The Labor Department’s proposal to delay the full implementation of the fiduciaryrule to July 2019 will likely meet a legal challenge fromconsumer advocate groups, according to several sources.

“If they finalize the delay as it is proposed, Labor shouldexpect a legal challenge,” said Micah Hauptman, an attorney withthe Consumer Federation of America, which filed a comment letteropposing the delay of the scheduled January 1, 2018 implementationof the rule.

The proposed delay, released in August, was opened to a 15-dayperiod of public comment, which closed September 15.

At issue is the whether the Labor Department has adequatelyjustified the necessity of a delay, which executive agencies arerequired to do under the Administrative Procedure Act.

Opponents of the delay have also claimed that Labor’s proposaldoesn’t accurately cite its statutory authority to postponeimplementation of the fiduciary rule.

At the core of consumer advocates’ position is whether Labor isactually proposing a stay of the rule under the guise of a simple delay of therule.

“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 PolicyIntegrity, a non-partisan think tank, also characterize theproposed delay as a stay of the rule, and argue that Labor does nothave the statutory authority to issue a stay.

“Where is Labor’s authority to do this? They haven’t said,” saidBethany Davis Noll, litigation director at the Institute.

Davis Noll says administrative law is clear: Agencies mustdescribe their statutory authority at all levels of rule making andback it up with fact.

“We’ve surveyed the landscape and I don’t see where they havethe authority to do this,” said Davis Noll. “If Labor thinks it hasthe authority, then tell us—but they haven’t. It’s not ok to hidethe ball.”

In its proposed delay, Labor cites a provision of the EmployeeRetirement Income Security Act that gives the agency authority togrant administrative exemptions.

But that authority does not allow Labor to issue a stay of therules, says Davis Noll.

In the comment letter she co-authored, Davis Noll argues thatLabor describes the proposal as an “extension” and a “delay” of thefiduciary rule, and does not say that it is issuing anexemption.

Moreover, the substance of the proposal amounts to a stay of therule, because it would remove its enforcement authority for 18months. “That proposed action can only be described as anadministrative stay,” according to language in the Institute forPolicy Integrity comment letter.

Labor accused of pulling a fast one

A provision of the Administrative Procedure Act gives agenciesthe authority to stay regulations.

But that authority is limited: It does not allow agenciesto stay rules that are already effective. The fiduciary rule becameeffective 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 consideringdoing so, but they opted to base its proposal on ERISA’s exemptionprovision, for fear of being sued.

“Labor knew this was going to be an issue,” said Davis Noll. Inher analysis, Labor is betting that it will have better legalgrounds to repeal the rule if it is not implemented.

“They are trying to set up a world where the rule hasn’t beenimplemented,” she said. “An eventual repeal of the rule will bedifficult to rationalize because of the original cost benefitanalysis behind the rule (under the Obama Administration). If theystay the rule and put off implementation, it will make repealeasier.”

Davis Noll says the strategy amounts to Labor trying to “pull afast one.”

That position presumes the Labor Department is intent onrepealing the rule outright.

But other evidence in requests for information from the agencysuggests that Labor is focused on improving the rule through newexemptions that would facilitate compliance, and not simplyeradicating the fiduciary rule.

Whether those prospective new exemptions would improve the rule,or deprive retirement investors of adequate protections, is in theeye of the beholder.

“One person’s sensible reform is another person’s neutering ofthe consumer protections,” said Aron Szapiro, director of policyresearch at Morningstar.

Szapiro is skeptical of the position that Labor’s intent is tosimply repeal the rule without issuing new investorprotections.

“There is broad consensus that investors need more protectionsthan they previously had,” he said. “Most people really do agree onthat.”

Szapiro expects a delay to be issued before January 1, butexactly when is anyone’s guess.

“It wouldn’t surprise me if the final delay looks different thanthe proposed delay. That was true of the first delay of the ruleissued earlier this year,” he said.

Circumstantial evidence

The CFA’s Hauptman says the circumstantial evidence found in theproposed delay and in public statements from the TrumpAdministration suggests the Labor Department has no intention toimplement the rule on January 1, 2018.

“I think they’ve made it clear they never intended for fullimplementation of the rule to kick in as scheduled,” saidHauptman.

In its proposal, the Labor Department said it is “particularlyconcerned” that industry will have to incur undue expenses tocomply with a rule that is ultimately changed.

The proposal also said the potential for investor losses under aprolonged delay of the rule “could be relatively small.”

Hauptman says that reasoning is proof the Labor Department isputting industry interests before consumers.

“All the evidence suggests Labor is willing to do whatever ittakes to cater to the rule’s opponents’ interests and notretirement savers,” he added.

The proposed delay amounts to a “backdoor procedural tactic” torevoke the most critical compliance and enforcement components ofthe fiduciary rule, said Hauptman.

“We’re saying you can’t do that,” he added. “If you want torevoke the rule then you need to do it on its merits. Labor won’tbe able to do that.”

Related: Catch up on all DOL fiduciary rulecoverage