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DOL Accused of ‘Legislation by Rulemaking’ on Fiduciary Rule

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The Department of Labor’s new rule to amend the definition of fiduciary on retirement advice is “legislation by rulemaking,” the former head of DOL’s Employee Benefits Security Administration told senators Wednesday, with the rule that “ultimately passed” running contrary to what Congress intended when it passed the Employee Retirement Income Security Act.

“Regulatory authority delegated to the executive branch by Congress was not intended to make federal regulators an ersatz legislative body, but to facilitate the practical implementation of laws passed by Congress,” Brad Campbell, former head of EBSA who’s now of counsel with the law firm Drinker, Biddle & Reath, told members of the U.S. Senate Committee on Homeland Security & Government Affairs.

Campbell argued during the hearing, titled “The Administrative State: An Examination of Federal Rulemaking,” that some regulators — specifically the DOL — are using the rulemaking process “to make policy and legal judgments that are properly the responsibility of Congress.”

DOL’s new fiduciary regulation, which Campbell said is likely “the most sweeping change” to retirement savings and financial regulation since the 401(k), “is entirely the product of the Department’s own initiative.”

Congressional direction, he continued, “was for a fiduciary standard to be handled by the Securities and Exchange Commission” through Section 913 of the Dodd-Frank Act.

Congress “did not intend” for DOL “to become a primary regulator of the conduct and compensation of financial advisors to individual retirement accounts,” Campbell said, nor did Congress intend for the “unique fiduciary standard of care applicable to employee benefit plans under ERISA to apply to IRAs.”

Lawmakers, Campbell continued, created ERISA plans and IRAs “at the same time, and affirmatively chose NOT to apply the ERISA fiduciary standard to IRAs. The reason is clear — in an ERISA plan, a fiduciary makes many decisions for me, and thus a fiduciary standard rooted in trust law strictly governs those decisions over which I have no control. By contrast, in an IRA, I make my own decisions, so Congress treated IRAs much as it treated other types of investment vehicles, and relied on the extensive network of federal and state financial regulators and laws already protecting investors.” Congress, he continued, “created a new private right of action and legal remedies for ERISA plans, but did not create a special cause of action for IRAs.”

Sen. Ron Johnson, R-Wis., chairman of the committee, said in his opening remarks at the hearing that DOL’s rule “will likely increase compliance costs for advisors, driving up the price of their services and decreasing access to advice for low- and middle-income investors. In drafting this rule, the Labor Department ignored concerns from Securities and Exchange Commission and Treasury Department staff.”

Johnson released a report in late February, The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers, based on an examination that he started in February 2015 on DOL’s rulemaking process in which he asked 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 about their collaborative process on DOL’s rule.

Sen. Kelly Ayotte, R-N.H., who led the effort to ensure that DOL took employee stock ownership plans out of the final fiduciary rule — and succeeded — argued that despite the fact that “a whole host of comments” were submitted to DOL, “they seem to be pretty much ignored.”

She questioned Campbell on whether comment periods generate “a lot of interest” from regulatory agencies.

“The power of an agency to proceed with its own policy judgment is relatively unconstrained,” Campbell replied. Taking public comments and looking at them, he said, is “different from being informed by them.”

He also questioned DOL’s ability to carefully consider the comments given “how rapidly” DOL was able to finalize the rule. “I don’t see how they could have done a credible job at considering those comments in that time period.”

Congress should consider as part of regulatory reform measures “significant overlap in regulation” among various regulatory agencies, Campbell said. When agencies fail to coordinate, “the regulated community gets whipsawed in the middle,” he said. “Mandatory coordination between the agencies is needed.”

He said: “Whether you think the Labor Department is right that IRAs should be subject to the ERISA standard of care is not the issue. The issue is that this matter is something Congress previously addressed, and changing it should be a Congressional decision, not legislation by rulemaking.”

— Check out GOP Fights to Block DOL Fiduciary Rule on ThinkAdvisor.