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Dec. 1 — If the fiduciary rule is doomed to die under President Trump, what will be the cause of death?
The election of Donald Trump cast uncertainty on a number of Obama-era regulations, and the Department of Labor’s fiduciary rule is no exception. The rule, which purports to cut down on allegedly conflicted advice given to retirement savers by the financial industry, has been singled out for repeal by Trump adviser Anthony Scaramucci and repeatedly criticized by House Speaker Paul Ryan (R-Wis.) as overly burdensome and expensive.
Once President-elect Trump takes office and the Republican-controlled 115th Congress convenes in January, fiduciary rule opponents have multiple options for eliminating or dismantling the fiduciary rule, whether through legislation, administrative action or litigation. Each option carries with it a specific set of challenges.
One obvious way to kill the rule would be through legislation. Congressional Republicans’ previous attempts at repeal couldn’t overcome President Barack Obama’s veto, but future efforts likely wouldn’t face the same threat. Such legislation would, however, face opposition from Democrats, who have vowed to “fight against” any attempt to roll back the rule.
Russell D. Sacks, a partner in Shearman & Sterling LLP’s financial institutions advisory and financial regulatory group in New York, said there is a “fair likelihood” of seeing legislation in this area. Sacks pointed in particular to the Financial CHOICE Act, a bill introduced in September by Rep. Jeb Hensarling (R-Texas), which repeals the fiduciary rule and would prevent the DOL from regulating in this space absent action from the Securities and Exchange Commission.
Sacks told Bloomberg BNA that legislative action on this issue, either in the form of Hensarling’s bill or a not-yet-proposed alternative, was a distinct possibility once the 115th Congress convenes.
“Both of those options are real possibilities, because the Republican-controlled Congress is under substantial pressure to show progress and show movement, and this is an area in which they have options that enjoy support within the Republican caucus,” Sacks said.
Alternatively, Trump’s not-yet-named labor secretary could revoke the rule, but this likely would require a detailed rulemaking process similar to the one that preceded the rule’s adoption.
In addition to being costly and time-consuming, this option could leave the department vulnerable to litigation.
Litigation challenging agency about-faces has seen some success in the past: just last year, a full panel of appellate judges struck down an exemption to certain environmental regulations adopted by the George W. Bush administration after finding that the administration didn’t offer a reasoned explanation for departing from factual findings developed under President Bill Clinton.
Andrew L. Oringer, a partner with Dechert LLP in New York and co-chair of the firm’s ERISA and executive compensation group, said that Trump’s labor department may fare better if its decision to repeal the rule is challenged on these grounds. That’s because the factual record developed in the course of promulgating the rule could support a number of different agency actions, including a decision to repeal, Oringer said.
“I don’t think even today’s DOL would argue that there’s no other reasonable way forward,” Oringer told Bloomberg BNA. “Once you understand that there are multiple reasonable ways forward, it becomes a question of who’s driving the bus.”
“We have a new bus driver, and that driver is permitted to conclude that this factual record informs a contrary approach,” Oringer said.
The Trump administration also could look to the federal courts, which are hearing six separate lawsuits challenging the fiduciary rule from seemingly every angle. After taking office, Trump could instruct his administration to stop defending the rule in court.
Despite its appealing simplicity, this option isn’t problem-free. For one, the most high-profile recent example of this tactic came in 2011, when the Department of Justice stopped defending the federal Defense of Marriage Act. In explaining this decision, former Attorney General Eric Holder said the decision not to defend an individual law must be “exceedingly rare” and rest only on “firm constitutional grounds,” as opposed to mere “policy or political disagreements.”
However, the fiduciary rule differs from DOMA in that it’s a regulation promulgated by the executive branch, rather than an act of Congress. This distinction means that a key justification for dropping DOMA’s defense—that it was a check by the executive branch on the powers of Congress—couldn’t be used to justify a similar move with respect to the fiduciary rule.
Another problem with this strategy? So far, the federal courts haven’t cooperated. One of the pending lawsuits led to a full-throated defense of the rule that is now on appeal, and in another case, a judge refused to block the rule after finding that the lawsuit was unlikely to succeed. The other pending cases are being heard by judges appointed by Democratic presidents.
Finally, refusing to defend a legal challenge to an agency regulation doesn’t necessarily mean that the regulation will be invalidated, and it could leave behind a messy precedent.
A challenge to a regulation is different from a civil lawsuit between private parties over money, Dechert’s Oringer said. In the latter case, failing to show up in court and mount a defense typically leads to a default judgment against the absent litigant, but the same isn’t necessarily true in lawsuits challenging government action.
