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Like an actor in a rubber monster suit stomping on a city in a cheesy Saturday afternoon TV movie, the Labor Department’s impending fiduciary rule, limiting access to retirement investment advice for small businesses and their workers, tramples over the rule of law, attorney Eugene Scalia writes in The Wall Street Journal:
To a lawyer, though, what’s most striking about the rule is that it’s a regulatory Godzilla—an extraordinary example of disregard for limitations imposed by Congress and the Constitution.
To start, although the rule will transform the market for IRAs, the Labor Department has no authority to regulate IRAs. How, you might ask, is it regulating something that by law it may not?
Well, Labor has deregulatory authority with respect to IRAs—it can lift restrictions that otherwise apply. So the Labor Department first adopted an overbroad definition of who is a fiduciary, essentially capturing all insurance agents and brokers who deal with IRAs. They automatically became subject to the restrictions Congress places on fiduciaries, effectively barring the receipt of commissions.
Then the department used its deregulatory authority to make insurance agents and brokers an offer they couldn’t refuse: They could get commissions after all, if they complied with a raft of new requirements designed for IRAs. In this way the Labor Department made itself—not the Securities and Exchange Commission and not state insurance agencies—the principal regulator of financial professionals who service IRAs.
But it doesn’t stop there. The Labor Department created a “new grounds for people to sue,” when the Supreme Court has ruled that only Congress can do that. In addition, Scalia also points out the rule also attacks arbitration, a useful alternative to long, drawn-out court cases:
The Federal Arbitration Act generally prohibits federal agencies and states from restricting the use of arbitration. But again the Labor Department used its contract requirement to flout Supreme Court precedent: Under the new rule, the contracts financial firms must enter with customers can’t allow arbitration of claims that could be brought as class-action lawsuits.
As ugly as the rule’s “sweeping assault on the rule of law,” are the harms small retirement savers will endure from it. A Center for Capital Markets Competitiveness report that collected and analyzed data from public submissions to the Labor Department found:
- 7 million IRA holders could lose access to investment advice.
- Service fees could rise 200%. Over the next 10 years this would cost investors $109 billion.
- 11 million households could find themselves with fewer retirement investment options.
Now, the SEC is getting into the act and is accepting comments to discern a path forward. This is significant as the SEC is the agency charged with overseeing investment advisors and broker-dealers. Former Labor Secretary Tom Perez went through contortions to create this regulatory Godzilla. Who knows, maybe SEC Chair Jay Clayton will find a new weapon to conquer this monstrosity.