Close Close

Regulation and Compliance > Federal Regulation > DOL

Senator Blasts DOL for Ignoring SEC’s Fiduciary Rule Concerns

Your article was successfully shared with the contacts you provided.

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.”

Said Roper: “That DOL did not always take its lead from an agency that has been paralyzed into inaction [on its own fiduciary rule] may explain why the DOL has proposed such a strong, pro-investor rule.”

Johnson notes in the report that after DOL “sought to address the SEC’s stated items of concern,” a senior SEC official emphasized to DOL that concerns remained:

“We continue to believe that commentators are likely to raise concerns that the proposal may result in reduced pricing options, rising costs and limited access to retirement advice, particularly for retail investors,” the official said, according to the report. “Commentators also may express concerns that broker-dealers, as a practical matter, may be unlikely to use the exemptions provided and may stop providing services because of the number of conditions imposed, likely compliance costs, and lack of clarity around several provisions.”

But Roper argues that the SEC official’s remark is indicative of the SEC’s “long and undistinguished history of folding in the face of these sorts of [brokerage] industry arguments.”  

Concluded Roper: “If [Johnson and his committee] went looking for a smoking gun, they failed to find it.”

Johnson also noted remarks made by former SEC Commissioner Daniel Gallagher that the DOL “did not collaborate with the SEC” in the rulemaking process. Gallagher said last February at the SEC Speaks conference in Washing that despite public reports of “close coordination between the DOL and SEC staff,” regarding the fiduciary rules, “I believe this coordination has been nothing more than a ‘check the box’ exercise by the DOL designed to legitimize the runaway train that is their fiduciary rulemaking.”

Johnson stated in his report that the information he obtained “supports Commissioner Gallagher’s position” that DOL “failed to work in good faith with the career, nonpartisan, professional staff at the SEC.”

For more than a year before DOL released the proposed rule, the report states, “SEC staff received draft portions of the proposed rulemaking package, including a draft regulatory impact analysis, draft global exemption (best interest contract exemption), and background on the point of sale disclosure.”

Communications between DOL and the SEC staff, the report continues, “reveal numerous instances in which the Labor Department requested advice from SEC staff on fundamental aspects of the proposal, but disagreed with the SEC’s recommendations and, in doing so, disregarded the SEC staff’s subject-matter expertise.”

Gallagher, who left his post as an SEC commissioner early and is now president of Patomak Global Partners in Washington, told ThinkAdvisor in a Wednesday email message that DOL’s fiduciary rule “is a train wreck and claims of SEC coordination are beyond exaggeration. This is a political campaign, not a rulemaking.”

— Related on ThinkAdvisor:


© 2023 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.