(Editor’s note: This article was adapted from Human Capital, Melanie Waddell’s newsletter on the people shaping the financial regulatory landscape.)
The uncertainty surrounding the Labor Department’s fiduciary rule reached full throttle late last week when the U.S. Court of Appeals for the 5th Circuit stunned industry watchers by vacating the rule in its entirety. What now? I chatted with Eugene Scalia, the lead Gibson Dunn attorney who argued against Labor’s rule before the 5th Circuit, on Wednesday afternoon during the East Coast’s fourth nor’easter. Scalia’s take: The Obama-era fiduciary rule will be taken “off the books.”
Eugene Scalia is a son of deceased Supreme Court Justice Antonin Scalia who also served as the Labor Department’s solicitor during the George W. Bush administration, and is now a partner in the Washington office of Gibson, Dunn & Crutcher.
At Gibson Dunn, he co-chairs the firm’s Administrative Law and Regulatory Practice Group and is a member of its Labor and Employment Practice Group.
He represented nine plaintiffs, including the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association and the Financial Services Institute, in the case brought in a Texas court against Labor’s fiduciary rule.
My question-and-answer phone conversation with Scalia (as the snow piled up) follows:
What’s your reaction to the 5th Circuit ruling? “We were very pleased by the court’s decision. This is exactly the relief we thought was warranted and we asked for. The court recognized the very serious problems with the rule” that the Labor Department promulgated.
The court vacated the rule, “taking it off the books; the effect is on the rule itself, and of course if that rule applies nationwide, the effect is nationwide.”
Do you see Labor asking for a rehearing by the 5th Circuit? “I’d be very surprised to see Labor seek rehearing. This was an extraordinarily controversial rule by the prior administration. The [fiduciary] rule is a leading example of the kind of regulatory overreach that the White House counsel and other White House officials have criticized.”
The 5th Circuit “judges in the majority in the case are very well-regarded, and have a lot of admirers at the Justice Department.” Also,”from a policy perspective, one of the challenges in any new presidential administration is moving past your predecessor’s priorities. Having the Obama-era fiduciary rule vacated is an opportunity to move past the last administration’s priorities.”
The 5th Circuit ruling isn’t effective until May 7. Correct? “Unless rehearing is sought by the Labor Department, the mandate [to vacate the rule] will issue on May 7.”
That includes vacating the entire rule, correct, including the Impartial Conduct Standards that took effect on June 9, 2017? “Important elements of the rule took effect in 2017; once the 5th Circuit ruling becomes effective, no part of [Labor’s fiduciary] rule will be in effect.”
In terms of next steps? “This [fiduciary issue] is a matter that ought to be addressed by the SEC; Dodd-Frank made clear that the question of a uniform fiduciary standard is under the SEC’s purview. Eyes now turn to the SEC, and Labor can go back to focusing on the areas that Congress put under its responsibility. Likewise, state regulators have always been the primary regulators of insurance products, another aspect in which this [fiduciary] rule had the Labor Department” straying beyond its responsibilities.
Will this case eventually land at the Supreme Court? “Given where things stand now, I’d be very surprised to see this [case] reach the Supreme Court. The court’s decision is right in the mainstream of Supreme Court jurisprudence regarding the review of agency rules. I don’t see the 5th Circuit decision as one that would surprise or attract the attention of the Supreme Court.”
Does the 5th Circuit decision impact fiduciary actions being taken in the states? “I think the place to focus on now is the SEC. Congress has identified the SEC as the proper regulator for broker-dealers. The 5th Circuit decision does not prevent states” from taking fiduciary-related measures.
Former Labor Secretary Tom Perez and Assistant Secretary of Labor Phyllis Borzi maintained that the rule was designed to update the 40-year-old Employee Retirement Income Security Act to reflect changes in the retirement planning landscape. “First of all, this rulemaking was not about ERISA. It was far and away mainly about IRAs and the tax code. What you saw [with the fiduciary rule] was a statement by Assistant Secretary Borzi and others that basically the law that Congress enacted wasn’t good enough. That kind of assessment is not the Labor Department’s job, yet they acted as if it was proper for them to step in [and rectify] what they saw as errors” by Congress.
— Check out Looking for Leniency From FINRA? Don’t Count on Mitigation on ThinkAdvisor.