Welcome back to Human Capital! I’m Melanie Waddell in Washington. This week, Eugene Scalia, the former Gibson Dunn attorney who fought tooth and nail to see that the Obama-era Labor Department fiduciary rule was overturned, may still be able to influence a new DOL fiduciary rule.
Scalia, who President Donald Trump picked to be the new head of Labor, told senators Thursday that he would, if confirmed, seek advice from DOL in-house ethics folks on whether he should participate in crafting a new rule that jibes with the Securities and Exchange Commission’s Regulation Best Interest.
On Tuesday, the Senate Health, Education, Labor and Pensions Committee voted 12-11 on to advance Scalia’s nomination to the full Senate; no Republican senators voted against the nominee.
The question now: Is it too late for Scalia — who was instrumental in helping kill the previous fiduciary rule — to influence a rule, or is it already sewn up? Word on the street is that Labor’s current deputy solicitor, Rachel Mondi, a former Scalia protégé at Gibson Dunn, has had an active hand in devising the new Labor rule, which is said to be in its final stages.
Also on tap: SEC Chairman Jay Clayton will no doubt be peppered with questions about Reg BI as he testifies Tuesday before the House Financial Services Committee.
During his nomination hearing before the Senate HELP Committee, Scalia told Sen. Patty Murray, D-Wash., that he was retained by clients while at Gibson Dunn to address the now-defunct fiduciary rule, which he said “was a controversial rule. Thankfully, the Securities and Exchange Commission has stepped in and itself adopted what’s called a best-interest standard with respect to broker-dealers who are folks that ordinarily are regulated directly by the SEC, rather than by the Department of Labor. Again, having worked at the department before, I’m very mindful of this special role that the department has in protecting pensions and workers’ retirements.”
Fred Reish, partner at Drinker Biddle & Reath, believes Scalia “punted instead of answering” Murray’s question. Scalia “knew that, if he said that he would be involved in developing a new fiduciary regulation, the challenges and questions [during the hearing] would have been intense.” Instead “he said that he would consult with the Department’s Ethics Office and follow their guidance.”
The bottom line: “We still don’t know if he will be involved or not,” Reish said. Steve Saxon, principal at Groom Law Group, agreed that “we just don’t know the answer on the ethics side.”
Based on ethics rules during her time as head of Labor’s Employee Benefits Security Administration (EBSA) during the Obama administration, Phyllis Borzi tells Human Capital that “there’s no doubt” in her mind that Scalia should recuse himself from fiduciary rule participation. “However, it does not appear to somebody outside of the process that the Trump ethics standards appear to even exist, let alone apply.”
Is it too late for Scalia to get involved? “That’s a really good question,” said Borzi, the architect of the now-defunct fiduciary rule.
Labor’s regulatory agenda said a proposed rule would be out in December. There’s talk it could come sooner.
One factor could affect timing: a reorganization of EBSA, the Labor division in charge of a fiduciary rule, is said to take effect on Oct. 1.
“By all reports, the Labor Department has done substantial work” on its fiduciary rule redux, adds Joshua Lichtenstein, a partner at Ropes & Gray in New York who focuses on ERISA and employee benefits, and there’s “certainly an opportunity” for Scalia to make changes before it’s released.
Scalia “brings with him great knowledge and expertise about the litigation market as it deals with DC plans,” Lichtenstein said. Labor may want Scalia to weigh in on how to shield its new fiduciary rule from lawsuits by “designing more safe harbors for plan fiduciaries to be able to make decisions in the best interest of plan participants.”
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