Schwab’s recent victory upholding its class action waiver provision in its customer contracts raises a number of potential issues for fiduciaries, especially since most B/D’s can be expected to follow suit with similar provisions if Schwab’s waiver provision withstands the anticipated appellate review. In most cases, broker-dealers (B/D’s) are not held to a fiduciary standard, so actions that they take may not raise the same fiduciary concerns that such actions may raise for RIAs.
After the Schwab decision was announced, I had a number of clients call me and ask me what, if any, ramifications would it have on them. Many of the callers suggested that anything Schwab did should not have any ramifications on them since they could not control Schwab’s actions. While this is certainly true, it does not follow that RIAs and other fiduciaries can ignore potential implications of the class action waiver.
Fiduciary law is based primarily on trust law and agency law. The fact that RIAs are fiduciaries is clearly established by law. As fiduciaries, RIAs owe their clients a duty of loyalty, a duty to always put the clients interests first and to disclose any actual or potential conflicts of interest.
RIAs routinely maintain relationships with B/D’s. In some cases, RIAs receive soft dollar benefits from B/D’s in exchange for the RIA’s recommending that the client open or maintain a custodial account with the B/D. These soft dollar arrangements often involve the B/D providing an RIA with research and/or money for office provisions.
The right to participate in a class action is a potentially important legal right for many investors. Class actions have long been criticized on many fronts, including the potential to bring frivolous lawsuits and using leverage to force defendants to settle actions rather than bear the financial burden such actions often create.
As a trial attorney, I feel compelled to point out that in many cases, class actions are the only realistic opportunity that those whose rights have truly been violated have to seek redress for such wrongs. The costs of litigation can effectively prevent some victims from pursuing claims unless they can pursue a class action.
Like it or not, the law says that there shall be a right for every wrong, whether in law or equity. As is often the case, people do not care about inequitable treatment or unjust laws until and unless it involves them or their family. Professional prejudices aside, denying the public access to the legal system flies in the face of fundamental rights guaranteed by the Constitution.
OK, I’m off the soap box. Back to the issue at hand, the potential implications of a class action waiver provision in B/D customer contracts. In my opinion, an RIA that knowingly recommends that clients open or maintain an account with a B/D that requires that customers waive their legal rights, including an important legal right such as the right to participate in class actions, may very have violated their fiduciary duties. The situation should definitely concern RIAs.
I can already hear the argument that “I’m not an attorney, so I cannot give legal advice.” With all due respect, that is not the point. Giving up a legal right is an important issue. Both federal and state RIA laws prohibit any advisory contract that requires a client to give up any legal right. RIAs can put in certain clauses that address a client’s legal rights. However, any RIA that chooses to do so must include “clear and conspicuous” language stating that such language is not meant as a waiver of a client’s legal rights.
Supporters of the waiver provision will argue that a client can simply choose not to open an account with a B/D that requires a class action waiver provision or, if their RIA only works with B/D’s that use such a provision, the client can find another RIA. Is that really what RIAs want? RIAs work so hard to find clients and develop strong client relationships as it is.
If the Schwab provision is upheld on appeal, it is reasonable to assume that other B/D’s will adopt similar provisions in order to protect themselves. If so, would clients really have a choice? Common sense would suggest that a few B/D’s would not follow suit for marketing purposes and to grow their own business, but due diligence review may raise other fiduciary issues for RIAs and/or clients. Would it be in an RIA’s best interests to work with more than one B/D, one of whom would be a B/D that does not require clients to waive their legal rights?
To me, the strongest case against RIAs who recommend B/D’s that adopt the class action waiver provision would be situations where the RIAs receives some sort of benefit from the B/D, such as common soft dollar benefits like research and money for office needs. Schwab has their popular annual IMPACT conference. an argument can be made that any RIA that recommends that their clients agree to the class action waiver and also receive any sort of discount on travel, lodging, etc. in connection with such a conference has violated their fiduciary duty to their clients, both in terms of the “exclusive interests” rule and the conflict of interests rule.
I obviously do not know how the Schwab case will be resolved. My point is that RIAs and other fiduciaries need to monitor such cases and re-examine what, if any impact, such cases could have for them with regard to their obligations as a fiduciary. As I always remind my clients, ignorance of the law is no excuse and, to quote my favorite fiduciary quote from the courts, “a pure heart and an empty head are no defense” to a breach of fiduciary claim.