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Capitol News | PLANADVISER January/February 2017

Compliance News

Legislative and judicial actions.

By PA editors@assetinternational.com | January/February 2017
Art by Kyle Stecker

Bill Would Halt Fiduciary Rule
A new bill introduced to halt the implementation of the Department of Labor (DOL) fiduciary rule offers a dramatic contrast to the complicated rulemaking due to take effect in April, running less than 200 words in total compared with thousands of pages of rule language.

The measure stands before the House Ways and Means Committee; it provides simply for a two-year delay in the effective date of the rule—ostensibly to give Congress more time to dismantle the conflict of interest rule entirely. Given the recent shift in political power, it stands a much better chance of passage than previous attempts to influence the DOL and could, in fact, spell the end of the road for the longstanding effort to revamp advice standards under the Employee Retirement Income Security Act (ERISA).

Introducing the bill, Representative Joe Wilson, R–South Carolina, described the “Protecting American Families’ Retirement Advice Act” as a necessary step to maintaining open access to different forms of financial advice.

DOL Issues FAQs on Advice
Two new frequently asked questions (FAQ) publications from the Department of Labor (DOL) seek to inform investors about their rights as consumers of products and services governed by the Employee Retirement Income Security Act (ERISA).

The publications give advisers a look into the thinking on consumer protection that has played a significant role in the DOL’s fiduciary reform efforts.

On the question of whether the rule is expected to “cause change in the financial services industry,” the DOL answers with an unequivocal “Yes.” Questions covered in the second FAQ document range from the general to the specific. For example, on the high-level question, “Is every communication with a financial adviser about retirement accounts a fiduciary recommendation?,” the agency answers, simply, “No.”

SEC Offers Guidance on Fiduciary Rule
The Securities and Exchange Commission (SEC) will not be in charge of applying the stricter conflict of interest standards being introduced for retirement plan advisers and for the investment providers supplying them with products to sell, but many of its own rules and regulations will interact intimately with the Department of Labor (DOL) rulemaking.

According to the SEC’s latest guidance, since the Labor Department rule’s proposition and finalization, representatives of mutual funds have been considering a variety of issues related to the rule’s implementation, including “contemplating certain changes to fund fee structures that would, in certain instances, level the compensation provided to a financial intermediary for the sale of fund shares by that intermediary and facilitate intermediaries’ compliance with the rule.”

DOL Says Income Can Be Prudent Default
In an informational letter to Christopher Spence, senior director, federal government relations at TIAA, the Department of Labor (DOL) says a defined contribution (DC) plan could prudently choose a default investment for the plan that contains lifetime income elements.

The letter was in response to a request regarding the application of the Employee Retirement Income Security Act (ERISA) to TIAA’s Income for Life Custom Portfolios (ILCP). The DOL notes that one requirement for qualified default investment alternatives (QDIAs) is that any participant, or beneficiary on whose behalf assets are invested, must have as frequent opportunities to transfer such assets “in whole or in part” to any other investment alternative available under the plan as do participants and beneficiaries electing to invest in the QDIA, and no less frequently than once in any three-month period. The ILCP’s Annuity Sleeve does not meet this requirement so would not constitute a QDIA.

Claims Against Prudential and CAPTRUST Are Dismissed
A federal judge has dismissed complaints against Prudential Retirement, an employer and its adviser in an excessive fee suit.

The participant who brought the proposed class action alleged that certain fees, including revenue-sharing payments, were kickbacks from mutual funds to Prudential. He also claimed that the 401(k) plan sponsored by Ferguson Enterprises included too many actively managed funds with higher fees vs. passively managed funds. Finally, he accused Prudential’s GoalMaker program—an option within the plan that assisted individual plan participants in making their investment selections—of directing participants to place their investments in higher-cost mutual funds that engaged in revenue sharing with Prudential; as a result, he said, the company received additional compensation at the expense of the plan and its participants.

U.S. District Judge Victor Bolden of the U.S. District Court for the District of Connecticut first determined that Prudential was not a fiduciary with respect to the lawsuit’s allegations. The company did not have the contractual authority to delete or substitute mutual funds from its menu without first notifying Ferguson and ensuring its consent. In addition, Bolden found, the trust agreement strips Prudential of its discretionary authority over its own compensation, limiting that compensation to the fee schedule provided to the employer and requiring advance notice to the employer of any changes to the agreed-upon schedule.

Concerning Ferguson and CAPTRUST, Bolden ruled that the plaintiff has made no allegations directly addressing the methods used by the two companies to select investment options for the plan. Additionally, the plaintiff makes no allegations that the funds in the plan underperformed, instead stating broadly that the concentration of mutual funds imposes unwanted expenses on plan participants without including any factual allegations regarding the availability of lower-cost alternatives.

Disney Suit Dismissed
U.S. District Judge Percy Anderson of the U.S. District Court for the Central District of California has dismissed a lawsuit in which a participant in the Disney Savings and Investment Plan challenged plan fiduciaries’ continued offering of the Sequoia Fund as a plan investment option.

According to the complaint, the Sequoia Fund is a high-cost mutual fund run by adviser Ruane, Cunniff & Goldbarb and its portfolio managers, Robert Goldfarb and David Poppe. The lawsuit claims that, in violation of plan investment policies, the fund managers concentrated the Sequoia Fund’s assets in a single stock, Valeant Pharmaceuticals Inc.

Anderson noted that, generally, plaintiffs in federal court are required to give only “a short and plain statement of the claim showing that the pleader is entitled to relief.” However, in Bell Atlantic Corp. v. Twombly, the Supreme Court had rejected the notion that “a wholly conclusory statement of a claim would survive a motion to dismiss whenever the pleadings left open the possibility that a plaintiff might later establish some set of undisclosed facts to support recovery.” Instead, Anderson said in his opinion, the court adopted a “plausibility standard,” in which the complaint must “raise a reasonable expectation that discovery will reveal evidence of [the alleged infraction].”

In construing the Twombly standard, the Supreme Court has advised that “a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”

Stock Drop Suit Against Exxon
A participant in the Exxon Mobil Savings Plan has filed a complaint on behalf of himself and other similarly situated current and former employees of Exxon Mobil Corp., or its predecessor companies, alleging plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by continuing to offer company stock when it was no longer prudent to do so.

The plaintiff claims defendants’ breaches of fiduciary duty occurred when they knew or should have known that Exxon’s stock had become artificially inflated in value due to fraud and misrepresentation, thus making Exxon stock an imprudent investment under ERISA and damaging the plan and those plan participants who bought or held Exxon stock.