NASD Says Former Wachovia Broker Wrongfully Fired for Market Timing

The National Association of Securities Dealers (NASD) handed down a $4.3 million award to a former Wachovia Securities broker who was fired in 2003 amid the firestorm of market-timing allegations.

The National Association of Securities Dealers (NASD) handed down a $4.3 million award to a former Wachovia Securities broker who was fired in 2003 amid the firestorm of market-timing allegations.

An arbitration panel accepted Frederick O’Meally’s claims that he had been wrongfully fired and that his former employer still owed him compensation from a company savings plan and from a retention bonus, according to the New York Law Journal.

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O’Meally had engaged in market timing on behalf of hedge fund clients, but argued these practices were reviewed and approved by in-house counsel at Prudential Securities — and later at Wachovia after the two companies merged in 2003. His attorney argued that O’Meally did nothing contrary to policy.

The NASD panel dismissed O’Meally’s claims against Prudential and denied Wachovia’s request for damages of $323,712. The panel directed Wachovia to pay, with interest, $2.7 million to O’Meally in profit-sharing benefits and $1.6 million in retention bonuses to be paid over five years.

Admitting to “criminal wrongdoing,” Prudential settled market-timing allegations with NASD in August when it agreed to pay out $600 million in monetary sanctions. NASD said the company’s clients earned more than $162 million in profits as a result of market-timing activities and Prudential earned more than $50 million in gross commissions from the transactions.

Even though the NASD panel found Wachovia erred in its decision to fire O’Meally, he, along with three other former Prudential brokers, still face civil charges relating to market-timing activities from the Securities and Exchange Commission (SEC), according to the New York Law Journal.

DOL Unwraps New Default Investment Guidelines

On September 26, US Department of Labor (DoL) officials released a proposed safe harbor rule covering retirement plan sponsors who have default investment options for employees entering plans via auto-enrollment or in situations in which individual account plan assets are invested on behalf of participants or beneficiaries who fail to give investment instructions.

On September 26, US Department of Labor (DoL) officials released a proposed safe harbor rule covering retirement plan sponsors who have default investment options for employees entering plans via auto-enrollment or in situations in which individual account plan assets are invested on behalf of participants or beneficiaries who fail to give investment instructions.

Under the proposed regulation a participant will be considered to have exercised control over the assets in his retirement account if the plan fiduciary invests those assets in a qualified default investment alternative (QDIA) if the participant does not affirmatively elect an investment. The QDIA can be a lifecycle or target-date fund, a balanced fund, or a managed account. The QDIA must be diversified, so it minimizes the risk of large losses, and it must be either managed by an investment manager or by an investment company registered under the Investment Company Act of 1940.

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Even though the introduction of the QDIA offers some fiduciary relief to plan fiduciaries, they still are expected to fulfill their traditional due diligence of selecting and monitoring the investment selection prudently.

Administrative Requirements

In order to qualify for the relief, participants must be given the option to self-direct their investments and the plan must offer a “broad range of investment alternatives’ as defined under the Employee Retirement Income Security Act (ERISA) section 404(c). Participants must be allowed to move money out of the QDIA with the same frequency as other plan investments without suffering a financial penalty (but not less than quarterly). Larry Goldbrum, general counsel at the SPARK Institute, the legislative arm of the Society of Professional Administrators and Recordkeepers , comments that this is an area in which he hopes the DoL will offer clarification because it is not clear if a fund that imposes a redemption fee would be allowed as a QDIA, although plan fiduciaries need to consider whether a fund that imposes a redemption fee is appropriate as a default investment, in any event.

The proposed rule also requires that a notice be furnished to participants and beneficiaries 30 days in advance of the first investment, and on an annual basis thereafter – a notice that must contain a description of the circumstances under which assets will be invested in a QDIA; a description of the investment objectives of the QDIA; and an explanation of the right of participants and beneficiaries to direct investment of the assets out of the QDIA. The 30-day requirement would seem to suggest that the default fund guidance might be applicable to plans that have immediate eligibility or eligibility of less than 30 days, Goldbrum said, because the participant will not be given the proper advance notice.

The plan participants invested in the QDIA also must be given any material, including investment prospectuses and other notices, provided to the plan by the QDIA. This is another area Goldbrum would like clarified because, he said, this provision seems to suggest that the participant invested in the default fund would need to receive annual reports or proxy voting statements, which would imply that the participant is receiving more information than those who, at least in theory, are actively managing their account.

A fact sheet about the proposal is here. The text of the proposed rule is here.

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