Oringer also said that any court ruling invalidating the rule could create a “nebulous precedent,” particularly if it wasn’t decided after a clear legal defense by the government.
The fiduciary rule also could face challenges from the SEC, which had been working toward its own rule harmonizing the different legal standards applicable to professionals who give investment advice. The commission released a study on how to best accomplish this in 2011, and it sought input from the industry in 2013.
Shearman’s Sacks said that the SEC’s regulatory process was well underway when the DOL released the “800-pound gorilla” known as the fiduciary rule earlier this year. According to Sacks, despite the fact that the SEC and DOL had been in communication on these issues, it was already unclear the extent to which they were on the same page with respect to regulating retail financial advice. The election of Donald Trump and the new Congress merely added additional layers of confusion to an already jumbled situation, Sacks said.
Dechert’s Oringer said that over the years, some within the SEC have expressed frustration that the DOL took the lead on this issue. If the new SEC leadership holds this view, the agency could be a voice advocating the elimination of the DOL’s fiduciary rule in favor of action of its own.
This option could be “messy” if new leadership at the DOL and SEC weren’t aligned on how to proceed, Oringer said.
Louis S. Harvey, president and chief executive officer of Boston-based Dalbar Inc., said that any SEC action in this area was unlikely to differ significantly from the rule adopted by the DOL.
Harvey, whose firm provides market research for the financial services industry, told Bloomberg BNA that the industry is already working toward compliance with the DOL’s new fiduciary standards. To drastically change those standards, Harvey said, the SEC would have to “explain to the industry why, after spending billions of dollars complying with the fiduciary rule, they’re going to come up with some rule that would turn it on its head.”
Harvey identified another factor making sweeping SEC action unlikely: the commission is short-staffed. The five-member body currently has two vacancies, with a third expected after current SEC chair Mary Jo White announced plans to step down in early 2017.
Finally, the anti-regulation messaging of President-elect Trump may be another reason to see regulatory action by the SEC as a longshot, Sacks said.
“The Commission itself, once reconstituted under a Trump administration, will surely be cautious about new rulemaking generally,” Sacks said. “There are a number of reasons for that, not the least of which is that the president-elect has made it a point as part of his messaging to indicate that he believes there is a degree of over-regulation and that new rulemaking will be viewed by the White House with suspicion.”
The fiduciary rule is—for the most part—scheduled to become applicable in April 2017. Some in the industry, including the Investment Program Association, have called on the Trump team to delay this deadline so that a more thorough cost-benefit analysis can be done.
IPA president and chief executive officer Tony Chereso told Bloomberg BNA that a delay would serve the public interest by allowing the incoming labor secretary to review the rule’s impact on American investors.
“It is critical that a comprehensive review of its cost, and more importantly, its impact on how financial advice is provided to millions of investors, be completed,” Chereso said. “Further, the SEC should also review the rule’s impact in concert with its ongoing efforts to create a uniform fiduciary duty.”
Blaine F. Aikin, chief executive officer of fiduciary consulting group fi360, told Bloomberg BNA that a six- to 12-month delay in the rule’s applicability date was the “most likely” scenario going forward. A delay much longer than that could cause problems, Aikin said, adding that the agency could become vulnerable to a lawsuit under the Administrative Procedures Act.
“You can’t just have a rule on the books and not implement it or enforce it without running the risk that somebody’s going to throw a flag,” Aikin said.
For his part, Dalbar’s Harvey expressed doubt that the fiduciary rule’s April 2017 applicability date would be delayed.
Harvey said that there may not be enough time between Trump’s January 2017 inauguration and the rule’s April 2017 applicability date for the incoming labor secretary to delay the rule. Once the rule becomes applicable, it’s much harder to eliminate, Harvey said.
“The Trump administration is going to have to appoint a new labor secretary who’s going to have to be approved by a senate with Elizabeth Warren in it,” Harvey said, referring to the Massachusetts Democrat who has long supported the fiduciary rule. “The timeline is just too short.”
Aikin had a different perspective on this short timeline. He said that others within the DOL might have the ability to delay the rule before the new labor secretary is confirmed.
In fact, the absence of a sitting secretary could form part of the argument in favor of delaying the applicability date, Aikin said.
With all of these options on the table, one thing seems clear: virtually no one has any idea what will happen to the DOL’s fiduciary rule.
“There’s a lot of voices shouting on this, and it’s entirely unclear which voices will ultimately be heard and picked up,” Sacks said.
Sacks added that the “jumbled” regulatory environment, combined with the “fresh complexity” of Trump’s election, meant that those within the industry will have a lot to deal with over the next few years.
“None of this gets easier for the next 24 months,” Sacks said. “It gets more complicated before it gets better.”
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