Godzilla (the Fiduciary Rule) Ate the Rule of Law: OPINION
June 1, 2017 by Eugene Scalia
Labor Secretary Alexander Acosta announced last week that he would let the controversial “fiduciary” rule take effect June 9. Respect for the rule of law, he explained, made further delay impossible without a new round of rule-making.
Although I disagree with Mr. Acosta’s legal analysis, he is a serious lawyer whose commitment to the rule of law is to be admired. That commitment will face an even greater test in July, when Mr. Acosta and the Justice Department, under Attorney General Jeff Sessions, are due to make their first significant court filing defending the fiduciary rule.
Adopted by the Obama administration last year, the rule radically alters the responsibilities of brokers and insurance agents who service individual retirement accounts. Critics of the rule focus on how it will disrupt the financial-services and insurance industries, raising costs and reducing investors’ options.
To a lawyer, though, what’s most striking about the rule is that it’s a regulatory Godzilla—an extraordinary example of disregard for limitations imposed by Congress and the Constitution.
To start, although the rule will transform the market for IRAs, the Labor Department has no authority to regulate IRAs. How, you might ask, is it regulating something that by law it may not?
Well, Labor has deregulatory authority with respect to IRAs—it can lift restrictions that otherwise apply. So the Labor Department first adopted an overbroad definition of who is a fiduciary, essentially capturing all insurance agents and brokers who deal with IRAs. They automatically became subject to the restrictions Congress places on fiduciaries, effectively barring the receipt of commissions.
Then the department used its deregulatory authority to make insurance agents and brokers an offer they couldn’t refuse: They could get commissions after all, if they complied with a raft of new requirements designed for IRAs. In this way the Labor Department made itself—not the Securities and Exchange Commission and not state insurance agencies—the principal regulator of financial professionals who service IRAs.
This is similar to a ploy the Environmental Protection Agency recently tried with greenhouse-gas emissions. The Supreme Court threw out the EPA’s rule, remarking that an agency may not regulate based on “its own sense of how the statute should operate”—an apt description of what Labor did here. For those committed to the rule of law, defending this sort of regulatory self-aggrandizement should be a very bitter pill.
As should this: A key issue in the fiduciary litigation is the Constitution’s restriction on federal agencies’ ability to create new grounds for people to sue. The Supreme Court held in 2001 that only Congress may create these private rights of action. “Agencies may play the sorcerer’s apprentice,” Justice Antonin Scalia wrote, “but not the sorcerer himself.”
Congress created no private right of action in the statute governing IRAs. But the Labor Department devised a workaround: As a condition for the “deregulatory” relief that allows the receipt of commissions, firms must enter into contracts with customers in which they agree to be subject to class-action lawsuits. Presto—now, there’s a private right of action.
In adopting the rule, the Labor Department justified this provision on the ground that the contract, not the regulation, contains the right to sue. But if that sleight of hand is allowed, federal agencies can create private rights of action at will simply by forcing businesses to sign customer contracts opening themselves to class-action liability and even punitive damages.
The fiduciary rule also attacks arbitration. The Federal Arbitration Act generally prohibits federal agencies and states from restricting the use of arbitration. But again the Labor Department used its contract requirement to flout Supreme Court precedent: Under the new rule, the contracts financial firms must enter with customers can’t allow arbitration of claims that could be brought as class-action lawsuits.
Arbitration restrictions like this ordinarily are anathema to Republicans—and to Mr. Sessions. In 2008 he joined a Senate report that said one antiarbitration bill would expose American businesses to “a rapacious trial bar.”
But now, in defending the fiduciary rule, the Labor and Justice departments may be paving the way for agencies to outlaw arbitration. A government agency that wants to ban arbitration could simply condition a license, or participation in a government program, on businesses’ signing contracts with customers that invite class-action lawsuits that cannot be arbitrated.
This ploy wouldn’t be limited to federal agencies. Under the Labor Department’s theory, a state or local government could do away with arbitration tomorrow by making government permits or benefits contingent on forswearing arbitration with customers.
One of the biggest challenges for any new administration is contending with its predecessor’s priorities and beginning to advance its own. This requires resolve and the dedication to principle that Mr. Acosta rightly extolled. In the weeks ahead, the Labor and Justice departments must give careful thought to how, in defending the fiduciary rule, they could inadvertently be advancing a sweeping assault on the rule of law.
Mr. Scalia, a former solicitor of the Labor Department, is a lawyer representing clients in a legal challenge to the fiduciary rule.
