In politics and policy, when a claim is made enough times, people often assume it to be true, regardless of whether it has any basis in fact or law. That’s certainly been the case with the Department of Labor’s (DOL’s) new Conflict of Interest rule, which promises to save retirement investors tens of billions of dollars every year by requiring all financial professionals who provide retirement investment advice to put their clients’ interest first.
Now, the same Wall Street lobbyists who fought unsuccessfully to kill the rule, using specious arguments about its supposedly harmful impact on “small savers,” have a new line of attack they are hoping will be persuasive with the incoming Trump Administration. Amid rampant speculation over whether the new Administration will try to kill, water down, or delay the implementation of the new rule, some D.C. “insiders” and Wall Street lobbyists have claimed that the new Administration has the authority on January 20th to delay the rule’s implementation date to buy time to significantly change or eliminate the rule altogether.
While this “delay first, ask questions later” approach may be attractive to some in the financial industry who aren’t actually interested or capable of serving their clients’ best interests, it would not pass legal muster.
A new administration can’t just change by fiat regulations that are already on the books. If the new administration wishes to amend or rescind the Conflict of Interest rule—including by changing the phased implementation dates that begin in April 2017—the DOL must begin a new rulemaking process pursuant to the Administrative Procedures Act (APA), just as they did in adopting the rule.
Under the APA, each agency is required to provide notice to the public and an opportunity to comment on proposed regulatory changes, including changes to a rule’s implementation timeline. The agency must explain its reasoning for any proposed changes, often including by conducting a regulatory impact analysis justifying the proposed regulatory action. Under settled Supreme Court jurisprudence, the agency, when engaging in rulemaking, must “examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made,” lest the decision be deemed by a court to be “arbitrary and capricious” or contrary to law. In short, any hasty changes to an agency rule without rigorous analysis and input from interested parties would violate the APA.
In their efforts to stave off this rulemaking, Wall Street opponents demanded that the DOL engage in a robust process, and the DOL more than met its legal obligation to do so. It would be the ultimate Conflict of Interest rulemaking irony if those same opponents suddenly decided that those same exacting standards shouldn’t apply when the proposed regulatory action is in their economic interests.
Upon consideration of some of the relevant facts supporting the Conflict of Interest rule, the DOL would face a high hurdle to justify delaying implementation.
- Retirement savers are losing tens of billions of dollars every year that the rule is not implemented, and the longer the rule is not implemented, the more money they would lose.
- At the same time, many firms have justifiably relied on the rule’s being implemented beginning in April 2017 and have already made the proper investments they need to comply on that date. As a result, they’re not likely to benefit from any delay and in fact would experience unnecessary and unjustified losses as a result of a delay.
- In addition, any delay could have the effect of eliminating any competitive advantage those firms would have gained relative to firms that have decided not to take such prudent efforts. In other words, if the DOL delayed the rule, it could effectively bail out firms that weren’t interested or able to come into compliance on time. And, perversely, it would harm firms that have done the right thing by being proactive and pro-investor.
Some D.C. “insiders” and Wall Street lobbyists have proposed an alternative path for the DOL to delay the rule’s implementation. They suggest that the DOL issue an “interim final” rule to circumvent the initial notice-and-comment process. However, implementing an interim final rule is proper only when an agency demonstrate an urgent need to issue a rule prior to the completion of notice-and-comment rulemaking. Indeed, courts have upheld agencies’ use of interim final rules in rare emergency situations when the delay necessitated by the rulemaking process would imminently threaten life or physical property.
In this instance, courts are unlikely to fall for such a blatant and unwarranted end-run around the normal rulemaking process. First, implementation of the rule beginning in April 2017 threatens no impending peril. In fact, it’s just the opposite. Retirement savers will benefit from the rule because it will ensure that they receive investment advice that’s in their best interest rather than more costly, conflict-ridden advice that drains their savings and exposes them to unnecessary risks. While industry lobbyists continue to push the tired argument that “small savers” could lose access to valuable products and services because of the rule, these claims are speculative and being refuted by actual evidence. Many firms, including Merrill Lynch, LPL, Schwab, and Betterment to name just a few, have announced that they can and will comply with the rule and provide all retirement savers with the best-interest advice they need and deserve, at a reasonable cost and without interruption. Second, circumventing the ordinary rulemaking procedures would in fact harm, not benefit, the public interest, because it would leave retirement savers without the protections of the rule, allowing certain firms and their advisers to continue to rip off retirement savers.
The APA demands that rulemakings follow a process intended to result in reasoned decisionmaking based on input from all sides. We should expect nothing less in this case, when billions of dollars in retirement money are on the line.