On Feb. 3, 2017, it was widely reported that President Trump would issue an executive order instructing the Department of Labor (DOL) to delay the applicability date of the fiduciary rule by 180 days. In the end, the “order” tuned out to be an “administrative memorandum” instructing the DOL to review the rule and determine whether it should be withdrawn or modified and reproposed. Consequently, the April 10, 2017 deadline remains intact unless and until one or more of the actions described below occur.
The confusion stemmed from a draft version of the memo that was leaked early Friday morning. The final memorandum doesn’t require a delay and merely calls for an examination of the rule (see below for our preliminary analysis of the memo).
The draft memo cited Sec. 705 of the Administrative Procedure Act (APA) as the source for the DOL’s “available legal authority to postpone by an additional 180 days the applicability date of all provisions of the Rule that are not yet applicable on the date this Memorandum is issued.” However, that section of the APA, entitled “Relief pending review,” provides:
“When an agency finds that justice so requires, it may postpone the effective date of action taken by it, pending judicial review. On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on application for certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.” [emphasis added]
The fact that the above citation, and any reference to a delay based upon pending litigation, was not included in the final memo seems to be telling. Indeed, the Obama administration’s DOL went to great lengths to protect the rule from being overturned by a new administration. The rule became “effective” in June 2016 and begins to become “applicable” on April 10, 2017.
Shortly after the memo was published on the White House website, the acting Secretary for the DOL, Ed Hugler, released the following statement: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”
Interestingly, the DOL’s statement doesn’t mention beginning the examination as directed by the memo and focuses solely on consideration of its legal options to delay the applicability date.
Analysis of the Requested Examination
Deconstructing the literal terms of the memo, it provides “that [the Secretary] shall publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and as consistent with law” if “[the Secretary] make[s] an affirmative determination as to any of the considerations identified in subsection (a)…” Subsection (a) sets forth three findings that, if determined by the Secretary during the course of the examination of the rule to be present, would require publication of new proposed rule as follows:
“(i) Whether the anticipated applicability of the Fiduciary Duty Rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
(ii) Whether the anticipated applicability of the Fiduciary Duty Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
(iii) Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.”
Finding No. (i) is arguably subjective and requires the Secretary to determine the regulation causes “harm.” Finding No. (ii) is similarly subjective and requires the Secretary to conclude that the regulation “adversely” affects investors or retirees.
Finding No. (iii), however, is much more straightforward and objective. There is no question but that if there are millions of written [BICE] agreements in circulation, it will necessarily increase the number of potential breach of contract claims filed by investors — particularly after a significant market correction. And while lower-cost products and fee-based accounts may be more widely recommended under the new regulation, the prices required to “gain access to retirement services” could arguably include aggregate charges from manufactures to distributors to advisors/planners and could be positioned in a way that factors in costs of compliance and additional regulatory and litigation exposure. While it has been suggested that there is not adequate time to conclude an examination prior to the applicability date (currently April 10, 2017), Finding No. (iii) could be reached in relatively short order.
Alternatively, the memo directs the Secretary to publish a new proposed rule “if [the Secretary] conclude[s] for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the priority identified earlier in this memorandum…” The “priority” described in the first paragraph is:
“… to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies [sic]”
Again, it would be subjective to find that the regulation does not sufficiently “empower Americans” in any respect. Consequently, the path of least resistance seems to be for the Secretary to focus on Finding No. (iii).
The bigger question, then, is what to expect in terms of either a “proposed rule rescinding or revising” the regulation and the degree to which either would be determined to be “appropriate and as consistent with law.” As it now stands, even if the DOL were to find that the rule infringes on any of Trump’s requirements described above, it would still have to find the legal authority to withdraw, repropose or delay the applicability date without going through the notice and comment process required under the APA.
APA Considerations
It is clear that the APA applies to an agency’s attempt to repeal or amend a rule that is already effective. Typically, it would require the DOL to provide notice of the proposed change(s), reference to legal authority under which the new rule is proposed, and either the terms or substance of the proposed changes or a description of the subjects and issues involved. The public would then have the opportunity to submit written comments, and it would need to publish a final rule at least 30 days prior to the new rule’s effective date.
In this case, a new rule would need to be finalized by the current rule’s applicability date of April 10 in order to comply with the APA. As discussed below, the DOL indicated that it would not issue its “status report” in response to the Trump memo until “on or around March 10th.” Consequently, it was widely suspected that there would not be ample time remaining to then complete a notice and comment period and issue a final rule (necessary to delay the applicability date of the current rule) that would allow for the APA’s 30-days-in advance requirement.
