ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.
Yet, many other provisions of the rules were delayed until Jan. 1, 2018. These include the written statement of fiduciary status, as well as a written commitment to adhere to the Impartial Conduct Standards.
However, as I discuss in this post, the absence of a express term in the contract that the Impartial Conduct Standards are to be adhered to does not means that the parties to the contract cannot enforce the Impartial Conduct Standards. Rather, the Impartial Conduct Standards become implied terms of every new IRA account agreement (or IRA annuity contract) entered into on or after June 9, 2017, and become applicable to existing IRA account agreements when transactions are undertaken that remove the arrangement from grandfathered status.
In other words, the Impartial Conduct Standards are likely enforceable by the customer for new IRA transactions (to the extent not grandfathered), through a breach of contract action, as if the financial services provider had expressly placed in writing its commitment to adhere to the Impartial Conduct Standards.
Permit me to summarize the law in this area, and then to apply it to the DOL's Conflict of Interest and other rules, as they now stand to be implemented on June 9, 2017. (For purposes of brevity and clarity, I omit the numerous court citations that would typically be found in a law review article that might address these issues.)
American courts have traditionally taken the view that competent parties may make contracts on their own terms, provided such contracts are neither illegal nor contrary to public policy, and in the absence of fraud, mistake, or duress a party who has entered into such a contract is bound thereby. The paramount public policy is that freedom to contract is not to be interfered with lightly.
Yet, under principles of contract construction, implied terms are very often held to exist within an express contract. While most often seen in Uniform Commercial Code Article 2 ("sale of goods") cases, the principle is derived from common law. In fact, under common law the general principle exists that a contract is the sum of its express terms and its implied terms.
The great majority of state and federal courts (but not all courts, at least not in all instances) accept the common law rule that courts in construing contracts may incorporate relevant, unmentioned laws as implied contract terms. Hence, it is a general principle that statutes in existence at the time a contract is executed are deemed, in the absence of contractual language to the contrary, part of the contract as though they were expressly incorporated therein. In other words, statutes become implied terms in an express contract. The parties to a contract are presumed to know the law applicable to their relationship.
And an action brought to enforce an implied term is an action that arises under the contract. The fact that the source of the implied term is a statute rather than an inference from what the parties said or from the circumstances of the contract makes no difference.
Naturally, not only the requirements of statutes themselves find their way into contracts as implied terms, but also requirements imposed by regulations enacted under the authority of a statute. In either instance - actual statute or regulation - the legal requirements imposed are implied into the contract. In essence, contracts incorporate the relevant legal requirements, whether or not they are referred to in the contract itself.
Hence, it appears that the terms of the DOL's Conflict of Interest Rule and related exemptions, and in particular the Impartial Conduct Standards with an applicability date of June 9, 2017, will likely find themselves to be implied terms in a contract. In other words, for any IRA account agreement entered into on or after June 9, 2017 - whether it be in the form of a brokerage account application, insurance or annuity contract, or investment adviser-client agreement - it appears that the Impartial Conduct Standards are likely an implied term of that contract, and enforceable by the customer in a breach of contract action. The Implied Contract Standards, despite the DOL dropping the requirement that they be explicitly referred to in the contract, are nevertheless "read into" such IRA account agreements.
While courts have been at times reluctant to imply into contracts the terms of any statute or regulation, in the current instance it is clear, from the language of the DOL's recent pronouncement (the "Delay Rule") that the DOL clearly intends that the Impartial Conduct Standards apply to all new IRA accounts. It appears more than equitable that courts will imply the Impartial Conduct Standards, not only because the DOL clearly intends that they apply, but also given the overwhelming knowledge within the financial services industry of the current DOL rule-making process and its impact.
Can financial services firm disavow the application of the Impartial Conduct Standards, as an implied term of the contract? It is true that the express terms of a contract generally overrule the implied terms. However, it is a general legal principle that contracts must be subject to existing, relevant laws, and that private parties may not abrogate or override laws enacted from public concern. The general rule is that one whose rights are subject to state restriction cannot remove them from the power of the government by making a contract about them. This would seem to be especially true since the DOL's 2016 regulations contain a provision that effectively prohibits the parties from disclaiming away their core duties arising under the Impartial Conduct Standards, and prohibits seeking client waivers of those duties.
It should be noted that the inclusion of the Impartial Conduct Standards as an implied term of the parties' contract is not about the creation of a new cause of action. The courts that have considered the DOL's Conflict of Interest Rule and the Best Interests Contract Exemption have all, to date, rejected the argument that a new cause of action is created by the DOL rules, when they expressly require incorporation of the Impartial Conduct Standards into the contract. Rather, the Impartial Conduct Standards are just that - they establish terms of the contract that constrain the actions of a party. In other words, they establish standards for performance of the contract. A claim brought by a party is still a contractual claim, whether the Impartial Conduct Standards are expressly a part of the contractual terms or an implied term of the parties' agreement.
Of course, as with nearly any application of common law principles, the conclusions stated above are subject to challenge. But I believe that the probability of success, in the event of a judicial challenge, clearly favors the conclusion that the Impartial Conduct Standards are implied terms of nearly all new IRA account agreements, effective June 9, 2017.
Accordingly, I urge all insurance companies, insurance marketing organizations, broker-dealers, and registered investment advisers to continue their implementation of their compliance policies and procedures, for adherence to the Impartial Conduct Standards.
