The Administration fully engaged in institutionalizing its policies through promulgated rules with the Employee Benefits Security Administration (EBSA), the Internal Revenue Service (IRS), and the Food and Drug Administration (FDA) all publishing economically significant final rules this week. Petitions for review challenged the Occupational Safety and Health Administration (OSHA)’s crystalline silica rule as expected. In a not expected event, a court ordered counsel to prepare to argue remedies, indicating the court has a serious concern that the Consumer Financial Protection Bureau (CFPB) lacks constitutional authority.
Corporate Inversions Ruled Out: The Department of the Treasury (DOTr)’s IRS published on Friday final temporary and proposed Inversions and Related Transactions rules. The temporary rule follows up on IRS September 22, 2014, and November 19, 2015, announcements that it intended to issue regulations to address corporate inversions and certain transactions, but these “notices” are not regulatory and the IRS did not published those notices in the Federal Register. The temporary rule also goes further than any prior notice. The temporary rule seeks to contain transactions structured to avoid taxation by moving a company’s tax home into a foreign country through a domestic parent or larger company being absorbed by a smaller foreign subsidiary or merger partner and certain post-inversion United States-tax avoidance transactions.
The temporary rule was effective on the day of its publication, last Friday, while the economically significant proposed rule requests comments by July 7, 2016.
► Several problems immediately become apparent in the temporary rule – the IRS baldly claims that the Administrative Procedure Act (APA) advance notice and an opportunity for public comment requirements “do not apply to these regulations” but provides no justification, let alone a concise statement of good cause. The IRS asserts discrete authority for its “temporary rule” but fails to state the temporary rule expiration date, leaving to the reader to find the requirement and calculate the date that the rule “expire[s] within 3 years after the date of issuance.” Transaction tax management may be an appropriate use for a temporary rule, but Congress imposed limitations on temporary rules in the Internal Revenue Code (IRC) that supplement the APA. The IRC’s special requirements do not supplant the APA in any way. Past abuse of the temporary rule concept lead to the restrictions and continuing abuse should lead to new restrictions.
Untrusted Fiduciary Rule: The Department of Labor (DOL)’s EBSA published the Definition of the Term Fiduciary; Conflict of Interest Rule – Retirement Investment Advice final rule in the Federal Register last Friday, along with its pride:
- Best Interest Contract Exemption;
- Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs;
- Amendment to Prohibited Transaction Exemption (PTE) 75–1, Part V, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefit Plans and Certain Broker-Dealers, Reporting Dealers and Banks;
- Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84–24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters;
- Amendments to and Partial Revocation of Prohibited Transaction Exemption (PTE) 86–128 for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers; Amendment to and Partial Revocation of PTE 75–1, Exemptions From Prohibitions Respecting Certain Classes of Transactions Involving Employee Benefits Plans and Certain Broker-Dealers, Reporting Dealers and Banks; and
- Amendments to Class Exemptions 75–1, 77–4, 80–83 and 83–1; Final Rule.
At bottom, DOL’s fiduciary rules alter the duty of care owed to a tax-advantaged retirement account investor: raising the duty from “suitability” to “fiduciary” best interest of the individual.
DOL made numerous amendments after the public comments, and initial evaluations suggested DOL may have avoided some of the issues found most troubling by the industry in the proposed rule. Currently advisors may suggest a “suitable” more expensive fund that pays them a higher commission or outside income rather than an equivalent (or even identical) fund with lower cost that pays them a lower commission or outside income. The rule seeks to eliminate the potential conflict by increasing the duty of care to a full fiduciary – client’s best interest – standard.
The rule becomes effective June 7, 2016, and DOL set the issuance date for the revised exemptions as of that date. The revised definition of fiduciary investment advice and the new and amended exemptions become applicable on April 10, 2017.
► The question remains whether this “apparent” conflict creates an actual harm. DOL has faced great difficulty in establishing a factual record of victims to justify its assertion that the rule will generate some $17 billion in benefits – indeed, this may be an accumulation of estimates, assumptions, theories, fears, and animosity, with only minimal anecdotal evidence against a few bad actors. The fear that should be of concern is whether the rule will shift additional costs to retirement plans and retirees. Whether the final rules are arbitrary and capricious or an abuse of discretion will require substantial analysis and will delay litigation.
Sanitary Transport: The Department of Health and Human Services (HHS)’s FDA published a final Sanitary Transportation of Human and Animal Food rule on Wednesday. One of the numerous rules required by the Food Safety Modernization Act (FSMA), and one subject of litigation to compel agency action when the FDA to act after it missed Congressional deadlines, the sanitary transport rule establishes criteria for determining whether food is “adulterated” because it has been transported or offered for transport under conditions that are not in compliance with the sanitary food transportation regulations. FDA estimates that the total annualized costs to be approximately $113 million annually (3% discount rate) to $117 million annually (7% discount rate) over 10 years, and admits that it does “not have sufficient data to fully quantify the benefits of this regulation.”
► Performance standards serve both the agency regulatory goals and industry management goals, but the sanitary transport is not strictly speaking a performance rule – more of a performance to avoid structured regulation rule because it must rely on the original century-old statutory structure of “adulteration.” While the goal may be worthy, and required by statute, the structure and the benefit-cost ratio raise questions about whether, in the larger scheme of regulatory planning, the outcome is worthwhile.
Silica Suits: At least two, and probably three or more, petitions for review have been filed challenging the DOL Occupational Safety and Health Administration (OSHA)’s respiratory silica final rule. Two petitions (the second increasing participation) were filed in the United States Court of Appeals for the Fifth Circuit, and an unconfirmed petition may have been filed in the United States Court of Appeals for the Eleventh Circuit. As with all petitions for review filed with courts of appeals, actual issue identification is deferred.
► The challenges are unsurprising and the litigation process will reach well into the next Administration before a court of appeals decision. The procedural posture is unclear because press releases and reports note the filing in the Eleventh Circuit, the docket does not reflect the petition. The different filings, and presumably service on OSHA, may require a random selection of venue by the Judicial Panel on Multidistrict Litigation (JPMDL), but, if not, the courts may order consolidation on the request of the parties.
Agency Authority Constitutional Challenge: On Tuesday, a panel of the United States Court of Appeals for the District of Columbia Circuit will hear a challenge to the constitutional authority of the agency in PHH Corp. v. CFPB, D.C. Cir. No. 15-1177. The case actually focuses on whether PHH, a mortgage servicer, violated the Real Estate Settlement Procedures Act (RESPA) and the efficacy of the CFPB’s $109 million monetary penalties. The interesting issue here is that the D.C. Circuit panel added structure to the coming oral argument in an order last week that requires counsel to be prepared to address:
(1) What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will but is removable only for cause; and (2) If an independent agency headed by a single person violates Article II as interpreted in Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of this statute, see 12 U.S.C. 5491(c)? Cf. Free Enterprise Fund, 561 U.S. at 508-10. Or is there a more appropriate remedy? And how would the remedy affect the legality of the Director’s action in this case?
► The challenge to the CFPB penalties reaches a core issue of authority, and, in a back door way, may undercut the efficacy of a host of CFPB regulations. The case was originally of, at least some, interest, but the court’s instructions to arguing counsel suggest that the court expects to reach the underlying question of agency authority.