Sec. 553(b)(B) of the APA provides a mechanism, however, for circumventing notice and comment procedures when the agency “for good cause” finds that doing so would be “impracticable, unnecessary, or contrary to the public interest.” Sec. 533(d) dispenses with the requirement to publish a final rule 30 days in advance of its effective date (or, in this case, the current rule’s applicability date)). Given the white-hot nature of the debate surrounding the fiduciary rule, it is certain that any attempt to invoke the “good cause” exception would be challenged in court.
As it turns out, courts are divided when it comes to the appropriate standard of review and burden of proof required for an agency to defend its bypassing of the APA’s standard notice and comment requirements. Click here for more information concerning the split among courts.
DOJ Request for Stay and Subsequent Ruling in the Texas Proceeding
On Feb. 8, the Department of Justice (DOJ) fined a Motion for Stay of Proceedings regarding a key case pending in the Northern District of Texas. The case, which was brought by five plaintiffs including the U.S. Chamber of Commerce, Financial Services Institute, and the Securities Industry and Financial Markets Association, alleged among other things, that the DOL exceeded its authority in promulgating the rule.
In the motion, the DOJ stated that the “The [DOL] is carefully reviewing the issues raised in the [Trump memo], with the immediate goal of deciding the best course of action to implement its spirit and intent.” The motion further cautioned the court that, among other things, despite the DOL’s “exhaustive regulatory impact analysis” supporting the rule,” the “outcome of the [DOL’s] review may differ in relevant ways from the ‘could be updated’ as a result of the Trump memo and that the rule “may ... be ‘revised’ or ‘rescinded’” as a result.
The DOJ implored the court to hold off on its rule because “a judicial decision on a rulemaking as complex as this while the [DOL] is undertaking the examination and potential promulgation of a proposal pursuant to the [Trump Memo] can be expected to cause confusion with the affected public.”
Notwithstanding the DOJ’s 11th-hour plea, Chief Judge Barbara M.G. Lynn issued her Memorandum and Opinion Order on the parties’ cross-motions for summary judgment ruling in favor of the DOL denying relief for the plaintiffs shortly thereafter. A joint statement issued by the co-plaintiffs stated: “We continue to believe that the [DOL] exceeded its authority, and we will pursue all of our available options to see that this rule is rescinded.”
Notice of Proposed Rule Making (NPRM)
While many anticipated that the DOL would need to provide its status report in response to the Trump memo before taking additional action, late in the day on Feb. 9, some media outlets began reporting that the DOL had sent two NPRMs to the Office of Management and Budget (OMB). According to those reports, the DOL is requesting a 180-day delay of the current rule’s applicability date pursuant to a 15-day notice and comment period.
Given that there is no minimum review period required for the OMB, the new rule could be published any day. If the reports are accurate, this strategy would allow the DOL to avoid the risk of bypassing the APA's standard requirements, since the final rule could be published within 30 days of the current rule’s April 10 deadline.
Any legal challenge would need to be brought in the form of a request for injunctive relieve (a.k.a. a temporary restraining order, or TRO). A TRO would evaluate, among other factors, the balance of irreparable harm if the rule was to be implemented on schedule versus that created preserving the status quo. The DOL will likely argue that the status quo is the 1975 regulation defining investment advice and that an additional 180-day delay would not result in more irreparable harm than that which would be caused by allowing the rule to proceed (if it was, in fact, to find that the current rule was overly burdensome and/or its impact analysis was unsound).
A court evaluating a TRO also will consider the parties’ likelihood of success on the merits (if a full hearing on the merits of the case were to be conducted). Ironically, the deference courts must afford to agencies’ rulemaking is what carried the day for the DOL in the Texas case the day before the NPRM was reportedly sent to OMB; this same precedent could now be relied upon by the DOL in support of its likelihood to prevail on the merits that it exceeded its authority by issuing the new rule that would operate to delay the current rule.
It was further reported that a second NPRM calls for a new notice and comment period to be opened on the current rule generally. There has been no mention, as of yet, on the timeline for comment. However, if the first NPRM allows the DOL to finalize the delay by March 10 (30 days in advance of the current applicability date), there would be less urgency required for this one. The comment period would simply need to close sufficiently in advance of the expiration of the 180-day delay for the DOL to issue a revised final rule (and/or request another delay).
Next Steps
Since the fiduciary rule still has an applicability date of April 10, the Pension Resource Institute recommends proceeding with efforts to identify and remediate conflicts in ERISA-covered and IRA accounts. Time is of the essence if the rule ends up not being delayed.
Jason C. Roberts is Chief Executive Officer of the Pension Resource Institute.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
Used with permission. This post was updated by the author on Feb. 10; the original article can be found here.
