Monday, February 29, 2016

Ends Seem to Justify Means for Partisan DOL

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.