Compliance June 26, 2018

Groom Law Group Calls for IRS Determination Letter Program Expansion

At the start of 2017, the Internal Revenue Service dramatically limited when a retirement plan could seek an individual determination on its tax-qualified status; ERISA attorneys are calling for a new expansion of the once-important program.

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When the Internal Revenue Service (IRS) in January 2017 significantly scaled back its determination letter program, which allowed retirement plan sponsors to directly petition the IRS for an opinion on their plan’s tax-qualified status, it caused substantial industry consternation.

Under the restricted program created by Revenue Procedure 2016-37, a plan can now request a determination letter only if any of these apply: It has never received a letter before; the plan is terminating; or the IRS makes a special exception. IRS said it would make exceptions based on program capacity to work on additional applications, and on the need for rulings in certain areas. The agency, at the time, said it would measure need in a variety of ways, including annual input from the Employee Plans (EP) community.

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Among other concerns voiced by retirement plan fiduciaries and employers is the fact that most large retirement plans do not use prototype plan documents—and that for other employers, prototypes would not fit in certain situations, such as for plan sponsors that have multiple plans or plans with specific provisions for certain groups following a merger or acquisition.

After hearing these concerns throughout 2017, the IRS earlier this year published Notice 2018-24, in which it requests comment “on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond provision of determination letters for initial qualification and qualification upon plan termination.”

Responding to this new call for commentary, Groom Law Group has put forward an analysis highlighting the fact that, to date, the Treasury and IRS have not identified any other circumstances beyond initial qualification and termination which allow a plan to seek a new determination letter.

“This is despite the fact that IRS said it would consider them each year,” the Groom attorneys write.

In its formal comment letters to the IRS, Groom recommends consideration of the following plans as appropriate applicants for updated determination letters: “Plans with a cash balance or similar benefit formula whose last determination letter was before the effective date of the final IRS hybrid plan regulations; plans that address income replacement and inflationary pressures through adoption of a variable annuity feature; and traditional pension plans that convert to a cash balance-type formula.”

Other suggested categories of plans that should be able to seek determination letters include plans that “undergo major changes that otherwise make certain compliance testing unnecessary,” such as safe harbor 401(k) plans. The attorneys also point to the situation wherein “plan changes are accompanying significant workforce adjustments, such as downsizings or corporate separations.”

Finally, the attorneys recommend IRS offer determination letters in the case that corrective plan amendments are submitted as part of an EPCRS submission, or in the case that a governmental plan has undergone “a significant change in the governing state or local law.”

The Groom attorneys say they are optimistic that IRS make take up some or even all of these suggestions, but it will take time. As they explain, in a June 7 report, the Advisory Committee on Tax-Exempt and Government Entities made nearly a dozen recommendations in this area, “including several also identified in the Groom letter.” 

“Among other additions, the Advisory Committee recommended allowing submissions after a plan has gone a long time, such as 10 to 15 years, without any updated letter, as well as for multiemployer plans and ‘complicated’ ESOPs,” the attorneys conclude. “Needless to say, we don’t expect the IRS to adopt many of these recommendations all at once—or even over an extended period of time. IRS officials have repeatedly noted that its staff and budget resources are still severely limited. However, it is hoped that the IRS will respond as soon as it can to allow some filings for updated letters.”

The attorneys add that employers who want or need ongoing assurance that their plans remain tax-qualified can participate in Groom’s Document Compliance Service (DCS) program under which the firm provides a legal opinion based on the particular plan documents reviewed.

The full Groom letters to IRS are available for download here:

Compliance June 25, 2018

Betterment Settles FINRA Allegations Tied to Bookkeeping Practices

Without admitting guilt or even the facts of the case, Betterment has settled various allegations of improper recordkeeping and "window dressing" leveled by FINRA, to the tune of $400,000.

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Responding to a challenge by the Financial Industry Regulatory Authority (FINRA), Betterment Securities has submitted a Letter of Acceptance, Waiver and Consent (AWC) for the purpose of proposing a settlement of alleged rule violations; the AWC is submitted on the condition that, if accepted, FINRA will not bring any future actions against Betterment alleging violations based on the same factual findings described therein.

