The Other Securities Regulator: A Case Study in Regulatory Damage

Abstract

Although the Securities and Exchange Commission is the primary securities regulator in the United States, the Department of Labor also engages in securities regulation. It does so by virtue of its authority to administer the Employee Retirement Income Security Act (ERISA), the statute that governs the investment of retirement assets. In 2016, the DOL used its securities regulatory authority to adopt a rule that, for the first time, designates securities brokers who provide investment advice to retirement investors as fiduciaries subject to ERISA's stringent transaction prohibitions. The new rule's objective is salutary, to be sure. However this Article shows that, by way of its reformation of many advisers' relationships with their retirement-investor customers, the 'fiduciary rule" imperils retirement investors in ways that are not immediately evident and that other scholars have not noticed. First, the rule promotes a particular investment strategy-namely, passive investing-for all retirement investors, regardless of their individual needs or objectives. Second, as a thought experiment demonstrates, the rule portends a constriction ofmost retirement investors'participation in the securities markets and a still-wider gap, in terms of investment opportunities and performance, between these investors and their "sophisticated" counterparts. Despite these dificulties and speculation that the Trump administration would scuttle the rule, moreover the rule's effects are likely enduring.Given the damage that the fiduciary rule threatens to inflict on retirement investors, the DOL's adoption of it is an episode of failed rulemaking-one that, as this Article contends, may be traced to doctrinal factors: US. securities regulation is based on the notion that regulation should be neutral as among firms' business and financial objectives and should harness, without necessarily abolishing, financial professionals' conflicts of interest. Yet with its fiduciary rule, the DOL has effectively forsaken the principle of neutrality and deployed a scorched earth strategy against conflicts. With a view toward addressing the special concerns that shared regulatory authority creates, the Article delves into the lessons arising fivm this episode and how policymakers might better promote regulatory objectives and sound policy going forward.