The confusion stemmed from a draft version of the memo that was leaked early Friday morning. The final memorandum doesn’t require a delay and merely calls for an examination of the rule (see below for our preliminary analysis of the memo).
The draft memo cited Sec. 705 of the Administrative Procedure Act (APA) as the source for the DOL’s “available legal authority to postpone by an additional 180 days the applicability date of all provisions of the Rule that are not yet applicable on the date this Memorandum is issued.” However, that section of the APA, entitled “Relief pending review,” provides:
“When an agency finds that justice so requires, it may postpone the effective date of action taken by it, pending judicial review. On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on application for certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.” [emphasis added]
The fact that the above citation, and any reference to a delay based upon pending litigation, was not included in the final memo seems to be telling. Indeed, the Obama administration’s DOL went to great lengths to protect the rule from being overturned by a new administration. The rule became “effective” in June 2016 and begins to become “applicable” on April 10, 2017.
Shortly after the memo was published on the White House website, the acting Secretary for the DOL, Ed Hugler, released the following statement: “The Department of Labor will now consider its legal options to delay the applicability date as we comply with the President’s memorandum.”
Interestingly, the DOL’s statement doesn’t mention beginning the examination as directed by the memo and focuses solely on consideration of its legal options to delay the applicability date.
Analysis of the Requested Examination
Deconstructing the literal terms of the memo, it provides “that [the Secretary] shall publish for notice and comment a proposed rule rescinding or revising the Rule, as appropriate and as consistent with law” if “[the Secretary] make[s] an affirmative determination as to any of the considerations identified in subsection (a)…” Subsection (a) sets forth three findings that, if determined by the Secretary during the course of the examination of the rule to be present, would require publication of new proposed rule as follows:
“(i) Whether the anticipated applicability of the Fiduciary Duty Rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
(ii) Whether the anticipated applicability of the Fiduciary Duty Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
(iii) Whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.”
Finding No. (i) is arguably subjective and requires the Secretary to determine the regulation causes “harm.” Finding No. (ii) is similarly subjective and requires the Secretary to conclude that the regulation “adversely” affects investors or retirees.
Finding No. (iii), however, is much more straightforward and objective. There is no question but that if there are millions of written [BICE] agreements in circulation, it will necessarily increase the number of potential breach of contract claims filed by investors — particularly after a significant market correction. And while lower-cost products and fee-based accounts may be more widely recommended under the new regulation, the prices required to “gain access to retirement services” could arguably include aggregate charges from manufactures to distributors to advisors/planners and could be positioned in a way that factors in costs of compliance and additional regulatory and litigation exposure. While it has been suggested that there is not adequate time to conclude an examination prior to the applicability date (currently April 10, 2017), Finding No. (iii) could be reached in relatively short order.
Alternatively, the memo directs the Secretary to publish a new proposed rule “if [the Secretary] conclude[s] for any other reason after appropriate review that the Fiduciary Duty Rule is inconsistent with the priority identified earlier in this memorandum…” The “priority” described in the first paragraph is:
“… to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses, such as buying a home and paying for college, and to withstand unexpected financial emergencies [sic]”
Again, it would be subjective to find that the regulation does not sufficiently “empower Americans” in any respect. Consequently, the path of least resistance seems to be for the Secretary to focus on Finding No. (iii).
The bigger question, then, is what to expect in terms of either a “proposed rule rescinding or revising” the regulation and the degree to which either would be determined to be “appropriate and as consistent with law.” As it now stands, even if the DOL were to find that the rule infringes on any of Trump’s requirements described above, it would still have to find the legal authority to withdraw, repropose or delay the applicability date without going through the notice and comment process required under the APA.
APA Considerations
It is clear that the APA applies to an agency’s attempt to repeal or amend a rule that is already effective. Typically, it would require the DOL to provide notice of the proposed change(s), reference to legal authority under which the new rule is proposed, and either the terms or substance of the proposed changes or a description of the subjects and issues involved. The public would then have the opportunity to submit written comments, and it would need to publish a final rule at least 30 days prior to the new rule’s effective date.
In this case, a new rule would need to be finalized by the current rule’s applicability date of April 10 in order to comply with the APA. As discussed below, the DOL indicated that it would not issue its “status report” in response to the Trump memo until “on or around March 10th.” Consequently, it was widely suspected that there would not be ample time remaining to then complete a notice and comment period and issue a final rule (necessary to delay the applicability date of the current rule) that would allow for the APA’s 30-days-in advance requirement.
