Compliance February 22, 2017

Oracle Fails to Get 401(k) Excessive Fee Suit Dismissed

A judge concluded that the legal and factual merits of plaintiffs’ claims are better resolved on a fuller factual record, either in the context of a motion for summary judgment or at trial.
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A federal magistrate judge has recommended Oracle Corporation 401(k) Committee’s motion to dismiss a lawsuit regarding excessive plan fees be denied.

In the lawsuit filed in January, plaintiffs in Troudt vs. Oracle allege the Oracle Corporation 401(k) Savings and Investment Plan caused participants to pay recordkeeping and administrative fees to Fidelity that were “multiples of the market rate available for the same services.”

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In addition, the complaint says because of the way the trust agreements with Fidelity are structured, Fidelity is described by the plaintiffs as “the sixth largest institutional holder of Oracle stock, owning over $2 billion shares. Thus, Fidelity has the influence of a large stockholder in light of its stock ownership.” The complaint continues, “Oracle has chosen and maintained funds from one of its largest shareholders, Fidelity, to be investment options in the Plan.”

In moving to dismiss, the Oracle defendants insist that the plaintiffs’ first claim for excessive fees and revenue-sharing fails because revenue-sharing is “perfectly legal” and because “nothing in ERISA [Employee Retirement Income Security Act] requires fiduciaries to solicit bids [for record keeping services]” through a competitive process. Defendants further contend that the first claim rests on nothing more than implausible conclusory allegations. The Oracle defendants also argue that claims by plaintiffs are “predicated entirely, and impermissibly, on hindsight;” “do not allege Defendants selected [the allegedly underperforming funds] for impermissible reasons;” and are “devoid of any supporting factual allegations sufficient to raise a plausible inference of misconduct.”

U.S. Magistrate Judge Craig B. Shaffer of the U.S. District Court for the District of Colorado noted in his opinion that the law firms of the parties in the case refer to other cases in which they prevailed, but “Tenth Circuit case law, however, does not figure prominently in either party’s arguments.” Shaffer said his own research has not found any controlling Tenth Circuit ERISA precedents on point. “At best, each side is relying on non-binding authority that it believes, from its own particular perspective, is enlightening,” he wrote.

NEXT: Specific facts are not necessary

In considering the arguments advanced by the parties, Shaffer carefully considered the “Facts Applicable to All Counts,” many of which he says could be described as generic allegations that might be found any ERISA pleading. Other paragraphs present legal arguments or mere conclusory statements. ”Depending on one’s particular perspective, I suppose, many of Plaintiffs allegations might be considered ‘conclusory’ or ‘legal conclusions masquerading as facts,’” he wrote.

Shaffer noted that other case law finds “conclusory allegations without supporting averments are insufficient to state a claim upon which relief can be based.” However, the Tenth U.S. Circuit Court of Appeals has acknowledged that “the plausibility standard has been criticized by some as placing an improper burden on plaintiffs,” particularly where “there is asymmetry of information.” Shaffer also cited the Supreme Court’s decision in Erickson v. Pardus, decided very shortly after Bell Atlantic Corp. v. Twombly, which re-affirmed that under Rule 8(a)(2), “[s]pecific facts are not necessary; the statement need only ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.’”

Shaffer offered no opinions regarding ultimate merits of plaintiffs’ claims and said he does not discount any of the arguments or authorities advance in defendants’ briefing. “Although Defendants raise some significant questions regarding the merits of Plaintiffs’ claims, I am guided by the Tenth Circuit’s admonition … that ‘Rule 12(b)(6) motions to dismiss are not designed to weigh evidence or consider the truth or falsity of an adequately pled complaint,’” Shaffer wrote.

He went on to say that the complaint in the case presents allegations that challenge actions and omissions on the part of the defendant fiduciaries of the Oracle Corporation 401(k) Savings and Investment Plan, and for purposes of the pending motion, he must construe those allegations in a light most favorable to plaintiffs. “While I am not discounting the possibility that Defendants may ultimately prevail on the merits, for purposes of the pending motion, I believe Plaintiffs have met their pleading obligations,” Shaffer wrote.

He concluded that the legal and factual merits of plaintiffs’ claims are better resolved on a fuller factual record, either in the context of a motion for summary judgment or at trial.

Compliance February 22, 2017

Dodd-Frank Repeal Battle Parallels Fiduciary Fight

Federal agencies and initiatives carry significant momentum and must be redirected carefully, but forcefully, by any incoming president.
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Many in the retirement plan advisory industry are closely watching the Trump administration’s effort to repeal the Department of Labor’s (DOL) fiduciary rule, but the wider financial services community is clearly focused on the related effort to attack the Dodd-Frank reforms.

A quick refresher: The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010, and it was expected to at least peripherally impact the standard of conduct of those financial advisers who provide their services as registered representatives of broker/dealers. Mainly the rulemaking impacted consumer and investment banks, but the extent of the changes mandated by Dodd-Frank were massive in scope.

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As a very helpful “Dodd-Frank cheat sheet” supplied by Morrison and Foerster observes, the term “Dodd-Frank” represents an entire ecosystem of rules and requirements that have been variously well-established among the nation’s large and small financial institutions. Similar to the DOL fiduciary rule, millions have been spent on compliance efforts market-wide.  

