The Labor Department’s proposal to delay the full implementation of the fiduciary rule to July 2019 will likely meet a legal challenge from consumer advocate groups, according to several sources.
“If they finalize the delay as it is proposed, Labor should expect a legal challenge,” said Micah Hauptman, an attorney with the Consumer Federation of America, which filed a comment letter opposing the delay of the scheduled January 1, 2018 implementation of the rule.
The proposed delay, released in August, was opened to a 15-day period of public comment, which closed September 15.
At issue is the whether the Labor Department has adequately justified the necessity of a delay, which executive agencies are required to do under the Administrative Procedure Act.
Opponents of the delay have also claimed that Labor’s proposal doesn’t accurately cite its statutory authority to postpone implementation of the fiduciary rule.
At the core of consumer advocates’ position is whether Labor is actually proposing a stay of the rule under the guise of a simple delay of the rule.
“This is clearly not a proposed delay; it’s a proposed stay,” wrote the CFA in its comment letter.
Attorneys with New York University’s Institute for Policy Integrity, a non-partisan think tank, also characterize the proposed delay as a stay of the rule, and argue that Labor does not have the statutory authority to issue a stay.
“Where is Labor’s authority to do this? They haven’t said,” said Bethany Davis Noll, litigation director at the Institute.
Davis Noll says administrative law is clear: Agencies must describe their statutory authority at all levels of rule making and back it up with fact.
“We’ve surveyed the landscape and I don’t see where they have the authority to do this,” said Davis Noll. “If Labor thinks it has the authority, then tell us—but they haven’t. It’s not ok to hide the ball.”
In its proposed delay, Labor cites a provision of the Employee Retirement Income Security Act that gives the agency authority to grant administrative exemptions.
But that authority does not allow Labor to issue a stay of the rules, says Davis Noll.
In the comment letter she co-authored, Davis Noll argues that Labor describes the proposal as an “extension” and a “delay” of the fiduciary rule, and does not say that it is issuing an exemption.
Moreover, the substance of the proposal amounts to a stay of the rule, because it would remove its enforcement authority for 18 months. “That proposed action can only be described as an administrative stay,” according to language in the Institute for Policy Integrity comment letter.
Labor accused of pulling a fast one
A provision of the Administrative Procedure Act gives agencies the authority to stay regulations.
But that authority is limited: It does not allow agencies to stay rules that are already effective. The fiduciary rule became effective in June of 2016.
Labor does not cite that section of the APA in its proposal. Davis Noll said it is rumored that regulators where considering doing so, but they opted to base its proposal on ERISA’s exemption provision, for fear of being sued.
“Labor knew this was going to be an issue,” said Davis Noll. In her analysis, Labor is betting that it will have better legal grounds to repeal the rule if it is not implemented.
“They are trying to set up a world where the rule hasn’t been implemented,” she said. “An eventual repeal of the rule will be difficult to rationalize because of the original cost benefit analysis behind the rule (under the Obama Administration). If they stay the rule and put off implementation, it will make repeal easier.”
Davis Noll says the strategy amounts to Labor trying to “pull a fast one.”
That position presumes the Labor Department is intent on repealing the rule outright.
But other evidence in requests for information from the agency suggests that Labor is focused on improving the rule through new exemptions that would facilitate compliance, and not simply eradicating the fiduciary rule.
Whether those prospective new exemptions would improve the rule, or deprive retirement investors of adequate protections, is in the eye of the beholder.
“One person’s sensible reform is another person’s neutering of the consumer protections,” said Aron Szapiro, director of policy research at Morningstar.
Szapiro is skeptical of the position that Labor’s intent is to simply repeal the rule without issuing new investor protections.
“There is broad consensus that investors need more protections than they previously had,” he said. “Most people really do agree on that.”
Szapiro expects a delay to be issued before January 1, but exactly when is anyone’s guess.
“It wouldn’t surprise me if the final delay looks different than the proposed delay. That was true of the first delay of the rule issued earlier this year,” he said.
The CFA’s Hauptman says the circumstantial evidence found in the proposed delay and in public statements from the Trump Administration suggests the Labor Department has no intention to implement the rule on January 1, 2018.
“I think they’ve made it clear they never intended for full implementation of the rule to kick in as scheduled,” said Hauptman.
In its proposal, the Labor Department said it is “particularly concerned” that industry will have to incur undue expenses to comply with a rule that is ultimately changed.
The proposal also said the potential for investor losses under a prolonged delay of the rule “could be relatively small.”
Hauptman says that reasoning is proof the Labor Department is putting industry interests before consumers.
“All the evidence suggests Labor is willing to do whatever it takes to cater to the rule’s opponents’ interests and not retirement savers,” he added.
The proposed delay amounts to a “backdoor procedural tactic” to revoke the most critical compliance and enforcement components of the fiduciary rule, said Hauptman.
“We’re saying you can’t do that,” he added. “If you want to revoke the rule then you need to do it on its merits. Labor won’t be able to do that.”