Enforcement and Litigation Update

In 2016, I wrote a column about the rise of litigation and enforcement against plan advisors. At the time, there were only a few lawsuits involving advisors. Now, unfortunately, this concern has come to pass. What should an advisor and his or her advisor organization do now?

As our firm has counseled more and more advisors on both regulatory enforcement against them and in litigation where they are named as a party, three lessons have emerged — both in pre-enforcement/pre-litigation counseling and when enforcement or litigation occurs.

1. Insurance Is Essential

Too often, we see advisors who believe that their insurance provides coverage for regulatory investigations and litigation expenses. Unfortunately, it is not always the case. Many insurance policies do not cover expenses incurred for lawyers prior to a regulator actually asserting that a violation of an applicable law (whether ERISA, the Advisers Act or some other law) has occurred, and, to the extent that there is coverage, it is often subject to a greatly reduced dollar limit. Furthermore, in litigation, advisors, whether named as defendants or subject to discovery requests as part of litigation involving their clients, may not always have coverage for costs incurred prior to being named as a defendant.

Layered on top of these concerns is the fact that the defense of advisors requires a unique skill set, knowledge of the advisor space, and a knowledge of ERISA or securities law that, put together, is not widely held. Many insurance policies limit choice of counsel to “panel firms” that may or may not include advisor-focused ERISA or securities law litigation and defense practices.

2. Update Your Service Agreement

Periodic updating of service agreement language and processes to reflect changes in services and responsibilities assumed by an advisor, to proactively address agency enforcement priorities (such as default investment issues for the SEC or fiduciary rule issues for the Department of Labor), and to update indemnity, arbitration, and statute of limitations language can be essential. Taking these steps regularly, much like many recordkeepers now do with their core recordkeeping agreements, can better position facts and obligations in advance of enforcement and litigation, thus potentially reducing stress on a client relationship when the client and advisor are both on the radar of a regulator or a plaintiff.

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Too often, cookie-cutter agreements that are used off the shelf do not align with an advisor’s actual practices and can set the stage for increased liability and exposure. Detail and precision count. In fact, in the long term, attention to detail and precision can lead to lower costs.

3. Training Cuts Mistakes

For larger advisor organizations, “foot faults” made by non-home office advisors are a significant risk. We often spend time with our advisor clients discussing their processes and service agreements, and adding provisions on ERISA and similar compliance items to their compliance manuals. However, what sometimes comes to light when you’re in an enforcement or litigation situation is that all the paper in the world won’t help if it isn’t followed. A multi-office organization is well served to train and update its teams on its processes and risk management activities. In fact, this training can often be utilized in client-facing situations as a positive engagement tool.


Regardless of which political party is in power, enforcement and litigation involving advisors will continue and probably grow. What might be considered a best practice today is likely to change in the next six months. As regulatory enforcement and litigation continues to swirl around advisors, taking proactive steps on an ongoing basis can protect advisors and their clients and minimize burdens and costs.

David N. Levine is a principal with Groom Law Group, Chartered, in Washington, DC. This column appears in the Spring issue of NAPA Net the Magazine.

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