Compliance December 22, 2006

IRS Lifts Moratorium on Cash Balance Conversion Letter Requests

Facing a backlog of about 1,200 requests for Internal Revenue Service (IRS) determination letters on cash balance conversions, the agency announced Thursday that it had lifted a 1999 moratorium on processing the requests.
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An IRS news release said officials decided lifting the suspension was appropriate with the passage of the Pension Protection Act (PPA). The tax agency had shut down the process, pending a study on issues raised in such conversions, including the impact on older employees – an aspect of the plan changes that has proven immensely controversial and the subject of numerous court cases.

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Even though the PPA included safe harbor protection for new cash balance plans, Thursday’s announcement said the agency will not include age-discrimination issues in the newly activated reviews.

The IRS said in the announcement this approach is consistent with its past practice and with the fact that the PPA’s safe harbor did not address the issue of age discrimination on pre-June 30, 2005, conversions.

The agency said it hopes to resolve a significant majority of the cash balance letter backlog by the end of 2007.

In Notice 2007-6, the IRS also provides interim guidance on provisions of the Pension Protection Act of 2006 involving cash balance plans, and requests public comments.

The IRS notice is here.

Compliance December 22, 2006

Fidelity to Pay $42M into Funds After Report Reveals Brokers' Gifts to Traders

Fidelity Investments has announced it will pay more than $42 million to its funds after a report issued by independent trustees of Fidelity’s board said some of its traders directed business to brokers who provided them with lavish gifts.
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Reuters reports that chairman Edward Johnson apologized to investors in an open letter and said the company will pay “$42 million plus interest to Fidelity Mutual Funds based on an allocation formula to be agreed to with the Independent Trustees.”

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In a statement, Fidelity said it “took strong disciplinary action against those individuals involved in this misconduct, including sanctions, fines, suspensions, demotions and, in appropriate cases, termination from employment. Those responsible for the most serious misconduct have long since left the firm or been reassigned to projects outside the trading desk.’

In 2004, the Securities and Exchange Commission (SEC) began a broad inquiry into whether traders at Fidelity received free trips on private planes to Las Vegas, the Super Bowl, and golf courses in Florida, expensive wine, and other lavish perks from brokers who handled stock trades from the mutual fund company, including the brokerage firm Jeffries Group, Inc. Earlier this month, the SEC also revealed for the first time details of its two-year probe into possible fraud at Fidelity Investments (See More Details Emerge in Fidelity Fraud Probe). Also this month, the NASD announced it had slapped Jefferies & Company with a $5.5-million fine for providing “improper gifts and entertainment” to Fidelity stock traders (See NASD Fines Jefferies $5.5M for “Improper Gifts’ to Fidelity Traders).

The report said it is statistically impossible to prove whether fund investors were cheated during the gifts and gratuities scandal, but certain Fidelity traders had “misdirected” order flows among brokerage firms, according to Reuters. Additionally, the report said “inadequate supervision and other shortcomings exposed the Funds to the potential risks of adverse publicity, loss of credibility with their principal regulators and loss of Fund shareholders.”

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