For arbitration panels, “it comes down to if they think the broker or firm did something wrong” rather than whether the industry defendants violated a technical point of law, said Robert Banks, an investor lawyer in Portland.
In addition to individual arbitrations, the DOL is counting on class-action claims as an enforcement tool. To that end, the rule prevents firms from precluding class claims in court via their arbitration agreements. (Finra does not allow class actions in its arbitration forum.)
But whether investors will be able to bring class-action claims is unclear.
A number of trade organizations are challenging the DOL rule, including its ban on using the so-called class-action waivers in arbitration agreements. The trade groups, which include the Securities Industry and Financial Markets Association and the Financial Services Institute, can cite at least one Supreme Court decision in their favor.
Whether government agencies can ban class-action waivers is “a much contested question,” said Edward Sherman, a professor at Tulane University School of Law and an expert on class actions.
Both the National Labor Relations Board and the Consumer Financial Protection Bureau are in “hot contests with various courts” over their efforts to ban the waivers, Sherman said.
The DOL can now be added to that list, possibly leaving enforcement of its fiduciary rule up to investors who file individual arbitration claims.
While fiduciary duty provides a stronger legal case, arbitration attorneys don’t see a gold rush—especially if the rule helps clean up suspect activity.
Lipner, for one, thinks the industry will cut back on proprietary and high-fee products as a result of the DOL rule.
“That’s where a lot of problems come from,” he said.