Compliance September 19, 2007

SPARK Says Fee Disclosure Proposal Too Burdensome

The 401(k) fee disclosure legislation pending in Congress will have a detrimental effect on the employer-sponsored retirement plan system, argues the SPARK Institute.
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A new SPARK analysis answers a legislative call for advice on how best to approach fee disclosure, and explores what effects the fee legislation proposed by Representative George Miller (D-California) might have (See Fee Disclosure Legislation Introduced in House). Miller’s proposal prompted mixed reactions from the retirement industry, most of them fearing that such disclosure would be too burdensome without enough benefit to participants.

The Department of Labor also has received much correspondence about possible revisions to 401(k) fee disclosures, which said that educating plan sponsors and participants about fees was important but suggested that any revisions needed to be carefully pondered (See DoL Receives Letters Urging Caution in Fee Disclosure).

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Like other groups, SPARK contends regulation for fee disclosure should be handled by the Department of Labor and the Securities and Exchange Commission, rather than Congress.

The basic guidelines SPARK suggests legislators follow when they are developing participant disclosure rules are:

  • Fee information is only one of many data points, and arguably not the most important one, that participants should consider when making investment decisions.
  • Over-emphasis on fees and expenses may lead to poor investment decisions, as well as lower employee participation and contributions to employer sponsored retirement plans.
  • Participant fee disclosure must be short and simple to have any chance of being effective.
  • Only information that is reasonably likely to be read and to influence the investment decisions of otherwise passive participant investors in choosing among their plans’ investment options should be included in any required disclosure.
  • Participants will ultimately bear the costs of any required disclosure and access to additional information.
  • Fee disclosure requirements should neither favor any one retirement plan or investment industry segment nor disrupt the current competitive balance among such service providers.

“Although The SPARK Institute supports and encourages greater fee transparency, we have concerns about several aspects of the proposal and hope this analysis will create additional awareness of the legislation and stimulate discussion regarding its impact on retirement plan sponsors, plan participants and service providers,” said Larry Goldbrum, General Counsel of The SPARK Institute, in a press release.

The full analysis by SPARK is available here.

Compliance September 19, 2007

Absolute Immunity Does Not Apply to NYSE in Oversight Duties

The 2nd U.S. Circuit Court of Appeals has reinstated a case brought against the New York Stock Exchange (NYSE) by institutional investors who claim the exchange and seven trading specialist firms worked together to defraud investors.
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Circuit Judge Sonia Sotomayor said the NYSE shouldn’t get the immunity afforded to it in a previous holding by U.S. District Judge Robert Sweet of the U.S. District Court for the Southern District of New York.

Sweet’s ruling said the exchange gets the same immunity enjoyed by the Securities and Exchange Commission (SEC) when it is performing duties assigned by the SEC, meaning NYSE would get absolute immunity from claims that it failed to regulate and provide a fair and orderly market.

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The original lawsuit filed by the California Public Employees’ Retirement System (CalPERS) and other public pension funds in nine states also claims that the NYSE’s evasion of regulatory scrutiny and deliberate failure to supervise and discipline the firms accessing inside information led to a misrepresentation of market prices.

The complaint followed revelations in 2003 that several specialists were accessing inside information and making millions of dollars trading stocks they supervised.

Investors claimed that NYSE’s repeated public statements about the operation of its specialist firms and its oversight of their daily functions deliberately created the false impression that the exchange was “overseeing and operating its auction market in accordance with laws, rules and regulations that l[ed] investors to believe that the NYSE was an honest and fair market,” and that they relied on these statements in trading stocks. They say those misrepresentations affected market prices of securities.

However, Sotomayor remanded the case to Sweet for further proceedings, declining to make a decision on whether investors’ claims of misrepresentation on the part of the exchange were adequate to state a claim. However, Sotomayor said that the remaining claims “do not appear to be of the nature where the fraud-on-the-market theory would apply, where the misrepresentation itself affects the market price of the security purchased.”

The 2nd Circuit decision is here.

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