Many of the options for the incoming Trump administration to stop a Labor Department investment advice rule entail significant effort.
Rescinding the regulation would have to be done through another rulemaking process. Legislation to repeal the rule would have to overcome likely opposition from Senate Democrats.
But one approach would require the new administration to do virtually nothing.
The Trump administration could undermine the rule simply by dropping its defense of the regulation in several lawsuits that are under way.
“It's something the administration could do right away without jumping through rulemaking hoops,” said Norm Champ, a partner at Kirkland & Ellis and a former Securities and Exchange Commission official. “If you think about it from a political capital perspective, you could do a few things like that that don't cost much.”
If the Trump Department of Justice backs away from the DOL rule, it would leave the playing field to the plaintiffs.
(More: The most up-to-date information on the DOL fiduciary rule)
“By dropping their defense, they're accepting the relief that the other side is asking for,” said Steve Feldman, a partner at Murphy & McGonigle. “It allows a court, based on the plaintiffs' papers, to decide where it wants to come down.”
On Thursday,
a Dallas federal court held a hearing on one of the suits that has been filed against the DOL rule, which requires financial advisers to act in the best interests of their clients in retirement accounts.
In another legal challenge to the rule, a federal court in Washington recently upheld the regulation, a decision that
is being appealed by the plaintiff, the National Association of Fixed Annuities. Other cases are being adjudicated in Kansas and Minnesota.
For now, the Obama administration Department of Justice is vigorously defending the rule, which it argues is necessary to protect workers and retirees from conflicted advice that erodes retirement savings.
In its lawsuits, the financial industry argues that the rule is too complex and costly and that the Obama DOL didn't have the authority to promulgate it.
There is precedent for the Trump administration effectively to agree in court with the opponents of the rule. For instance, the Obama administration stopped defending the Defense of Marriage Act in 2011.
“Instructing the DOJ to stop defending the rule could present an effective way to have the courts strike down the rule, unless a third-party intervened and continued a successful defense without DOJ's participation — as happened when the House Bipartisan Legal Advisory Group voted to intervene in defense of DOMA,”
an analysis by the law firm Morgan Lewis states.
But even if the Trump DOJ leaves the DOL rule to the mercy of the courts, it doesn't necessarily mean that the rule will be abolished.
The lawsuits vary in their details — as could court decisions. One court has already backed the rule. Others could vacate the whole thing or strike down only parts of the measure.
“It could leave it in a state of flux,” said Laura Anthony, founding partner at Legal & Compliance. “Until there is a definite repeal of the rule, a [financial] firm has to follow the law.”
Mr. Feldman agreed.
“A court decision isn't necessarily going to have the same effect as a congressional action overturning it,” he said.
The resolution likely will come outside the court system, according to Don Andrews, a partner at Venable.
“The Trump administration will elect to put it on hold,” Mr. Andrews said. “I'm not convinced this is going to be worked out in court.”
