Rolling Back the Fiduciary Rule: A Primer on Making (and Unmaking) and Regulation

During the first weekend of the Trump Presidency, the President promised one of the ways he would stimulate growth in the economy was to cut federal regulations by 75%, or “maybe more.” A January 20, 2017 Executive Order required that, for every new regulation it proposed, a federal agency needed to identify at least two existing regulations to be repealed. The Code of Federal Regulations, the repository for existing rules, is approaching 200,000 pages. Through May 2016, the Obama administration alone had added 20,642 regulations, some quite complex.

​The new President may be aiming a bit high. Rolling back an existing regulation can be every bit as difficult and time consuming as promulgating the rule in the first place, as we’ll see in the case of the “fiduciary” rule, a regulation the new administration has specifically targeted.

​The more than 50 regulatory agencies of the federal government have the power to promulgate and enforce administrative regulations, which have the force of law. The rules govern businesses, non-profits and individuals across a broad range of conduct. Just how are these regulations promulgated?

​When Congress passes a law, it typically authorizes a federal agency to develop regulations which are necessary to implement the law. In doing so, the agencies are guided by the Administrative Procedure Act. New regulations or amendments to existing regulations are called “proposed rules.” The APA requires that agencies publish proposed rules in the Federal Register at least 30 days before they are effective and provide a means for the public to offer amendments to, to comment on or to object to the regulatory proposal.

​Congress dictates the manner in which the process goes forward. Some regulations require publication and formal public hearings; others only publication and an opportunity for comment. Proposals that require hearings can take months or even years in the case of controversial or complex matters before they become a “final rule,” the regulation which takes effect and is ultimately printed in the Code of Federal Regulations.

​There are two procedures for expedited rulemaking. For regulations on matters which are deemed to be non-controversial, ”direct final” rulemaking involves agency publication of a rule in the Federal Register with the statement that the rule will be effective on a particular date unless adverse comment is received within a period of time, typically 30 days. If there is adverse comment, the “direct final rule” is withdrawn, and the agency may publish a proposed rule. Agencies can dispense with advance publication if there is “good cause” for doing so. This exception applies in the case of “interim final” rulemaking, in which a rule is effective with post-promulgation opportunity for comment, or where more formal procedures are “impractical, unnecessary or contrary to the public interest.” The “good cause” exemption is a very narrow one.

Once made, regulations can be overturned by the courts or an act of Congress, or pursuant to the Congressional Review Act (“CRA”), under which Congress can disapprove a rule by joint resolution, subject to presidential veto, within 60 legislative days after submission to Congress for “major” rules and within 30 days for “non-major” rules. Until the second week of the Trump Presidency, Congress had only once before, in 2011, successfully utilized the 20-year-old CRA, to overturn a rule requiring that employers take steps to avoid ergonomic injuries, while President Obama had vetoed five other attempts. In just one week, Congress has now used the CRA five times to roll back a regulation, including an SEC rule requiring energy companies to disclose payments made to foreign governments for developmental rights.

​Unless vulnerable under the CRA, the President will likely find that eliminating federal regulations, especially the ones he deems overly burdensome for business, is a complicated and lengthy process. A proposal to repeal a rule is itself a “proposed rule,” and it triggers rulemaking in reverse. Rolling back a regulation requires publication, comment and perhaps hearings. Take the “fiduciary” rule as an example.

​The rule, issued by the Department of Labor under the authority of the Employment Retirement Income Security Act of 1974, requires that those who provide advice to retirement plans, and plan participants and beneficiaries act in the best interests of clients and provide up front disclosure of fees, and bars conflicts of interest. A similar, more broadly applicable, proposal is before the SEC. The rule would virtually preclude brokers and others from recommending certain pricey investment vehicles. It would also impose what critics have said are onerous compliance and recordkeeping requirements.

​The fiduciary rule was promulgated in April 2016. So it is not subject to congressional disapproval under the CRA. Creating the rule took years and was a contentious, complicated affair. Repealing it may be no easier. The fiduciary rule cannot be undone through an abbreviated procedure. Rolling it back would require a new proposal, notice and a potentially lengthy comment and hearing period. In other words, it might take just as long to unmake the rule as it took to make it in the first place. What is more, it is almost certain that a repealer would not be in place by the time the rule is scheduled to take effect, on April 10, 2017.

​There are also new complications. Some of those who initially opposed the rule–namely, the larger brokers and insurance companies–have already made substantial investments in the technology and compliance expertise necessary to implement it. Believing that independent advisors and broker-dealers lack the resources to do the same, the larger firms may well believe that they have a stake in the survival of the rule to preserve their competitive advantage. In fact, that is precisely what happened in the United Kingdom, which adopted a similar rule in 2011. Since then, the number of U.K. financial advisors has decreased by approximately 22.5%.

​The fiduciary rule is not unique in its complexity and in the consequences, intended and unintended, to which it gives rise. Imagine that complexity multiplied many times over and you can see the magnitude of the task of slimming down the Code of Federal Regulations and the bureaucracy it governs.

​There is, however, a tactic on offer to take the sting out of the fiduciary rule or, for that matter, any regulation. Without funding and a regulator willing to regulate, a rule will have no, or limited, effect. If the new administration decides to withhold funding and declines to enforce the regulation, those who are regulated need not worry about federal government interference. The rule could soon be forgotten.

A draft of a White House memorandum of February 3, 2017 contained an order that implementation of the fiduciary rule be delayed for 180 days pending further review. The order was contrary to the existing rule and of dubious legality. Ultimately, the Presidential Memorandum on Fiduciary Duty Rule of the same date called for reexamination of the regulation, but otherwise left it intact.

​While our purpose is not to recommend policy, we do see merit in a suggestion by Cass Sunstein, who served in the Obama White House, in a November 29, 2016 Bloomberg View column. He called the “two-for-one” idea a “gimmick,” and proposed tweaking the mechanism for eliminating regulations focused on the burdens they impose: the administration could waive two-for-one or impose two-for-one on a government-wide basis, with an emphasis in either case on preventing imposition of a costly rule coupled with elimination of two whose total cost is modest.

​Assessing the costs of a roll back of the fiduciary rule is no easy matter. It requires a balance of the burden on the industry against the cost of repeal, borne exclusively by consumers in the form of higher fees. That’s only one reason an attempted repeal might be controversial, and maybe challenging.