The cheat sheet outlines the reforms this way: “The Dodd-Frank Act implemented changes that, among other things, affected the oversight and supervision of financial institutions, provided for a new resolution procedure for large financial companies, created a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduced more stringent regulatory capital requirements, effected significant changes in the regulation of over the counter derivatives, reformed the regulation of credit rating agencies, implemented changes to corporate governance and executive compensation practices, incorporated the Volcker Rule, required registration of advisers to certain private funds, and effected significant changes in the securitization market.” Get all that?

At the time of its implementation, Marcia Wagner, a trusted ERISA attorney and columnist for PLANADVISER, explained that the Dodd-Frank Act was technically unrelated to the Department of Labor’s regulatory initiative to broaden the “fiduciary” definition under the Employee Retirement Income Security Act (ERISA). This was the rulemaking specifically targeting financial advisory professionals and their supervising firms, but both efforts were expected to have an impact on the standard of care that brokers must adhere to when advising their clients, including retirement plan clients. This was because the Dodd-Frank Act required the U.S. Securities and Exchange Commission (SEC) to perform a study of the different standards of conduct that apply to broker/dealers and investment advisers working in various distribution channels and with various compensation structures.

Obama administration officials ostensibly wanted a two-pronged attack against what they perceived as conflicts of interest standing between fair access to investment products and consumers, one lead by the DOL and the other by the SEC. Their goal, now quickly unraveling under President Trump, was to start to reduce confusion about client care standards that were variously applied based on adviser type and compensation model. In the end, the DOL far outpaced the SEC in proposing and adopting regulations impacting conflicts of interest—although the SEC has indicated its research efforts support the basic notion of unifying advisory standards.

NEXT: How likely is a full successful repeal? 

Exactly how Dodd-Frank or the DOL fiduciary rule will be unraveled is still not clear. It’s not like the Trump administration can simply snap its fingers and undo the amazingly complex package of rulemaking casually referred to as “Dodd-Frank.” There are standards of prudence and process that must be followed in dialing back any properly established and enforced rulemaking—an area governed by both the Regulatory Flexibility and the Administrative Procedures Act, as well as by the U.S. Constitution.

PLANADVISER has received various predictions about what may unfold, including some insightful analysis from Segal Marco Advisors. The advisory group “expects action in 2017 on some key provisions in the Dodd-Frank Act that will impact investor rights,” yet they feel a complete repeal of Dodd-Frank is probably not in the cards. Certainly this will be nearly impossible to achieve in the short term.   

“A complete repeal of Dodd-Frank is unlikely but investors could lose some protections,” suggests Maureen O’Brien, vice president and corporate governance and proxy voting practice leader. “President Trump signed an executive order on Friday, February 3, to begin reexamining Dodd-Frank. Two provisions that are likely to change are a threshold for enhanced regulatory oversight of banks and a section which requires companies that source gold, tantalum, tin or tungsten to determine whether their purchase helped fuel the ongoing conflict in the Democratic Republic of the Congo and surrounding areas.”

These areas are clearly less directly influential for the retirement advisory market, and so it may be some time before advisers get the whole picture as to how partial Dodd-Frank repeal will impact their own working lives. O'Brien says she is encouraged that Segal Marco is “seeing investors engage companies, largely through organized coalitions, on issues that include executive compensation, diversity and board accountability.” This is one way that consumers are apparently stepping up to push for transparency and good governance at a time that their political leaders seem intent on loosening the reins.

“Executive compensation continues to be a strong focus of our corporate governance work,” O’Brien concludes. “The push for proxy access on shareholder proposals remained strong while efforts around social and environmental proposals gathered steam. The policy priorities of a new presidential administration could dampen or ignite investor efforts to address corporate governance, as well as environmental and social priorities.”

NEXT: More symbol than substance? 

Others are simply less sure that the Trump administration has the necessary focus and stamina to successfully tackle such a herculean task as repealing Dodd-Frank. The group includes Jamie Hopkins, co-director of the Retirement Income Program at the American College of Financial Services.

Hopkins suggest Trump’s orders regarding financial regulations “is mostly symbolic as it merely tells congress to review Dodd-Frank, as they are the only body that can specifically rewrite the legislation. So it could be months before we see any meaningful changes to Dodd-Frank.”

“But it is clear that the Trump Administration wants to clear the way for financial service firms and banks to operate with more freedom and without the regulative restraints that were set up since the last financial crisis in order to curtail the bad actors,” he opines. “This could also mean trouble for the Consumer Financial Protection Bureau moving forward as it was created in Dodd-Frank, and has suffered some serious legal setbacks as of late. If key parts of the rule are removed, the CFPB might no longer fit the regulatory framework of what is needed.”

Others agree with that sentiment, including Seth Rosenbloom, associate general counsel at Betterment for Business, a 401(k) advice and recordkeeping provider. Rosenbloom says his firm is focused on learning whether the Trump administration believes consumers “should have ultimate control over the use of their financial information, a right that Section 1033 of Dodd-Frank grants.”

“Citing security issues, banks have restricted other companies from accessing customer financial data,” Rosenbloom concludes. “We believe that they are motivated not by customer well-being, but by a desire to stave off consumer-friendly competition and to safeguard the economic value of customer data. Dodd-Frank requires banks to allow consumers access to their data and to share it with other companies. This is critical to the functioning of innovative digital tools that let customers obtain a holistic view of their financial health, better understand fees, and plan for the future.”

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