A trio of Senators recently sent a letter to Secretary of Labor Eugene Scalia pressing him to outline the actions he’s taken to prevent another rash of fake comments from appearing as the Department of Labor considers how its new prohibited transaction exemption (PTE) will align with the SEC’s Regulation Best Interest.
Senators Tina Smith (D-MN), Elizabeth Warren (D-MA) and Patty Murray (D-WA) sent the letter, citing a Wall Street Journal analysis which found that in the case of the 2015 rule on retirement investment advice, “40% of respondents didn’t write the comments attributed to them,” and that most of the 345 fraudulent comments analyzed were slanted in favor of financial industry views. It raised the question of whether powerful financial interests may have submitted industry-favored fake comments.
The Senators said they were “alarmed by the fact that much remains unknown about the rash of fake critical comments that flooded the public comment period” of the since-vacated Obama era fiduciary rule.
The three lawmakers, all members of the Senate Health, Education, Labor, and Pensions Committee, said their questions about the integrity of public comments are important now as the Department of Labor reviews comments on two new proposed rules governing the operation of retirement plans.
They told Scalia that protecting the integrity of the comment process is critical to ensuring all Americans, not just well-connected industry lobbyists, have a fair opportunity to make their voices heard within the crafting of federal rules.
“We believe that the federal rulemaking process should ensure that the voices of Americans are reflected fairly and transparently—not in a manner than gives large financial institutions undue influence on industry regulations,” wrote the Senators. “Preventing industry-favored fake comments would be an important step to restoring Americans’ confidence that federal regulators are on their side.”
It’s standard practice for the federal rulemaking process to include a comment period, where the public can share their thoughts on the proposed rule. In 2015, after the Obama Administration proposed strengthening rules to prevent conflicts of interest in retirement advice, the DOL was flooded with comments. According to the WSJ analysis, many took financial services industry-backed positions, while falsely claiming to be written by ordinary retirement savers.
A DOL spokesman told the Journal it removes fraudulent comments when they are brought to the agency’s attention, and that the submission of “fraudulent statements or representations” to the federal government is a felony.
With the DOL recently releasing two new rule proposals for comment this summer, Smith, Warren and Murray said they are seeking to ensure that a repeat of fake comments does not occur again. They also asked Scalia to explain the decision to provide shorter 30-day comment periods for recent rules—despite requests for an extension—and pressed to ensure that the comment periods in the future provide sufficient time for the public to provide meaningful input on the proposed rules.
Per the letter, the Senators asked Scalia to respond to the following questions by Sept. 3:
- What steps have you taken to understand the scope and sources of the fake comment problem?
- What have you determined to be the scope of the problem? Have you identified the source(s) of the fake comments? If so, please describe the source(s).
- Has the Department made any referrals to the Department of Justice or other agencies for further investigation and/or criminal or civil enforcement actions in relation to fake comments?
- Have you engaged with other agencies regarding fake comments, and if so, what have you learned from them?
- What solutions have you devised, if any, to protect the integrity of the public comment process? Have they been implemented?
- In reviewing comments on EBSA’s current rulemakings on investment advice and ESG-related issues, have you identified any fake or suspicious comments? If so, how have you handled them?
- With respect to the length of comment periods, why has the Department determined that a 30-day comment period is appropriate for the two rules referenced above? In the future, does the Department intend to regularly deviate from the 60-day minimum comment period directed by Executive Order 12866?
Scalia’s fiduciary rule history
The Senate confirmed Scalia by a 53-44 vote as the Trump administration’s Secretary of Labor in September 2019 after President Trump’s last permanent pick for the job, Alexander Acosta, resigned in July 2019. Scalia, who had previously worked as the agency’s top lawyer during the George W. Bush administration, has a long record in private practice of defending major corporations against financial and labor regulations.
But it is his direct involvement in getting the Obama era fiduciary rule vacated that has previously drawn the ire of the Senators writing the letter. That fiduciary rule was overturned by a lawsuit brought by Scalia while he was in private practice and representing the Chamber of Commerce, the broker-dealer industry, and other business interests.
Ethics rules prevent government officials from involvement in issues in which they participated while in the private sector, The Wall Street Journal noted as Scalia was up for Senate confirmation, and pointed to Scalia’s handling of the legal challenge that in March 2018 derailed the Obama administration’s version of the fiduciary rule.
The new proposed PTE, released on June 29, was developed by DOL’s Employee Benefits Security Administration (EBSA).
“The proposed exemption would be broadly available to investment advice fiduciaries who adhere to a best interest standard and plainly inform retirement investors that they are acting as fiduciaries when making investment recommendations,” said Assistant Secretary of Labor for EBSA Jeanne Klinefelter Wilson. “The proposed exemption would authorize a wide range of investment advice models and relationships, consistent with the fundamental goal of ensuring that workers and retirees receive investment advice that is in their best interest.”
The proposed rule has two major features. First, the rule reaffirms the five-part test for determining whether a person renders investment advice for purposes of ERISA. Second, the rule sets forth a new prohibited transaction class exemption for investment advice fiduciaries that is based on the “impartial conduct standards,” which were generally adopted as a temporary policy after the prior iteration of the fiduciary rule was vacated.
What’s next
It remains to be seen whether the DOL will respond to the Senators’ questions. As of Aug. 17, the DOL had posted 106 comments to the PTE proposal, with the most recent being from Warren submitted on Aug. 5, requesting the comment period be extended by an additional 60 days.
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