Of all the big-ticket regulations the Labor Department hopes to push through before the end of the year, three in particular worry the retirement and benefits industry because of their short comment periods, which could leave the agency vulnerable to legal challenges.
The Employee Benefits Security Administration released three major proposals this summer that were deemed “significant” or “economically significant” and impact fiduciary responsibilities and benefits plans focused on environmental, social, and corporate governance funds—all of which come with a short, 30-day comment window. An “economically significant” rule has an estimated annual impact on the economy of $100 million or more.
“The comment periods are preposterously, unreasonably, and arbitrarily short for economically significant rules,” said Amit Narang of Public Citizen. “That looks to me like an agency more interested in getting a rule out and keeping it moving.”
The public comment period allows outsiders to weigh in on new rules from a federal agency. An agency is supposed to read each comment, absorb the concerns shared with the administration, and address them before issuing a final rule. A court challenge blocking those policies would leave much of the U.S. retirement industry in limbo and would upend the progression of EBSA’s key regulatory efforts under the Trump administration, industry stakeholders fear.
A proposal released last week, for example, would prohibit fiduciaries and other asset managers from voting by proxy or exercising other shareholder rights affecting a retirement plan unless a matter has an economic impact on pension and 401(k) plans. The public was given 30 days to submit a comment.
“It’s nearly inevitable the rule will be challenged” due to the shortened comment period, according to attorney George Michael Gerstein, of Stradley Ronon Stevens & Young LLP. He advises financial institutions on the fiduciary provisions of the Employee Retirement Income Security Act of 1974.
The DOL didn’t respond to requests for comment. The agency has said it believes 30 days is sufficient time for the public to respond to these new rules.
‘Rushed, Unfair, and Unethical’
Executive Order 12866 from former President Bill Clinton in 1993 recommends agencies include a comment period of no fewer than 60 days for rulemaking. Traditionally, major rules get 90 days for public comment, Narang said.
Better Markets, a nonprofit and nonpartisan group that promotes public interest in the financial markets, called the DOL’s process “rushed, unfair, and unethical,” in a recent comment letter on the fiduciary rule. “The DOL took the almost unheard-of step of allowing only 30 days for public comment on a complex rule that will affect virtually every American and which has been the subject of intense debate for over a decade,” the group added.
A short comment period alone won’t be grounds for a legal challenge, but it would leave DOL vulnerable to other critiques based on the perception that it is rushing the regulatory process, according to Narang and Ropes & Gray attorney Josh Lichtenstein.
The agency appears to be rushing to complete these rules before the end of the year out of concern there will be a change in the White House, Narang and Lichtenstein said.
The DOL will find itself in hot water if it continues with this rushed pace, said Lichtenstein, who advises banks, asset managers, large pension plans, and other institutions. DOL officials will struggle to prove in court that the agency underwent a full, deliberative process under the Administrative Procedure Act, the law that governs agency rulemaking, he said.
“It’s less about the pure duration of the comment period, and more about the ability to demonstrate the full deliberative and iterative process they would need to go through for the APA,” he said.
It wouldn’t be the first time the agency was sued over proposed rules. On April 8, 2016, the Obama-era DOL proposed a new fiduciary regulation that the U.S. Chamber of Commerce challenged, a lawsuit that Labor Secretary
Take It Slow?
Public Citizen is monitoring EBSA’s rulemaking because it believes the agency conducted a “bare-bones” economic analysis of the fiduciary rule and the two proposals impacting ESG-fund investments, which also feature 30-day public-comment periods, Narang said.
“These significant procedural irregularities in all three of these rules will only make them more legally vulnerable, not less,” he said.
The agency could take several steps to lessen its exposure to litigation, including by extending the comment period or reopening the regulations for additional public input, Narang and Lichtenstein said.
It’s a request some commenters, including trade associations and lawmakers, have submitted to the agency.
“If they really take their time and produce really thoughtful, responsive, updated versions of the rules, that would probably be the best thing they can do to prevent at least a portion of litigation,” Lichtenstein said.