Sec. 553(b)(B) of the APA provides a mechanism, however, for circumventing notice and comment procedures when the agency “for good cause” finds that doing so would be “impracticable, unnecessary, or contrary to the public interest.” Sec. 533(d) dispenses with the requirement to publish a final rule 30 days in advance of its effective date (or, in this case, the current rule’s applicability date)). Given the white-hot nature of the debate surrounding the fiduciary rule, it is certain that any attempt to invoke the “good cause” exception would be challenged in court.
As it turns out, courts are divided when it comes to the appropriate standard of review and burden of proof required for an agency to defend its bypassing of the APA’s standard notice and comment requirements. Click here for more information concerning the split among courts.
DOJ Request for Stay and Subsequent Ruling in the Texas Proceeding
On Feb. 8, the Department of Justice (DOJ) fined a Motion for Stay of Proceedings regarding a key case pending in the Northern District of Texas. The case, which was brought by five plaintiffs including the U.S. Chamber of Commerce, Financial Services Institute, and the Securities Industry and Financial Markets Association, alleged among other things, that the DOL exceeded its authority in promulgating the rule.
In the motion, the DOJ stated that the “The [DOL] is carefully reviewing the issues raised in the [Trump memo], with the immediate goal of deciding the best course of action to implement its spirit and intent.” The motion further cautioned the court that, among other things, despite the DOL’s “exhaustive regulatory impact analysis” supporting the rule,” the “outcome of the [DOL’s] review may differ in relevant ways from the ‘could be updated’ as a result of the Trump memo and that the rule “may ... be ‘revised’ or ‘rescinded’” as a result.
The DOJ implored the court to hold off on its rule because “a judicial decision on a rulemaking as complex as this while the [DOL] is undertaking the examination and potential promulgation of a proposal pursuant to the [Trump Memo] can be expected to cause confusion with the affected public.”
Notwithstanding the DOJ’s 11th-hour plea, Chief Judge Barbara M.G. Lynn issued her Memorandum and Opinion Order on the parties’ cross-motions for summary judgment ruling in favor of the DOL denying relief for the plaintiffs shortly thereafter. A joint statement issued by the co-plaintiffs stated: “We continue to believe that the [DOL] exceeded its authority, and we will pursue all of our available options to see that this rule is rescinded.”
Notice of Proposed Rule Making (NPRM)
While many anticipated that the DOL would need to provide its status report in response to the Trump memo before taking additional action, late in the day on Feb. 9, some media outlets began reporting that the DOL had sent two NPRMs to the Office of Management and Budget (OMB). According to those reports, the DOL is requesting a 180-day delay of the current rule’s applicability date pursuant to a 15-day notice and comment period.
Given that there is no minimum review period required for the OMB, the new rule could be published any day. If the reports are accurate, this strategy would allow the DOL to avoid the risk of bypassing the APA's standard requirements, since the final rule could be published within 30 days of the current rule’s April 10 deadline.
Any legal challenge would need to be brought in the form of a request for injunctive relieve (a.k.a. a temporary restraining order, or TRO). A TRO would evaluate, among other factors, the balance of irreparable harm if the rule was to be implemented on schedule versus that created preserving the status quo. The DOL will likely argue that the status quo is the 1975 regulation defining investment advice and that an additional 180-day delay would not result in more irreparable harm than that which would be caused by allowing the rule to proceed (if it was, in fact, to find that the current rule was overly burdensome and/or its impact analysis was unsound).
A court evaluating a TRO also will consider the parties’ likelihood of success on the merits (if a full hearing on the merits of the case were to be conducted). Ironically, the deference courts must afford to agencies’ rulemaking is what carried the day for the DOL in the Texas case the day before the NPRM was reportedly sent to OMB; this same precedent could now be relied upon by the DOL in support of its likelihood to prevail on the merits that it exceeded its authority by issuing the new rule that would operate to delay the current rule.
It was further reported that a second NPRM calls for a new notice and comment period to be opened on the current rule generally. There has been no mention, as of yet, on the timeline for comment. However, if the first NPRM allows the DOL to finalize the delay by March 10 (30 days in advance of the current applicability date), there would be less urgency required for this one. The comment period would simply need to close sufficiently in advance of the expiration of the 180-day delay for the DOL to issue a revised final rule (and/or request another delay).
Next Steps
Since the fiduciary rule still has an applicability date of April 10, the Pension Resource Institute recommends proceeding with efforts to identify and remediate conflicts in ERISA-covered and IRA accounts. Time is of the essence if the rule ends up not being delayed.
Jason C. Roberts is Chief Executive Officer of the Pension Resource Institute.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
Used with permission. This post was updated by the author on Feb. 10; the original article can be found here.
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