The U.S. Labor Department has revoked a 2020 policy that allowed banks to maintain key retirement asset management waivers after foreign convictions, accusing Trump administration political leaders of overruling agency regulators to OK requests from powerful financial institutions.
In a Wednesday letter marked confidential that was obtained by Bloomberg Law, the Biden-appointed deputy labor solicitor informed an industry trade association that the opinion provided to the group in November is now withdrawn because DOL’s then-No. 2 and No. 3 officials advanced an improper legal stance that “bypassed” the “objections” of leadership at the department’s employee benefits subagency.
Nearly five months after the Trump administration’s late-term policy change—issued on Election Day but never publicized by DOL—the department’s Employee Benefits Security Administration will once again review banks’ convictions under foreign laws, rather than only domestic statutes, when determining whether to approve their applications for a crucial exemption that permits their continued management of retirement assets in the U.S.
The November opinion “was issued through a flawed process and was based on a legal analysis that was inadequate to support abandoning the Department’s long standing position,” wrote Elena Goldstein, the Biden-appointed deputy solicitor of labor, to the Securities Industry and Financial Markets Association. The letter’s authenticity was confirmed by a financial services industry representative, speaking on condition of anonymity.
The move signals the financial services industry can expect more scrutiny from the Biden administration, following other DOL steps to return power to career civil servants who had authority stripped by Trump-appointed leaders.
The Labor Department declined to comment “beyond the contents of the letter,” spokesman Michael Trupo said in an emailed statement. SIFMA declined to immediately comment.
The exemption status, known as qualified professional asset manager, is considered essential among global banking giants such as
EBSA approved all the requests. But the foreign felonies still triggered arduous paperwork submissions, public transparency into embarrassing criminal actions, agreements to undergo future audits, and in one instance, a public hearing for Credit Suisse Group AG’s bid for an exemption. The Trump DOL opinion letter would’ve eased those demands.
Before 2005, all of the QPAM exemptions tied to crimes that the Labor Department granted were for domestic felony convictions. Since then, a handful of big banks have sought exemptions for illegal misconduct that took place overseas. Roughly 40% of these criminal waivers—known as I(g) exemptions—the DOL issued were for foreign convictions, according to a Bloomberg Law analysis of QPAM exemptions published in the Federal Register.
Most recently, the department has proposed granting Goldman Sachs an individual exemption after its Malaysia affiliate pleaded guilty to U.S. bribery law in an international money-laundering scheme.
The new policy doesn’t provide a clear replacement plan for how foreign convictions will factor into EBSA’s consideration of future exemption applications, but says DOL will analyze the relevant issues to develop new guidance.
Until this guidance is released, “the Department will continue its longstanding practice of considering individual exemption applications from QPAMs in connection with relevant convictions under domestic as well as foreign law,” Goldstein wrote.
‘Glossed Over Issues’
The Tuesday letter is also notable in that it sends a message about the distribution of authorities between the Solicitor of Labor’s office, DOL’s central legal division, and other enforcement agencies, including EBSA, to which it provides advice.
The 2020 letter from then-Solicitor Kate O’Scannlain stated that she was responding to SIFMA at the direction of the deputy labor secretary, Patrick Pizzella. The secretary of labor at the time, Eugene Scalia—previously a corporate attorney with prominent financial services clients—was recused from the matter.
SIFMA originally had submitted the request to EBSA through the traditional process in which outside parties seek “advisory opinions” that interpret the Employee Retirement Income Security Act of 1974, which polices private-sector retirement plans.
But according to Goldstein, “the 2020 SOL Letter glossed over issues of substantial concern and improperly disregarded EBSA’s role and expertise in administering the exemption program and its established procedure.”
Pizzella, in a Wednesday interview, said, “In all likelihood, the new administration’s lawyers will probably reach a similar conclusion to the one that was reached by our Solicitor’s Office and was convincing to me.”
It’s not unusual for two separate DOL subagencies to be in disagreement, Pizzella said, “and in this instance I found the solicitor’s argument a little more convincing.”
The O’Scannlain letter had said it was the department’s “official legal opinion” that foreign felony convictions wouldn’t constitute a QPAM violation under ERISA. Her analysis focused on ERISA Section 411, which prohibits individuals who’ve been convicted of crimes from holding positions of power in a retirement plan. That section of the law is specific to federal, state, and local offenses, she wrote.
The Biden administration’s reversal argued the Trump administration lawyer didn’t acknowledge “important differences” between Section 411 and the 1984 regulation establishing the QPAM exemption related to convictions.
O’Scannlain’s opinion also contravened her administration’s own executive order designed to give the public fair notice of agency interpretive guidance because it wasn’t posted to the DOL’s guidance website until Jan. 19, the March 23 letter stated. The DOL’s regulation implementing that executive order has since been rescinded under Biden.
“The Nov. 3 letter to SIFMA reflects careful legal analysis supported by Supreme Court case law and ample authority, consistent with the practice of the Solicitor’s office,” O’Scannlain said in an emailed statement.
“It is not surprising that there are policy differences between the two Administrations but it is telling that in retracting its legal opinion, the Department did not supply a cogent, alternative legal analysis, unlike past practice,” she said.