Will the fiduciary rule give way to frivolous class-action claims brought under the Employee Retirement Income Security Act?

That question is at the forefront of the Labor Department’s new analysis of the rule, ordered by President Trump.

The answer is in the eye of the beholder. Opponents of the rule have long argued it will be a boon for the plaintiffs’ bar; proponents say the rule’s clear guardrails will protect against frivolous claims, so long as firms comply with the new best-interest standard.

The Presidential memorandum issued in February instructs the Labor Department to assess how the rule’s private right of action will impact retirement investors.

The Department has requested comments on whether an increase in litigation will impact the cost of retirement advice and investments. Regulators also want to know if class-action lawsuits against sponsors of defined contribution plans have been “particularly prone to abuse,” according to Labor’s solicitation for comments.

Stakeholders who want to see the rule amended or withdrawn can be expected to focus on those questions, says Rob Foregger, cofounder of NextCapital, a provider of automated investment platforms in the institutional and retail space.

“The rule is focused on forcing conflicted advice out of the industry,” said Foregger, an early supporter of the fiduciary rule. “One could argue that will create more litigation, or that it will create cleaner lines as to what best-interest practices are. It certainly is an area some want to see amended.”

According to Morningstar, $3 trillion in IRA assets will be affected by the fiduciary rule, which creates new relief for IRA investors who claim to be victims of conflicted investment advice.

The private right-of-action provision prohibits financial service firms and insurance companies from writing class-action exclusions into the rule’s Best Interest Contract Exemption, the binding agreement brokers and advisors must use when receiving compensation on individual investment recommendations.

By design, the threat of class-action claims serves as the rule’s primary enforcement mechanism. Without the plaintiffs’ bar patrolling for alleged breaches of the BIC Exemption, oversight of the trillions in IRAs would be left to individual arbitration claims, which proponents of the rule say are a weak deterrent to conflicted advice.

Phyllis Borzi, former head of Labor’s Employee Benefits Security Administration, was forthcoming about the agency’s enforcement limitations before she left her post. The EBSA’s 400 auditors are spread across 15 field offices, and already oversee trillions in employer-sponsored retirement plans. Expecting them to police millions of IRA transactions impacted by the rule is hardly realistic.

Whether or not litigation would increase under the rule is dependent on how industry reacts to it, says Foregger. “I think we’ve already seen that industry has done a good job adapting to the letter and spirit of the rule, and that puts industry in a strong position.”

Seth Rosenbloom, associate general counsel at Betterment for Business, expects commenters to bring attention to the past decade’s worth of 401(k) class-action litigation.

By and large, those cases have vastly improved the quality of retirement plans offered by employers, thinks Rosenbloom.

“When those cases first emerged, everyone was skeptical of the claims,” he said. “But ultimately what they did was bring some of the worst practices to light.” Betterment is also a supporter of the fiduciary rule in its current form.

“At a minimum, the deterrent value of the threat of litigation will help reduce the worst practices in the retail space,” says Rosenbloom. “Will there be frivolous litigation brought under the rule? No one really knows. But I don’t see how it will be appealing to file lawsuits without merit.”

The potential for abusive litigation, or so-called strike suits brought on limited merit for the purpose of forcing a settlement, are a reality in all areas of the law, notes Rosenbloom, and would not be unique to the fiduciary rule.

But in the case of the fiduciary rule, Rosenbloom expects symmetry between the deference courts have given the Labor Department in promulgating the regulation, and the standard courts can be expected to apply to investors’ claims.

“Courts have been reluctant to overturn the fiduciary rule out of deference to Labor’s authority. I think it will be a similarly high standard for investors to prove a breach under the rule. Courts are likely to defer to fiduciaries that are generally compliant with the rule,” said Rosenbloom, a former securities litigator.

‘Inordinate amount of litigation’

Labor’s 45-day comment period supporting the rule’s new analysis is scheduled to close seven days after the rule’s scheduled April 10 implementation date. Labor has proposed a 60-day delay of the rule to accommodate for the review.

Comments are already pouring into Labor, but mostly from individual investment professionals and consumers. Detailed assessments of the rule’s private right of action will undoubtedly require more time to formulate.

The safe bet is that not all will be as sanguine about the prospects of litigation under the rule.

Lawrence Cagney, chair of the employee benefits practice group at Debevoise & Plimpton, expects litigation to be rampant if the rule is implemented as written.

“There are clear benefits to this rule, and financial institutions are not adverse to working with something that improves protections for retirement investors,” said Cagney. “But as it’s written it will invite an inordinate amount of litigation.”

Cagney thinks the rule can be amended to provide strong protections and remedies for investors in the event of conflicted advice, without inviting unnecessary litigation.

“It’s difficult to come up with a path that makes the litigation risk under the rule manageable,” he said. “The best investment advisor in the world is going to make good, prudent decisions that don’t always work out. As it’s written the rule puts the burden on the advisor to prove they have not acted improperly. They have to prove their recommendation wasn’t influenced by a conflict—that’s a hard, if not impossible, thing to prove.”

Facilitating the ability to save for retirement

Forecasting litigation trends is highly speculative, says Betterment’s Rosenbloom. “I don’t think anyone has a crystal ball.”

Labor’s analysis will consider the rule’s consequences beyond the private right of action. Whether the rule restricts access to some retirement products or advice will also be assessed, according to President Trump’s memorandum.

“One of the priorities of my Administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies,” the memo says.

If the analysis proves the rule is inconsistent with that priority, then Labor is instructed to rescind or revise the rule.

“The priorities laid out in the presidential memo are pretty highly aligned with the intent of the rule,” said NextCapital’s Foregger. “The Trump administration is likely to listen to industry. The big question now is whether industry will try to simplify the rule, or support a full repeal.”