It’s mea culpa time! I messed up: In a recent post I warned that it’s vital that we not give Trump & his people any ammo in their war on the media by providing them with legitimate examples of their favorite accusation, “fake news.” I ended that post with a plea to you guys – and to myself, because I’m bound to make mistakes too – to be cautious when we consume and share the news. Well, guess what? It’s not even a week later, and already I get a chance to make an example of myself! I’m here to update a recent post, because I didn’t get it quite right the first time. Plus, there have also been some new developments on the topic, including a new court ruling, so I have those for you as well.
Trump’s “Fiduciary Rule” Executive Order
The post I need to correct is the February 3 post “Would You Like Fries With That?” The post was about two executive actions Trump had signed that day making changes to financial regulations (one was an executive order while the other was technically a memorandum but for simplicity, I’ll refer to them both as executive orders, or EOs for short. This post on executive actions explains the difference between the two types). One executive order dealt with the Dodd-Frank financial reform law and the other dealt with a rule made by the Obama administration known as the “fiduciary rule.”
It’s the section of my post on the fiduciary rule that I want to update & correct today. For those who didn’t read the original post, in brief, Obama’s fiduciary rule says that financial advisors will have to adhere to the “fiduciary standard,” which means they will have to put their clients’ interest ahead of their own profit when giving their clients advice. The rule is slated to go into effect on April 10, 2017. Many in the industry and many in the Republican Party are not fans of this rule and would like to see it reversed.
In my previous post, I didn’t write very clearly about what exactly Trump’s EO did with respect to the fiduciary rule, and that’s the problem I’d like to clear up now. I wrote in the post that Trump’s EO would overturn the fiduciary rule. (While Trump can’t directly overturn a law or a rule with an EO, he can use an EO to direct his agencies to implement laws and regulations in ways that – in some instances – effectively nullify them. And in some cases the relevant agencies can actually overturn regulations).
Anyway, it turns out, Trump’s EO did not direct the Department of Labor (DOL)* to reverse the fiduciary rule. The EO directed the DOL to review the rule and then if it determined that the rule harmed investors or investment firms, it could propose reversing the rule. So the distinction is that Trump’s EO simply calls for a review – for now. CNBC, Reuters & others are also reporting that the Trump administration has 2 draft proposals circulating, which are expected to become official shortly, that would expand on the EO.
These proposals would order a 180 day delay in the implementation date of the rule and begin another round of public comment on the rule. (When a federal agency makes a new rule, it must go through a long, rigorous process, which I explained here. Public comment is one step required in this rule making process. In most cases this same process must also be followed in order to unmake, ie, reverse a rule. So this is the administration beginning the process to change or reverse the rule. Going through the proper rule making process to reverse the rule now might give the administration a better chance at surviving any court challenges later on).
A New Court Ruling Might Throw A Wrench In
Though Trump has only ordered a review at this point, his goal is generally believed to be a reversal of the rule. However, in just the short time since his EO came out, a federal judge in Dallas, Texas has delivered a ruling that may reduce Trump’s chances of achieving that goal. As mentioned above, many in the industry are not fans of the fiduciary rule, so there have been several lawsuits brought to try to get it overturned.
This latest was brought by a bunch of trade groups including the U.S. Chamber of Commerce, the Financial Services Institute, the Financial Services Roundtable, and others. Some have surmised that the plaintiffs purposely brought the suit in Texas because they expected the courts there to be industry friendly. Their main argument was essentially that the DOL had exceeded its authority by making this rule. They also argued that the rule restricted their freedom of speech along with several other claims. But the judge rejected all of their arguments and ruled against them to uphold the fiduciary rule.**
This is relevant to Trump’s executive order because the judge’s ruling may make it harder for the Trump administration to overturn the fiduciary rule. In her ruling, the judge explicitly considered most of the arguments opponents would make against the rule during the agency’s review process, and she found them unpersuasive. Proponents of the rule say this shows that the agency’s review process was solid and well-founded the first time around, when they originally made the rule. Also note, there was an earlier court case challenging this rule as well, so this was the second federal court to uphold the rule. And a third court rejected a motion for a stay of implementation of the rule.
Under these circumstances, some legal experts, say it will be harder for the agency to justify significantly revising or reversing the rule. But the rule’s opponents are not giving up and will continue pushing to get the rule overturned anyway, and it’s unclear exactly how much impact this recent court ruling will really have on the DOL agency review.
So, the updated, corrected news is that the fiduciary rule is being reviewed with the possibility of reversal. Reports coming out of the administration say that a 180-day delay for the rule’s start date is in the works, along with a new public comment period. What will happen to the fiduciary rule at the end of that time remains a mystery for now . . .
*The Department of Labor is the agency that issued this rule and would be responsible for revising or reversing it.
**An interesting side note to this case is that much of the argument & analysis turned on the application of a legal doctrine known as “Chevron deference.” Chevron is a landmark 1984 Supreme Court case, which says that courts should give wide deference to regulatory agencies in interpreting laws in situations where a statute is ambiguous (i.e. where Congress’ intent isn’t clear). This point is noteworthy because several legal experts who have looked at the history of Trump’s Supreme Court nominee, Neil Gorsuch, have pointed out that he has an unusual view on this topic.
Gorsuch went out of his way to write a concurring opinion arguing that Chevron gives the executive branch too much power (taking power from both Congress and the Judiciary). He appears to be looking for a reconsideration of Chevron deference, which is not a position that has been commonly expressed even among conservatives, though it does fit in with the general conservative desire for a smaller government. If Chevron were reversed, that would be a radical change to the regulatory state, significantly curtailing the authority of federal regulatory agencies. This case gives us a perfect example.