Compliance December 23, 2021

Birdthistle Takes Helm at SEC Division of Investment Management

SEC Chair Gary Gensler says he looks forward to working closely with William Birdthistle, an at-times harsh critic of the mutual fund industry, to plan and execute a proactive regulatory agenda.

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This week, the U.S. Securities and Exchange Commission (SEC) announced the appointment of William Birdthistle as director of the Division of Investment Management.

Birdthistle currently serves as a professor at Chicago-Kent College of Law. The SEC division he will lead oversees regulatory policy for investment advisers and investment companies, including mutual funds and other investment products and services relied upon by investors.

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SEC Chair Gary Gensler cites Birdthistle’s “remarkable expertise in investment funds” as a primary reason for his appointment, and, in a statement about the move, he thanked Sarah ten Siethoff for serving as acting director of the Division of Investment Management during his first eight months as SEC chair.

“The Division of Investment Management develops regulatory policies to oversee investment companies and investment advisers so that American investors can confidently save to buy homes, pay for college or plan for retirement,” Gensler adds. “I look forward to working closely with William to execute our mission.”

As spelled out by the SEC, Birdthistle joined the faculty at Chicago-Kent College of Law in 2006. He also has served as a visiting professor of law at the University of Chicago Law School. His research explores the interplay of investment funds, securities regulations and corporate governance, and he has served as counsel of record on multiple amicus briefs to the U.S. Supreme Court.

Prior to his academic career, Birdthistle practiced law at Ropes & Gray in Boston, serving as a corporate associate in the firm’s investment management practice. Birdthistle received his Juris Doctor from Harvard Law School, where he served as managing editor of the Harvard Law Review, and he received a bachelor’s in English and psychology from Duke University in 1995.

At a high level, Birdthistle’s selection fits into the trend seen in prior SEC appointments made by the Biden administration, as it is taking a clear change in direction relative to the prior administration, which put the focus of the SEC squarely on expanding access to investments and easing regulatory restrictions on advisers and investment companies. Gensler, on the other hand, has emphasized the need to more aggressively police conflicts of interest and other problematic behaviors seen in the securities markets and among its practitioners. To this end, in May, the SEC announced it had appointed Barbara Roper, former director of investor protection at the Consumer Federation of America (CFA), to the role of senior adviser to Gensler.

Birdthistle is known for his involvement as an expert witness in several important lawsuits in recent years, including Kennis v. Metropolitan West. In that case, Birdthistle offered pro-plaintiff testimony that suggested, in sum, that the mutual fund industry is insufficiently competitive to ensure arm’s-length bargaining on fund fees. He also opined that certain compensation structures used for portfolio managers can create incentives contrary to the financial interests of fund investors and shareholders, and that there are potential conflicts arising from certain payment of sub-accounting fees to financial intermediaries from fund assets for distribution.

Among his many publications, Birdthistle has also written about problems in the money market fund industry, with a particular focus on the market stresses seen in the wake of the Great Recession. In one paper, he argued the SEC’s response to the 2008 financial crisis actually increased, rather than decreased, the likelihood of future failures in money market funds and the broader capital markets. He wrote that the SEC “endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements and the continued use of discredited ratings agencies.”

“These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure the true perils of money market funds,” Birdthistle writes in “Breaking Bucks in Money Market Funds.” “Rather than swaddling investment risks in misleading regulatory padding, the SEC should illuminate the possible menace of these funds. This article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments.”

Compliance December 22, 2021

PBGC Approves First Special Financial Assistance Funds

A transportation workers’ multiemployer pension plan will receive funds created by the American Rescue Plan Act of 2021 to pay retirement benefits.

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The Pension Benefit Guaranty Corporation (PBGC) has approved the first multiemployer plan application for special financial assistance, from a pension plan that covers transportation workers, under the Special Financial Assistance (SFA) program that was created by the American Rescue Plan Act (ARPA) earlier this year.

The approved application is from the Local 138 Pension Plan based in Baldwin, N.Y., which covers 1,723 participants working in transportation. The pension plan will receive $112.6 million in special financial assistance, including interest to the expected date of payment to the plan.

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“PBGC’s approval of the first application for special financial assistance is a major milestone in implementing the American Rescue Plan Act,” says PBGC Director Gordon Hartogensis. “The SFA program is estimated to protect the benefits of 3 million people in over 250 multiemployer pension plans that are severely underfunded. This is a significant advancement of PBGC’s mission to provide retirement security for America’s workers, retirees and their families.”

Without the special financial assistance, the pension, which was expected to run out of money in 2022, would have been forced to reduce participants’ benefits to the PBGC guarantee levels upon plan insolvency. This would have reduced benefits roughly 20% below the benefits payable under the plan’s terms. The special financial assistance funds will allow the plan to continue making benefit payments without reduction for payees and to pay plan expenses.

“Today more than 1,700 workers, retirees and their families will go to sleep easier knowing the secure retirement they were promised will exist for many years to come,” says U.S. Secretary of Labor Marty Walsh, who also is chair of the PBGC board of directors.

ARPA provides an avenue for multiemployer plans that are in critical or declining status and at risk of running out of money to receive lump-sum funds to make benefit payments three decades out, or until 2051. The bill approved $1.9 trillion in total for coronavirus relief, earlier this year and included provisions aimed to assist both single-employer defined benefit (DB) plans and multiemployer plans.

The PBGC issued an interim final rule earlier this year that detailed the requirements for the Special Financial Assistance program for multiemployer plans. Plans are required to use the money to make benefit payments and pay plan expenses. 

Plans that receive special funding assistance must monitor the money received and the earnings on those funds separately from other funds. PBGC has also detailed restrictions and conditions on the amounts received, which include the interest rate assumption to be used in calculating a plan’s benefit obligations to be considered when determining the amount of assistance, as well as how SFA assets can be invested.

The agency is accepting applications ahead of its final rule being published and has said any changes will not reduce the benefits that a plan may receive. Stakeholders have expressed concerns that permissible investments for the funds received will not earn the rate used for calculation of assistance payments. The concern is that, at that rate, the SFA will run out of money earlier than the 30 years it is intended to assist plans paying out promised benefits.

Shivin Kwatra, head of liability-driven investing (LDI) portfolio management at Insight Investment, says PBGC made it clear that the rate plans will need to use is the lesser of the third segment rate plus 2.5 basis points (bps), which is roughly 5.5%, or the interest rate the plan used in its Form 5500 filing with the Department of Labor (DOL).

“We were hoping for better alignment with market rates, but that’s not the direction regulators wanted to take,” Kwatra says.

PBGC said that it was only allowing only investment-grade bonds as permissible investments for the SFA payments, under the interim final rule.

Some stakeholders that have commented on the interim final rule, including human resources (HR) consulting firm Segal Marco Advisors, have expressed concerns that under the existing investment restrictions, plans won’t be able to get enough assistance to reach a 5.5% return. 

“Even a high-yield bond today is returning around 3.8%, and that isn’t even contemplated at some durations,” says Sue Crotty, senior vice president and multiemployer practice leader at Segal Marco Advisors. “Investment-grade bonds return around 2%, and there’s no leverage on that, so it’s a problem.”

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