Compliance April 27, 2016

ICI Supports Bills Against Fiduciary Rule

In a letter to lawmakers, ICI's president urged Congress to support bills that offer a different way to implement a best interest standard.
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In a letter to Speaker of the House Paul Ryan, R-Wisconsin, and House Minority Leader Nancy Pelosi, D-California, Investment Company Institute (ICI) President and CEO Paul Schott Stevens said that Congress should continue advancing bipartisan legislation to adopt a best interest standard in law, rather than through the “cumbersome contractual regime” imposed by the Department of Labor (DOL) in its final fiduciary rule. 

Stevens wrote to support H.J. Res. 88, introduced by Reps. Phil Roe, R-Tennessee, Charles Boustany, R-Louisiana, and Ann Wagner, R-Missouri.

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Stevens said the Institute strongly endorses the principle that financial professionals should act in the best interest of their clients when offering personalized investment advice, and that other bipartisan legislation already advancing in the U.S. House of Representatives is the appropriate way to implement this principle. “Such legislation has the distinct advantage of imposing a best interest standard through changes in the law, rather than through the cumbersome contractual regime contrived in regulations by the Department of Labor. The legislation would impose broad, strong statutory protections for savers seeking financial advice, without introducing the extreme complexity inherent in the Department’s rule,” Stevens wrote.

Stevens noted that while the DOL’s final rule reflects a number of modifications, the basic structure of the proposed rule remains intact. “Like the proposed rule, the final rule imposes significant new liability through a complicated, back-door regulatory regime that will have the effect of limiting available advice options for many savers,” he wrote, contending that implementation of the rule will make it more difficult for low- and middle-income Americans to save for retirement. He said small businesses, in particular, will find it more difficult to offer their employees saving opportunities.

Steven’s letter can be viewed here. 

A resolution has also been introduced in the U.S. Senate to stop implementation of the new fiduciary rule.

Compliance April 27, 2016

Fifth Third Standard Applies to Closely Held Company Stock Suits

A district court judge said her reading of the U.S. Supreme Court's decision in Fifth Thirdv. Dudenhoeffer does not preclude application of the "alternative action" standard to closely held companies.
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Participants in the Hill Brother Construction Company, Inc. Employee Stock Ownership and 401(k) Plan and Trust (ESOP) failed to state a claim under the requirements of Fifth Third v. Dudenhoeffer that plan fiduciaries breached their duties by continuing to offer company stock in the plan, a court found.

U.S. District Judge Sharion Aycock of the U.S. District Court for the Northern District of Mississippi, noted that in the U.S. Supreme Court decision in Fifth Third, the high court said to “state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”

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The plaintiffs in Hill v. Hill Brothers Construction Company, Inc. argued that because the business in Fifth Third was a publicly traded corporation, the same considerations and standards do not apply in their case, as Hills Brothers Construction (HBC) was a closely held corporation. In particular, the plaintiffs contend that the claim in Fifth Third was based on inside information that is not at issue here, and publicly traded corporations are subject to securities laws whereas non-public entities are not. Therefore, they assert there is no specific requirement to plead an ‘alternative action.’

However, in her opinion, Aycock said her reading of Fifth Third does not preclude application of the “alternative action” standard to closely held companies. In the Hill case, inside information is alleged to form the basis of the plaintiffs’ breach of the fiduciary duty of prudence, and Aycock found no securities law infringements are at issue or need to be balanced.

NEXT: Even if Fifth Third wasn’t applicable

Aycock concluded that the plaintiffs failed to allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than help it.

She noted that even if the court did not find the Fifth Third standard to be applicable, the plaintiffs failed to state a claim pursuant to Iqbal and Twombly. The Supreme court in Twombly said, “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal used this standard.

Aycock noted that this means, although a complaint need not include detailed factual allegations, it must provide “more than an unadorned, the-defendant-unlawfully-harmed-me accusation. A pleading that offers ‘labels and conclusions’ or a ‘formulaic recitation of the elements of a cause of action will not do.’ And, that is what Aycock found the plaintiffs in Hill offered.

The case arose because in October of 2012, the plan participants received official written notice that the value of their retirement investment was approximately $19.8 million. HBC was valued by an outside evaluator at $16 million in early 2013. Within six months, however, HBC had ceased operations. On June 18, 2013, HBC employees were notified that their retirement savings amounted to zero.

The District Court’s opinion in the case is here.

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