Law prof: Trump's lawless behavior with fiduciary rule undermines process

By Jessica Karmasek | May 18, 2017

WASHINGTON (Legal Newsline) - Mercer Bullard, a strong advocate of the U.S. Department of Labor’s new fiduciary rule, argues such a standard should have been adopted “decades ago” and the department’s current 60-day delay could hurt future rulemaking.

Bullard, a University of Mississippi law professor and founder of Fund Democracy, a group that advocates for mutual fund shareholders, is puzzled by the delay, arguing the rule had one of the most thorough vettings. The rule mandates financial professionals who service individual retirement accounts, including IRAs and 401(k) plans, to serve the “best interest” of savers and disclose conflicts of interest.

“Half-a-dozen court rulings have found that the rule is well-justified,” he recently told Legal Newsline. “The DOL, in issuing this delay, is undermining the credibility of administrative law and threatening the future viability of rulemaking.

“No agency will ever again allow for a compliance period that runs into another administration if it knows this type of lawless behavior will lead to a rule being rejected by the new administration without any analysis.”

Currently, Bullard teaches courses on securities, banking, corporations, corporate finance, accounting and capital structure and valuation. He created and is the director of the law school’s Business Law Institute.

Bullard also has served on the Securities and Exchange Commission’s Investment Advisory Committee and Public Company Accounting Oversight Board’s Investor Advisory Group. He is considered, by some, one of the most powerful voices in the financial services industry.

“I’ve been a strong advocate of the rule since the DOL started working on it,” Bullard said, adding he has both testified about the rule and submitted various comments.

He pointed out that the rule’s initial proposal came in 2010, but it was in the works no later than 2009.

A DOL spokesman told Legal Newsline the original rulemaking process required the consideration of “thousands” of comments, four days of public hearings, a detailed economic analysis, and “numerous” meetings and conversations with affected stakeholders.

In April 2016, the DOL released its final version of the rule. Last month, the department released a measure officially delaying the implementation of the rule and its related exemptions by 60 days. The applicability date is now June 9.

Written disclosure requirements and the full best-interest contract, or BIC, exemption are still scheduled for Jan. 1, 2018 implementation, according to the DOL.

The decision to delay the rule was made in response to President Donald Trump’s Feb. 3 order, directing the department to review the rule and determine whether it may “adversely affect” the ability of Americans to gain access to retirement information and financial advice.

“The gist of the rule is to address significant differences in compensation practices in the broker dealer industry,” Bullard explained. “In some cases, broker dealers can be paid three times as much as another.

“While not all brokers will be tempted, there are some who will give one recommendation over another based on compensation.”

Fred Reish, a partner with Drinker Biddle & Reath LLP who chairs the law firm’s Financial Services ERISA Team, which is a group that represents providers and advisers to plans and IRAs, said the “heart-and-soul” of the new rule is that investment advisers and brokers must comply with three rules known as the Impartial Conduct Standards.

“Those standards are that the adviser must adhere to a best interest standard of care in making investment recommendations to plans, participants and IRAs; the adviser must not charge more than reasonable compensation; and the adviser cannot make any materially misleading statements,” Reish explained.

While Bullard argues the DOL rule should have been adopted “decades ago,” he contends the rule, as it stands, doesn’t go quite far enough.

“It’s a huge step in the right direction, no doubt,” he said.

The problem lies largely in the details, he said.

“In the long term, yes, the industry has to provide less conflicted advice,” Bullard said of the rule. “But most of these financial advisers act as de facto fiduciaries already. Hundreds of them claim to provide conflict-free advice.

“The only difference now, really, is investors will be able to hold them accountable.”

As to whether the rule will be delayed again, go into effect at a later date or the Trump administration ultimately will kill it, Bullard said a lot of it depends on the new head of the DOL, R. Alexander Acosta.

The U.S. Senate confirmed Acosta, Trump’s pick to head the DOL, by a 60-38 vote April 27.

At a confirmation hearing in March, Acosta said he intends to follow the President’s February order directing the department to review its controversial new fiduciary rule.

At the hearing, U.S. Sen. Elizabeth Warren, D-Mass., asked Acosta if he was confirmed before the DOL’s proposed delay of the rule is finalized whether he would “promise to stop” the holdup.

Warren contends the delay would cost Americans $3.7 billion.

Acosta replied that he supports “following executive actions from the President, who will be my boss.”

“There is an executive action, which addresses with specificity the fiduciary rule,” he testified. “It has asked the Department of Labor to look at the rule and to assess specific questions: Will the rule reduce the investment options available to investors? Will the rule increase litigation? Will the rule financially impact retiree investors? And the executive action directs the secretary of Labor and Department of Labor to repeal or revise the fiduciary rule if any of the criteria laid out in that executive order is found.”

“It really depends on whether the new secretary of labor is an ideological warrior or a public servant,” Bullard said of Acosta. “If he turns out to be the former, we may see the delay amended to apply to all aspects of the rulemaking.

“But if Acosta is a pragmatic public servant, he will evaluate the pros and cons of the rule and decide whether to issue proposed amendments between June and December.”

Among those amendments, Bullard surmises, is a prohibition against broker dealers requiring class action claims be resolved through arbitration.

“To be honest, if Acosta decides it’s all about ideology and not about the industry and investors, the rule might not survive at all,” he said.

But if left mostly intact, the rule is not likely to have much of an economic impact, Reish noted.

“While the new rules will impact advice and investments for IRAs, they probably aren’t significant in terms of the whole economy,” explained Reish, who has clients on both sides of the issue.

“Some say that the rules have already reduced the sales of indexed and variable annuities, but that’s a long way from affecting the whole economy.”

From Legal Newsline: Reach Jessica Karmasek by email at

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