Compliance March 27, 2018

NAFA Drops Its Fiduciary Rule Challenge in DC Circuit

Following a broadly structured decision by the 5th U.S. Circuit Court of Appeals to vacate the DOL fiduciary rule expansion, the National Association for Fixed Annuities decided its own appellate challenge has been made unnecessary.

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This week the National Association for Fixed Annuities (NAFA) Board of Directors announced it is withdrawing its appeal to the U.S. Circuit Court of Appeals for the District of Columbia of an unsuccessful lawsuit challenging the Department of Labor fiduciary rule expansion.

The lawsuit had previously experienced multiple defeats before the district court, and the DC Circuit Court had flatly denied to grant an emergency preliminary injunction prior to its hearing of the appeal of the matter by NAFA. Because of this, prior to the show-stopping decision by the 5th U.S. Circuit Court of Appeals to entirely vacate the fiduciary rule expansion, it appeared the NAFA challenge would do no better before the higher court. In fact, the D.C. Circuit strongly rebuked NAFA’s request for an emergency injunction to halt the rulemaking from taking effect next April. The denial comprised just a few short sentences, suggesting NAFA had no reasonable claim to an injunction.

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Now that’s all history, and in a new filing with the U.S. Court of Appeals for the D.C. Circuit, NAFA and the United States Department of Justice agree to a voluntary dismissal of the appeal. NAFA directly acknowledges its decision comes on the heels of the March 15 ruling by the 5th Circuit, which again, surprisingly vacated the fiduciary rule in its entirety.

“We are very pleased the Fifth Circuit understood the harms the fiduciary rule created for middle-American retirement savers. This ruling vindicates both NAFA’s and the Fifth Circuit plaintiffs’ chief concerns, and, as a result, we see no reason to continue to pursue our litigation in another federal circuit court,” explains NAFA Executive Director Chip Anderson.

Here’s how NAFA summarizes the complex legal story leading up to this point: “NAFA brought its challenge to the fiduciary rule nearly two years ago in the D.C. District Court, while the Chamber of Commerce and several other trade organizations brought a similar challenge in the Northern District of Texas. The lower courts in both cases ruled in favor of DOL (upholding the rule), but, on appeal, the Chamber prevailed in the Fifth. NAFA believes the Fifth Circuit decision renders its case moot.”

Anderson adds that NAFA “will focus our energies on promoting insurance regulations that properly recognize differences among financial products and the way those products are delivered.” He indicates NAFA will “continue to engage with industry stakeholders, the NAIC, and other state and federal policymakers.”

Compliance March 27, 2018

Suit Claims Gannett 401(k) Holds Too Much in Parent Company Stock

The lawsuit contends the plan’s holdings of the parent company's common stock should have been liquidated on or shortly after the date Gannett was separated from its parent.

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A participant in the Gannett Co., Inc. 401(k) Savings Plan has filed a lawsuit regarding TEGNA’s June 29, 2015, spinoff of its publishing business into a new entity, Gannett, and the failure of the plan’s fiduciaries to decrease significant holdings in TEGNA common stock.

The lawsuit alleges that Gannett Co., its benefit plans committee and other fiduciaries’ decision to concentrate plan investments in TEGNA common stock was a breach of their fiduciary duties under the Employee Retirement Income Security Act (ERISA), and these breaches caused the plan and a class of all other similarly situated participants approximately $135 million in losses. The plaintiff contends the defendants’ decision to invest plan assets so heavily in a single company’s common stock during the class period was a breach of their duties of loyalty, prudence, and diversification under ERISA Section 404.

A statement to PLANADVISER says, “Gannett has reviewed the lawsuit recently filed concerning the Gannett 401(k) plan’s holdings in TEGNA stock. Gannett believes there is no merit to these claims and plans to vigorously defend the lawsuit.”

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Specific allegations include that the defendants caused the plan to be undiversified by their failure to decrease its substantial holdings of TEGNA common stock following the separation, thereby subjecting the plan and its participants to the risks associated with being too heavily invested in one company and industry. According to the complaint, at the end of 2015 and 2016, TEGNA common stock represented more than 80% and 74%, respectively, of the plan’s total common stock holdings (excluding Gannett stock).

The lawsuit also contends the defendants’ failure to decrease the plan’s TEGNA common stock holdings subjected participants to additional risks because the plan was already heavily invested in Gannett common stock and both TEGNA and Gannett are “consumer-cyclical” stocks —their performance is heavily dependent on the business cycle and economic conditions. Thus, Gannett and TEGNA stock exhibit high correlation. At the end of 2015 (more than six months following the separation), the plan’s TEGNA and Gannett common stock holdings collectively comprised more than 26% of the plan’s total assets (18% was TEGNA; 8.4% was Gannett).

In addition, according to the complaint, the imprudence of the defendants in holding such massive amounts of TEGNA common stock is further evidenced by the fact that TEGNA is a volatile stock. The complaint says that toward the end of 2015, TEGNA common stock was approximately 90% more volatile than the stock market as a whole.

To the extent the defendants liquidated the plan’s holdings of TEGNA common stock during 2017—which extent will not be known until the plan files its financial statements with the Department of Labor—the timing of such liquidation was unreasonable, the plaintiff claims, saying the defendants knew long in advance of the date of separation that TEGNA stock should be sold. The lawsuit contends the plan’s holdings of TEGNA common stock should have been liquidated on or shortly after the date of separation.

Because of the lack of diversification, the defendants should have been particularly attentive to the numerous warning signs that showed TEGNA stock was an imprudent investment for retirement assets, but they failed to take action as the price of TEGNA stock dropped from $20.24 on the day of the spin-off to its current price of approximately $14, the lawsuit says.

Finally, the lawsuit contends that Gannett is liable for the acts of the benefits plan committee in that the committee and its members were acting within the scope of their employment with Gannett. Moreover, Gannett failed to adequately monitor the committee and its members to ensure that they were meeting their fiduciary obligations.

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