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Last month, the Senate voted 56-41 to rescind the Department of Labor’s “Fiduciary Rule” using the Congressional Review Act. This was after a House vote of 234-183 to repeal the regulation. Under the Congressional Review Act, the House and the Senate reserve the right to jointly overrule unnecessary or burdensome acts of regulatory overreach. Today, as promised, President Obama has blocked Congress' efforts to deregulate. This is the 10th veto of the Obama presidency.
It seems that President Obama's retirement planning includes measures that will continue the administration's regulatory overreach long after he leaves the White House.
"The Department of Labor's final rule will ensure that American workers and retirees receive retirement advice that is in their best interest, better enabling them to protect and grow their savings," Obama stated in a message to Congress. "It is essential that these critical protections go into effect."
Unfortunately, the Department of Labor's (DOL) rule is only disguised as consumer protection, as the rule would make it difficult for elderly Americans to get retirement investment advice and would harm average Americans by making retirement investment advice only available to the wealthy.
With this rulemaking, the DOL has put into effect a new test to determine when investment advice gives rise to fiduciary status and therefore a fiduciary duty on the part of the intermediary. As a result of this new rule, many firms and financial advisers whose activities previously did not create a fiduciary duty under the DOL’s prior rules will now be subject to stricter regulations
Following Obama's veto, litigation remains the only viable recourse for killing the regulation.
A group of nine plaintiffs, including industry coalitions such as the U.S. Chamber of Commerce, the Securities Industry, and the Financial Markets Association filed lawsuits last week, according to a report by the Wall Street Journal.
The suit argues that the Department of Labor has violated the Administrative Procedures Act “[b]y adopting a Rule that will have severe and disruptive effects on the financial services and insurance industries, small businesses, and retirement savers without fairly addressing comments relating to the legality and effectiveness of the rule,” and that rule is “arbitrary, capricious, and otherwise not in accordance with law.”
In “overstep[ping] the Department’s authority, creat[ing] unwarranted burdens and liabilities, and undermin[ing] the interests of retirement savers,” the Department of Labor's rulemaking constitutes a violation of the First Amendment.
Additional legal challenges to the rule are grounded in a “best interest” provision that would replace the previous, more flexible standard of providing “suitable guidance.” The change in this requirement would allow investors to file class action lawsuits against financial advisers.
Under the Labor Department's new rule, many investment advisers will be deemed fiduciaries for the first time. Financial advisers and broker dealers whose activities did not constitute a fiduciary duty under previous DOL rules are now subject to the stricter standards of fiduciary status.
This rule carries daunting industry-wide implications, as many existing compensation agreements are not compatible with the stipulations imposed by fiduciary status. An investment adviser that is deemed a fiduciary adviser may not receive transaction-based compensation that varies based on their investment advice. They may also not receive compensation from third parties that provide investment products.
As the financial services industry suffers from bureaucratic overreach, regulators will wield one much broader impact: retirement investment advice will become unaffordable for many of America’s senior citizens. When enacted, retirement investment advice would become a right reserved for the wealthy, placed far outside the reach of middle-class Americans.
FreedomWorks Director of Legal Affairs Curt Levey commented:
“The new rule is costly and complicated. It will make it harder for the small businesses and individuals who provide retirement investment advice to stay in business, while raising the price of this advice such that only the wealthy will be able to afford it.”
“Like so many others examples of regulatory overreach, this rule is disguised as protection for consumers, when it really is a tangled web of red tape that deprives America’s seniors of the freedom to plan for their retirement. We hope the Labor Department’s attempted takeover of seniors’ financial planning will be stopped by congressional action or litigation.”
The rule will go into effect next April.