expect the SEC to use as its base the federal fiduciary standard applicable to investment advisers.”