Contextual information included in the AWC shows that Betterment Securities became a member of FINRA on October 21, 1999. In 2011, Betterment Securities became a wholly owned subsidiary of Betterment Holdings, Inc. Today, the business of Betterment Securities is to provide brokerage services to customers of the registered investment adviser, Betterment LLC, which is also a wholly owned subsidiary of Betterment Holdings.

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“Betterment LLC operates as an online wealth management service,” the AWC explains. “Betterment Securities’ customer base is made up of the clients of Betterment LLC. The firm’s place of business is New York, New York. Betterment Securities has one office and approximately 12 registered representatives. The firm has no relevant disciplinary history with the Securities and Exchange Commission [SEC], FINRA, any other self-regulatory organization or any state securities regulator.”

The outline included in the AWC includes Betterment’s strong growth trajectory. The firm had approximately $120,000 in annual revenues in 2011 and more than $1.2 million in annual revenues in 2014. The explanatory text of the AWC continues: “Betterment Securities holds its customers’ securities in omnibus accounts at its clearing firm. In June 2014 the value of securities in the omnibus account was approximately $608 million. During this period of significant growth in its business, the firm did not ensure that its practices complied with certain FINRA and SEC financial and operational rules and interpretations.”

First, the AWC states, during the period from October 2013 through January 2015, the firm “structured its transactions on days when it was required to calculate its reserve deposit differently than on other days in order to reduce its customer reserve account obligations.” Specifically, the firm generally moved customer deposits to its omnibus account to fund its pre-settlement withdrawal program. However, on days when the firm was required to compute its customer reserve requirement, the firm did not move customer deposits and instead used loans from its clearing firm to fund that program.

“Thus, the firm engaged in ‘window dressing’ by altering its practices on reserve computation days specifically to reduce its reserve formula computation and thereby reduce its reserve requirement,” the AWC states.

Second, during the period from October 2013 through August 2014, the firm “did not properly segregate customers’ wholly owned securities in a good control location.”

“These practices, along with other errors in the firm’s computation of its reserve requirement, constitute violations of the reserve formula and possession and control requirements of Section 15 of the Securities Exchange Act of 1934 and Rule 15c3-3 promulgated thereunder and FINRA Rule 2010 during the period from October 2013 through January 2015,” the AWC states. “In addition, from June 2012 through December 2014 the firm did not make and keep certain of its books and records in the manner required by SEC and FINRA rules.”

For example, the AWC says Betterment did not create and maintain certain records of cash movements in the form required by SEC and FINRA rules. In addition, the firm’s systems “maintained its stock record on a trade date basis, rather than settlement date basis.” By this conduct, the AWC says the firm violated Section 17 of the SEA and Rules 17a-3 and 17a-4 promulgated thereunder and FINRA Rules 4511 and 2010 during the period from June 2012 through December 2014.

The AWC goes on to suggest the firm did not have a supervisory system reasonably designed to ensure its compliance with customer protection rules and books and records rules.

“In particular, the firm did not implement a supervisory system in which certain decisions relating to financial and operational rules were made and supervised by people with appropriate expertise,” the AWC says. “For example, the firm’s former principal, who had no training or experience in applying SEC and FINRA financial and operational rules, had primary responsibility for the firm’s compliance with SEA Rule 15c3-3 during the relevant period. Further, the firm did not involve its financial and operations principal [FINOP] in certain decisions affecting the reserve computation and only provided the FINOP with monthly statements and record compilations instead of more complete access to its bank accounts and its omnibus accounts. By reason of the foregoing, the Firm violated NASD Rule 3010 (for the time period prior to December 1, 2014) and FINRA Rule 31 10(a) (for the time period on and after December 1, 2014) and FINRA Rule 2010 during the relevant period.”

As part of the agreement with FINRA, Betterment has agreed to a censure and a $400,000 fine, and it will create an “enhanced FINOP role with expanded access to review information for the purpose of maintaining compliance, as well as expanding oversight, installing new compliance leadership and updating written supervisory procedures.”

In the corrective action statement accompanying the AWC, Betterment Securities says it takes is regulatory responsibilities seriously—pointing out that the firm has cooperated with FINRA staff throughout this process and began implementing recommended changes even before the examination was complete.

The full text of the AWC is available here and includes substantial explanatory information around each of these allegations.  

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