For starters, we can dispense
with the notion that federal agencies are always impartial and unfailingly
neutral. We know better. We know that the heads of federal agencies
often dance to the tune played by the administration in power at the time. To the degree they do this, they are partisan,
something that in a perfect world these agencies would not be. Of course, this
phenomenon is not new. It has been this
way in previous administrations, too.
Some will argue that it is a
matter of degree, and contend that there has been more partisan teamwork during
the present administration than has been the norm. I’m not a historian, so I’ll leave that
judgment to those who are. I do believe,
however, that in the process of drafting and presenting proposed regulations on
conflicted advice in the retirement plan space, the Department of Labor (DOL)
and Obama administration are setting a high partisanship bar for future
bureaucrats to shoot for.
The latest after-shock in the
seismic upheaval these regulations represent for the industry is a report by
the Senate Committee on Homeland Security and Government Affairs, chaired by
Sen. Ron Johnson (R-Wisc). Though the connection
of these regulations to “homeland security” may seem tenuous, the original
purpose of the agency – as the “government affairs” element in the title
suggests – has historically been to oversee the efficiency, economy, and
effectiveness of agencies and departments of the federal government; in
particular, relationships between federal agencies in the regulatory
process. This side of its
responsibilities comes a lot closer to explaining the objections found in the Committee’s
report.
The report was published on
February 24, 2016, several weeks after legislation was introduced in the Senate
to block these regulations. The
regulations are currently in the hands of the federal Office of Management and
Budget (OMB), awaiting clearance to be released as “final.”
Contention over these
regulations, which would establish fiduciary standards and rewrite rules for
interactions between advisers and brokers and their retirement saver clients, is
nothing new. The process of proposing, collecting comments and (we hope) revising
the regulations for presentation as final has been as fraught with disagreement
and bitterness as any in our collective industry memory. What is new are some of the
revelations in Sen. Johnson’s report, which shine light on behind-the-scenes
procedures of DOL’s Employee Benefits Security Administration (EBSA), the
sub-agency that owns – and would enforce – the conflicted advice regulations.
A second comment on partisanship could
be made here. The Committee chaired by
Sen. Johnson is controlled by his party, the Republicans. The report released last week is the
“majority report,” which means it was not presented as the unanimous
conclusions of Republicans and Democrats on this committee. It should be said, however, that substantial
criticism of these regulations has also come from the Democratic side of the
aisle in both Senate and House. How
these Democrats would vote if it came down to an effort to override a veto of
regulations-killing legislation is unclear.
But there is easily more bipartisan opposition to these proposed
regulations than there is bipartisan support.
In fairness to EBSA and the Obama
administration, this Committee report does some dot-connecting and conjecturing
that could be questioned. For example,
the fact that EBSA has not demonstrated a willingness to accept some of the
suggestions offered by other federal agencies, and by public and private
critics, may not be convincing grounds for denunciation. None of us takes every suggestion given to
us, in either our personal or our professional lives.
But some of the report’s findings
are very troubling, findings based on e-mails and other communications which –
in many cases – were obtained without DOL cooperation. In fact, in some instances these
communications were obtained over opposition – even obstruction – by the
DOL.
One of the key concerns of
lawmakers and the retirement industry was whether the DOL had effectively
communicated with the Securities and Exchange Commission (SEC) as the
conflicted advice regulations were being drafted. This should have been important because a
major share of the investments in IRAs and retirement plans are securities, and
because the compensation formulas associated with securities investing have significant
variability, and – frankly – the most potential for abuse. Any attempt to regulate the process of
securities investing should have closely involved the agency with the greatest
securities expertise.
The DOL not only refused to
provide copies of what might have been its key communications with the SEC, but
evidence obtained by the Committee from the SEC paints a picture of the DOL
attempting to influence SEC not to fully cooperate with the DOL; not to provide
these requested communication records. SEC
staff had also pointed out numerous flaws in the regulations. The upshot is that the DOL’s claim to have
actively and substantively worked hand-in-hand with the SEC in creating these
regulations turns out to be a fiction.
Another key concern has been the actual
origin of the regulatory initiative. Did
it originate within the DOL, based on credible evidence that retirement
investors were being harmed? Or, did the
impetus come from the White House, based on a belief that investor abuse is
inevitable considering current structures for compensating advisors and brokers
who give saving and investment advice?
The report highlights substantial
evidence that administration staff were involved in ratcheting-up the
perception that the conflicted advice regulations were needed. A White House memo written months before DOL
issued its proposed regulations, and cited in the Committee report, had argued
that “aggressive regulatory action [is] necessary to remedy inadequate consumer
protections on investment advice.” As a
further indication of who was likely in the driver’s seat, an e-mail from a
dutiful DOL policy advisor to a White House senior political advisor declared
that “we need to determine whether the available literature … and any other
data we have not identified, can be woven together to demonstrate that there is
a market failure, and to monetize the potential benefits of fixing it.”
If that doesn’t sound like a
solution in search of a problem, I’m not sure what would. There are other examples in this Committee’s
report on these proposed regulations that would raise still more hackles on our
collective necks. But, in the interest
of not raising readers’ blood
pressures unduly, I will leave it at that.
