Compliance December 4, 2023

NASAA Proposal of Best Adviser Practices Receives Pushback

Critics say the proposal recommended to states goes beyond the SEC’s Reg BI and endangers annuity products and educational materials.

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Industry advocates in the insurance and securities industries expressed general disapproval of a proposal from the North American Securities Administrators Association which would update its model rule on dishonest or unethical business practices of broker/dealers and agents. The comment period for the proposal closes on Monday.

The proposal aims to implement the Securities and Exchange Commission’s Regulation Best Interest at the state level. For example, it would require advisers and broker/dealers to only make recommendations in their clients’ best interest and not to put the adviser’s interest ahead of the client’s. Certain practices, such as sales contests for specific securities in a set timeframe, would be presumed to be putting the adviser’s interests first.

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NASAA wrote in its proposal that the current rule, beyond needing to be updated to SEC standards, “does not fully account for other significant changes that have occurred in the financial services industry in recent years, including the blurring of brokerage and advisory service models and the emergence of fintech and other digital investing platforms.”

Sarah Wood, director of state policy and regulatory affairs at the Insured Retirement Institute, says that NASAA model rule proposals serve as recommendations for states that can advance legal uniformity between them. States are not required to accept model rules.

Industry critics of the rule argue, though, that the NASAA proposal goes further than the SEC’s Reg BI in some important ways. The comment letters from the IRS, the American Securities Association and the Securities Industry and Financial Markets Association all argued that the definition of “recommendation” and framework for conflicts both go beyond Reg BI.

The IRI’s letter explains that the definition of a recommendation would capture marketing and educational materials, which Reg BI excludes. Wood calls this an “extremely broad” definition that could “dramatically alter” the way various securities and annuity products are sold.

The proposal also creates a rebuttal presumption of a conflict if an adviser is compensated beyond transaction-based commissions, Wood explains, and could create issues for compensation models that involve recruiting clients.

According to Wood, some products may be taken off the market if their fee structures do not align with the NASAA proposal, assuming it is adopted. Wood emphasizes that even a few states adopting the proposal in its current form could “upend the industry.”

Wood expresses particular concern for variable annuities. She explains that the changes to rules governing conflicts and recommendations “are all things that could limit offerings that are available such as variable annuities.” Instead, Wood says that the framework created by the National Association of Insurance Commissioners is preferable, since it is a more faithful implementation of Reg BI to the insurance industry.

The IRI letter supports a “pure incorporation” of Reg BI.

 

Compliance December 4, 2023

Tyson Foods Employees Allege Excessive 401(k) Plan Fees

The plaintiffs’ complaint included a detailed comparison of allegedly similar, lower-cost recordkeeper fees for the plan with $3.2B in assets.

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Tyson Foods Inc.’s retirement plan committee is the defendant in a class action complaint filed by three employees accusing the Arkansas-based meat production company for passing on to participant excessive fees for 401(k) recordkeeping done by Northwest Plan Services Inc.

The complaint, Ruebel et al. v. Tyson Foods Inc. et al., was filed Thursday in the U.S. District Court for the Western District of Arkansas. Plaintiffs are seeking class action status for the Tyson 401(k) plan that, by year-end 2022, had 67,276 participants and $3.2 billion in assets, according to BrightScope, which, like PLANADVISER, is owned by ISS STOXX.

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In the complaint, the plaintiffs allege that during the class action period from November 30, 2017, through the date of judgement, Tyson’s plan committee breached two fiduciary duties. First is an allegation of “violation of the duty of prudence against defendants” for “charging plan participants excessive total RKA fees.” Second is an allegation that defendants failed to “monitor fiduciaries responsible for plan administration with regard to plan total RKA fees.”

The first count argues that, among other allegations, the defendants paid “over a 75% premium per-participant for total RKA fees” at an average of $42 per participant.

The complaint contains analysis of what the plaintiffs called comparable plans, including those administered by Fidelity Investments, Alight and the Vanguard Group, with total fees between $20 and $32. It also aggregated those comparable plans to show that, according to its figures, Tyson Foods plan should have been charging around $27 per participant on average for the market at that time.

“Defendants should have lowered its total RKA fees by soliciting bids from competing providers and using its massive size and correspondent bargaining power to negotiate for fee rebates, but it did not do so, or did so ineffectively, during the class period,” the plaintiffs allege.

To argue the scale of the plan, the plaintiffs note that Tyson Foods’ plan had more participant than 99.98% of the defined contributions in the U.S., and more assets than 99.97% of plans.

The second count alleges a breach of fiduciary duty for “failing to monitor those individuals responsible for paying these unreasonable total RKA fees.”

The complaint does not name recordkeeper Northwest Plan Services or any other administrators or providers of the plan.

Neither Tyson Foods nor Northwest responded to requests for comment on the complaint.

Legal firm Euclid Fiduciary, which tracks retirement plan litigation, noted in August that excessive fee and investment imprudence litigation was tracking lower in 2023 than the year prior—but the experts also noted that the plaintiffs’ bar was getting more intelligent in their arguments. At the time, the firm forecast 45 such complaints in 2023, up from 89 in 2022.

The complaint alleges Tyson Foods cost the plaintiffs and class members millions of dollars of harm, and it seeks to recoup those losses for all plan members.

The plaintiffs are being represented by the law firms of Walcheske & Luzi LLC and Carney Bates & Pulliam PLLC.

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