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The Trump administration threw a curve ball to the financial industry on Feb. 3, when it ordered additional review of the Labor Department’s fiduciary rule without delaying the rule’s quickly approaching compliance deadline.
The rule, which purports to cut down on allegedly conflicted advice given to retirement savers by the financial industry, has long been singled out for repeal by Trump adviser Anthony Scaramucci and repeatedlycriticized by House Speaker Paul Ryan (R-Wis.) and others in Congress as overly burdensome and expensive.
Instead of delaying the rule’s April 10 applicability date—as many in the industry had expected—the presidential memorandum signed by Trump directs the DOL to re-examine the fiduciary rule’s effect on retirement savers and revise or rescind the rule accordingly. The memorandum does nothing to delay the rule’s deadline for compliance.
Even so, a delay may be in the cards. Acting Labor Secretary Ed Hugler responded to Trump’s memorandum by saying that the DOL will “consider its legal options to delay the applicability date” as it complies with Trump’s directives.
Such a delay may be easier said than done, according to attorneys interviewed by Bloomberg BNA. Specifically, a temporary delay on implementation either would need to go through a formal rulemaking process, including a notice and comment period, or proceed under the “good cause” exception to the Administrative Procedure Act.
A formal rulemaking process would be the “most conservative” way of delaying the rule through regulation, Micah Hauptman, financial services counsel at the Consumer Federation of America in Washington, told Bloomberg BNA.
“That requires saying, ‘We disagree with the findings and the overall rulemaking of the previous administration, and here’s why,’” Hauptman said. “They would have to do it through reasoned decision-making and analysis based on all the relevant facts.”
Even if all they’re doing is pushing back the applicability date?
Yes, says Hauptman, whose group supports the rule.
“If they’re changing the applicability date, we still think it would require notice and comment, because the rule is already effective,” Hauptman said, referencing the unusual—and arguably strategic—way the rule was written. The fiduciary rule was promulgated in April 2016 and made effective shortly thereafter, but the rule’s “applicability date"—the date on which the industry must be largely in compliance with its mandates—isn’t until April 10, 2017.
A notice and comment period provides an opportunity for stakeholders and members of the public to give input on a proposed agency action. Before finalizing the fiduciary rule in April 2016, the Obama administration held two notice and comment periods that lasted more than four months. During those periods, the department received nearly 35,000 public comment letters.
However, just because the rule itself involved such a lengthy and detailed comment process doesn’t mean that the same process would be required to delay the rule.
“I would suspect it would require a lot less time for that process than a complete revamp of the rule,” Hauptman said.
Can the administration delay the rule without a formal notice and comment period? It’s possible, but the bar for doing so is high.
The APA allows federal agencies to bypass a formal notice and comment period if it has “good cause” to find that such a period would be “impracticable, unnecessary, or contrary to the public interest.”
This can be a high standard to meet, Kenneth J. Laverriere, an ERISA attorney and partner in Shearman & Sterling LLP’s New York office, told Bloomberg BNA.
“Good cause” for repealing or delaying a rule is typically tied to some “truly unanticipated” impact or other unforeseen circumstance, according to Laverriere.
“The idea is that this is a tool that is reserved for a genuine emergency,” Hauptman said.
Moreover, this method for delay could be challenged in the federal courts, which have taken different approaches for determining when the good cause requirement has been satisfied.
In one recent example, the federal circuit courts couldn’t agree on whether the Department of Justice had good cause for bypassing the notice and comment process in 2007, when it issued a rule clarifying who’s required to register under the federal Sex Offender Registration and Notification Act.
The DOJ argued that good cause existed because any delay in enforcing the law would risk “the commission of additional sexual assaults” that otherwise could have been prevented.
Some federal courts, including the Fourth and Eleventh circuit courts of appeals, agreed that this public safety risk satisfied the good cause requirement. Other courts, like the Sixth and Ninth circuits, disagreed and found no good cause justifying the decision to bypass notice and comment.
If the Trump team claims good cause for delaying the fiduciary rule without a notice and comment period, should it expect a legal challenge like those surrounding the sex offender rule?
“If the new administration violates the law, I think they should expect people to challenge it,” Consumer Federation’s Hauptman said. “We are considering all of our possibilities, including litigation to ensure that the rule of law is respected.”
It’s also possible that Congress could take up the mantle of fiduciary rule delay. Both Reps. Jeb Hensarling (R-Texas) and Joe Wilson (R-S.C.) have introduced legislation taking aim at the rule.
Hensarling’s Financial CHOICE Act, introduced in September 2016, would repeal the rule and prevent the DOL from regulating in this space absent action from the Securities and Exchange Commission.
Wilson took a simpler approach, introducing a bill in January that would push the rule’s effective date back two years. Wilson’s bill has 27 co-sponsors and is sitting in the House Ways and Means Committee.
The legislative approach would be the “easiest and least controversial” way for the fiduciary rule’s critics to delay or repeal the rule, according to Shearman’s Laverriere.
But even that option would face opposition from congressional Democrats, most notably Sen. Elizabeth Warren (D-Mass.). On Jan. 19, Warren sent letters to 33 financial firms asking whether they would support the administration’s efforts to delay the rule.
Warren hasn’t commented publicly on the response she’s received to these letters. On Feb. 3, her Senate office issued a blistering report on the financial industry that offered the following conclusion: “If President Trump delays the rule’s April 10th effective date, large financial firms will continue to take advantage of consumers and put perks like cruises and lavish vacations ahead of the retirement security of middle-class investors.”
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