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February 24, 2016 at 10:00 AM
The Department of Labor “ignored and rejected” concerns raised by the Securities and Exchange Commission on how to craft its rule to change the definition of fiduciary on retirement advice, resulting in a “flawed process” in devising a plan that “could ultimately hurt American retirement savers,” according to a report released Wednesday by Sen. Ron Johnson, chairman of the Senate Homeland Security and Governmental Affairs Committee.
In his report, The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers, the Republican senator from Wisconsin notes that he started examining in February 2015 DOL’s rulemaking process by asking for documents and correspondence from the SEC and DOL as well as from the Financial Industry Regulatory Authority, the Treasury Department and the Office of Management and Budget.
This inquiry, Johnson stated in his report, “found that career, nonpartisan professional staff” at the SEC, regulatory experts at the Office of Information and Regulatory Affairs (OIRA) within OMB, and Treasury Department officials “expressed numerous concerns” to DOL about its proposed rule.
Johnson states that documents obtained by the Committee also indicate that officials at DOL “disregarded many of these concerns and declined to implement recommendations” from the SEC, OIRA and Treasury.
“The majority staff found that the Labor Department frequently prioritized the expeditious completion of the rulemaking process at the expense of thoughtful deliberation,” Johnson said. Also, “the majority staff found indications that political appointees at the White House played a key role in driving the rulemaking process at the inception of the redrafting effort.”
(Related: House Speaker Ryan Opposes DOL Fiduciary Rule)
DOL’s proposal, Johnson concludes, “appears to be a solution in search of a problem, driven by ideology rather than a market need.”
Johnson’s report cites contentious emails between a DOL official and an SEC official about the rule’s intent, with the SEC official stating that he was “utterly confused as to what the purpose of the proposed DOL rule is.”
After receiving the full proposed rulemaking from DOL in November 2014, the agency exchanged edits and comments with DOL in January 2015, the report states. “Career, nonpartisan SEC staff identified at least 26 items of concern related to the substantive content of the proposed rule,” according to Johnson’s report, which included SEC staff concerns about the “clarity” of the rule’s best interest contract exemption, “inadvertent consequences of a de minimis breach, conflicts with federal securities laws and [Financial Industry Regulatory Authority] rules, and a lack of cost-benefit analysis of alternatives.”
DOL “repeatedly provided an incomplete response, declined to accept the SEC staff’s recommendations, or incorrectly implemented the SEC expert’s recommendations,” the report states.
Specifically, in response to eight recommendations, DOL “declined to edit the operative language of the proposal, and instead merely modified or added language in the proposal’s preamble. The Labor Department outright rejected the SEC’s two recommendations related to providing a quantitative cost-benefit analysis of considered alternatives to the rule.”
However, Barbara Roper, director of investor protection at the Consumer Federation of America, told ThinkAdvisor in a Wednesday email message that her “first impression” after reading Johnson’s report was that it showed “that DOL did exactly what they said they did, which is consult extensively with the SEC.”
