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Capitol News | PLANADVISER March/April 2017

Compliance News

Legislative and judicial actions

By PA Staff editors@planadviser.strategic-i.com | March/April 2017
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Art by Kyle Stecker

Dodd–Frank Repeal Battle Parallels Fiduciary Fight
Many in the retirement plan advisory industry are closely watching the Trump administration’s effort to repeal the Department of Labor (DOL) fiduciary rule, but the wider financial services community is clearly focused on the related effort to attack the Dodd–Frank reforms.

The Dodd–Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and it was expected to at least peripherally impact the standard of conduct of those financial advisers who serve as  registered representatives of broker/dealers (B/Ds). The rulemaking mainly affected consumer and investment banks, but the extent of the changes mandated by Dodd–Frank was massive in scope.

As the helpful “Dodd–Frank Act: A cheat sheet,” from legal firm Morrison & Foerster, observes, the term “Dodd–Frank” represents an entire ecosystem of rules and requirements that are now, to varying degrees, well-established among the nation’s large and small financial institutions. As with the DOL fiduciary rule, millions have been spent on compliance efforts marketwide.

Exactly how Dodd–Frank or the DOL fiduciary rule will be unraveled is still unclear. The Trump administration cannot simply snap its fingers and undo the amazingly complex package of rules casually referred to as Dodd–Frank. There are standards of prudence and process that must be followed in dialing back any properly established and enforced rulemaking—an area governed by both the Regulatory Flexibility and the Administrative Procedures acts, as well as by the U.S. Constitution.

Edward Jones Self-Dealing Suit Permitted to Proceed
A federal court judge has denied most of Edward Jones’ motions to dismiss a lawsuit alleging the company favored its own investments and those of its “preferred partners” in its 401(k) plan, at the expense of performance.

In arguing that the breach of fiduciary claims against them should be dismissed, the Edward Jones defendants said they had fulfilled their duties by offering an array of investment options. Plaintiff Charlene McDonald’s complaint asserts that defendants violated their fiduciary obligations and affiliated themselves with funds that benefited defendants at the expense of the plan participants. U.S. District Judge Rodney Sippell of the U.S. District Court for the Eastern District of Missouri found Edward

Jones’ defense that they offered an array of investment options does not insulate them from McDonald’s claims.

Edward Jones defendants argued that the complaint fails to state a claim for a breach of fiduciary duties and for a failure to defray plan expenses, but Sippell found that the complaint, when read as a whole, has provided sufficient facts to plausibly state the claims. Defendants dispute the complaint’s factual allegations and argued that they acted within Employee Retirement Income Security Act (ERISA) standards. “In deciding a motion to dismiss, I must determine whether the complaint states a claim for relief. Defendants’ arguments in support of their motion to dismiss challenge the factual allegations of the complaint and are premature at this stage of the litigation,” Sippell wrote in his opinion.

JPMorgan Sued Over 401(k) Fees
Fiduciaries of the internal JPMorgan Chase 401(k) plan face a proposed class action suit, being brought by an employee who argues the retirement plan’s fees were not properly controlled and that conflicts of interest damaged net-of-fee performance.

The suit, filed in U.S. District Court for the Southern District of New York, names as defendants JPMorgan Chase Bank, as well as the company’s board, various benefit committee members, human resources (HR) executives and others.

The complaint echoes allegations that are by now familiar to retirement plan industry professionals: “Plan’s fiduciaries breached their duties of loyalty and prudence to the plan and its participants by failing to utilize an established systematic review of the investment options in its portfolio to evaluate them for both performance and cost, regardless of affiliation to JPMorgan Chase … This failure to adequately review the investment portfolio of the plan led thousands of plan participants to pay higher than necessary fees for both proprietary investment options and certain other options for years.”

In no uncertain terms, the lawsuit alleges “blatant self-dealing” that occurred when fiduciaries “allowed higher than necessary fees to continue to be paid on their own proprietary options.” Again, like a long list of other proposed class action suits filed in recent years and months, the plaintiff says the large size of the plan, valued between $14.64 billion and $20.94 billion during the class period, should have been enough to allow plan fiduciaries to negotiate fees down to levels near the lowest available in the market—regardless of whether a proprietary or outside provider was utilized.