Panelists say DOL arbitration provision must go

The first morning of the Department of Labor’s public hearing on its proposed conflict-of-interest rule brought attention to a provision that could protect advisors from the plaintiffs bar, a group that DOL opponents say would benefit if the rule is finalized.

The proposed rule, which attempts to create a best-interest standard of care by imposing fiduciary requirements on nearly all advisors to IRAs and 401(k) plans, includes language which is consistent with existing policy under the Financial Industry Regulatory Authority, the broker-dealer industry-funded watch dog that litigates regulations violations through arbitration panels.

Language in the DOL’s proposal prohibits advisors from including contractual provisions that release the advisor from liability or forbid a client to bring a class-action suit, as does FINRA’s policy.

In effect, it is a prohibition against fine print that says clients can’t sue.

But in its provision, the DOL says that advisors would be free to include pre-dispute arbitration clauses in customer contracts.

That means advisors could present clients with a contract that says complaints could only be brought through FINRA’s arbitration panels, not in a court of law.

That’s a substantial problem with several of the first morning’s panelists, but none were as colorful in their disdain for the language than James Keeney.

Keeney, a Sarasota, Florida-based attorney who has represented plaintiffs in hundreds of claims against broker-dealers, RIAs, and insurance agents and companies, is an active FINRA arbitrator and a former trustee of the Public Investors Arbitration Bar Association.

In his comment letter to the DOL, Keeney argued that allowing advisors to contractually limit potential fiduciary claims to arbitration hearings would “swallow” the entire proposed regulation, and render the well-intended designs of the DOL “illusory” for retirement investors.

In his testimony at the open public hearing, Keeney went further, calling the arbitration provision a “fatal flaw” of the proposed regulation.

A financial advisor more often acts as a “used car salesman,” said Keeney, as they are beholden to monthly sales quotas, rendering the advice they give as inherently conflicted.

The Best Interest Contract Exemption, which would place extensive disclosure requirements on advisors and brokers looking to be compensated in commissions, is “self-defeating” because it allows advisors to limit claims to arbitration panels, he said. “Retirement investors will be forced to waive their sixth amendment rights to a jury trial,” said Keeney.

To his mind, limiting claims to arbitration hearings provides a get-out-of-jail-free card for advisors who fail to comply with the BICE in the future.

After a quarter century of representing investors’ claims in securities arbitration panels, Keeney doesn’t have much faith in their structural integrity.