This week, the U.S. Department of Labor’s highly controversial fiduciary rule — crafted during the Obama administration — is slated to go into effect. The regulation threatens to reduce retirement investment options for lower-income households, suck millions of dollars from the economy in compliance costs, create needless confusion, and spark wasteful litigation over poorly drafted text. Fortunately, it is not too late for Labor Secretary Alexander Acosta to take decisive corrective action in light of recently changed circumstances to put the entire flawed rule on hold, but time is running out.
This precarious situation could have been entirely avoided by the Labor Department chief, who chose the curious medium of a recent misleading Wall Street Journal op-ed to announce his decision not to delay the regulation’s June 9 effective date, which he erroneously justified out of “respect for the rule of law.”
{mosads}Understanding why his analysis and conclusion are wrong — as well as the fiduciary rule’s legally dubious origins — is critical to avert the rule’s looming damage. Indeed, there is now an excellent reason to take swift action: last week, U.S. Securities and Exchange Commission Chairman Jay Clayton announced that the SEC will consider modifying its own fiduciary standards for brokers providing investment advice to retail investors.
Long overdue cooperation between the DOL and SEC in this effort can stop the financial bleeding that the Obama-era fiduciary rule will soon cause to lower-income retirees. The SEC, which has primary authority in matters regarding brokers and investment advisers, was uncharacteristically absent in the rule’s formation under the previous administration due to DOL intransigence and likely political pressure from the Obama White House. Moving forward, Secretary Acosta must take this history into account and reassess his incorrect assertion that the SEC merely punted when the fiduciary rule was first being rolled out.
As DOL emails profiled in a 2016 U.S. Senate report show, DOL Obama appointees actively undermined SEC participation in the rule’s design. They instead turned to Obama White House officials for data to skew the rule’s regulatory impact analysis (RIA) in favor of a pre-desired outcome. Public outcry widely exposed the RIA’s glaring errors of understated costs and overstated benefits, which the politicized DOL ignored last year. My colleague, former SEC chief economist Craig Lewis, debunked the DOL’s fundamental claim that its rule will save investors $17 billion per year.
Given this Machiavellian history, it is unsurprising that the rule is currently being challenged in court for violating the Administrative Procedure Act. Indeed, the RIA’s errors, and the documented political interference that drove its false claims, hardly support Secretary Acosta’s conclusion in his op-ed that there is “no principled legal basis” to postpone effectiveness of the rule.
In fact, there are pending lawsuits, which give Secretary Acosta a clear legal path to delay the rule’s implementation under Section 705 of the Administrative Procedure Act, which expressly allows agencies to postpone effective dates of regulations when they are under judicial review. It is unclear why Secretary Acosta did not follow this appropriate legal path.
His recent op-ed also failed to acknowledge that DOL staff actively undermined one of President Trump’s first executive actions, a Feb. 3 memorandum that directed the DOL to “prepare an updated economic and legal analysis concerning [the rule’s] likely impact.” Instead of implementing the letter and spirit of the President’s directive, and prior to Secretary Acosta’s confirmation, holdover DOL staff refused to start an updated economic analysis and to put the entire rule on hold.
Fortunately, the SEC’s action requesting comment on its fiduciary standards for brokers offers Secretary Acosta and the DOL a second chance to delay this pending rule. Not only does the potential for future SEC action necessitate coordination between the two agencies in order to avoid unnecessary costs from conflicting standards of care, but also it could fundamentally alter the purported benefits set forth in the rule’s regulatory impact analysis.
Secretary Acosta’s decision to cooperate with the SEC in this matter moving forward is the right one, and he is lucky to have another opportunity to help American savers and to ensure regulators follow the law. He now must learn from his mistake, and delay this rulemaking until the DOL can prepare an updated economic and legal analysis of the fiduciary rule developed in full cooperation with SEC staff. It would be wholly illogical to implement a rule while, as the presidential memorandum mandated, the DOL studies potential harm to investors. Like doctors, the DOL should first do no harm.
Paul S. Atkins served as a Republican member of the U.S. Securities and Exchange Commission from 2002 to 2008 under President George W. Bush. He is now chief executive officer of Patomak Global Partners, a financial services consulting firm.
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