Compliance June 28, 2010

Financial Services Reform Compromise Reached

Last week, members of the House and Senate conference committee announced that they had reached a compromise on the new financial services reform bill.  

 

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Designed with the intention of preventing another market meltdown, protecting consumers from unfair lending agencies, and clarifying and correcting existing legislation, the bill promises significant change to the current practices of retirement plan advisers and financial service providers.  

The Securities and Exchange Commission (SEC) was given the authority to require brokers to put their clients’ interests first, a practice that is familiar to advisers. A six-month study of the brokerage industry, with specific attention paid to possible regulatory gaps or overlaps between brokers and investment advisors, will be conducted before any more significant changes are made. Within the next year, brokers who previously recommended “suitable” investments based on their clients’ financial goals and preferred risk level may be held to the fiduciary standard.  

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Under the terms of the legislation, the SEC also has the right to require private equity and hedge fund advisers to open their books for inspection. The SEC’s review may raise the threshold for customers as accredited investors, a designation currently given to “a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase,” as well as several other qualified companies and plans1. 

The bill also created a new Federal Insurance Office within the Treasury that will monitor insurers who were previously regulated only by states. The FDIC’s authority to liquidate failed commercial banks was also extended to large financial firms whose collapse would have a greater negative impact on the economy.  

The bill was expected to be brought to a vote this week, potentially being signed by President Obama by July 4.  However, the passing of Senator Robert Byrd (D-West Virginia) this morning has, at least temporarily, put that timetable, if not the passage of the compromise bill itself, in question.    

For more information on the SEC’s definition of accredited investors, please visit http://www.sec.gov/answers/accred.htm. 

The bill can be seen in its entirety at http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf 

Compliance June 28, 2010

SPD Language Not a Valid Plan Terms Change

A federal appellate court has ruled that a summary plan description (SPD) could not unilaterally grant a benefit plan administrator the right to make benefit eligibility decisions without having parallel language in plan documents. 

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With that holding, the 8th U.S. Circuit Court of Appeals threw out a lower court ruling in a suit filed by a former game table dealer at the Harrah’s Casino in St. Louis who had challenged a decision by Prudential Insurance Company to deny him long-term benefits after becoming unable to work due to HIV, depression and fatigue in April 2004.  

Writing for the court, Circuit Judge Kermit Bye asserted that plaintiff Eric Ringwald was correct that a trial court judge should have used a more in-depth standard of legal review in eventually ruling for Prudential.  The lower court contended that the less rigorous review was appropriate because the plan’s SPD grants the “the sole discretion to interpret the terms of the Group Contract, to make factual findings, and to determine eligibility for benefits.”  

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The problem, Bye explained, is that benefit plans are required under the Employee Retirement Income Security Act (ERISA) to provide a plan amendment procedure and simply putting a plan change in an SPD does not constitute a valid change of plan terms under ERISA.  

“Here, there are no terms in the plan which allow it to be amended by inserting into the SPD such critical provisions as the administrator’s discretionary authority to interpret the plan or to determine eligibility for benefits,” Bye wrote. “Indeed, this particular plan wholly fails to comply with (ERISA’s) requirement to include a procedure governing amendment of the plan.” 

Bye said the rule that an SPD prevails in the event of a conflict between it and plan documents only applies where doing so is necessary to protect plan participants.  

The case is Ringwald vs. Prudential Ins. Co. of Am. (8th Circ) No. 09-1933.  

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