Compliance News
Legislative and Judicial Actions
Reported by PLANADVISER Staff
Art by Sam Green
Opponents Must Litigate SEC ‘Reg BI’ in 2nd Circuit
The U.S. District Court for the Southern District of New York has dismissed a consolidated lawsuit seeking to derail implementation of the U.S. Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI) rulemaking package.The reason for the dismissal, however, was the court’s self-declared lack of subject matter jurisdiction, and the ruling notes that motions have already been filed by the parties in the appropriate appellate court. This means the 2nd U.S. Circuit Court of Appeals will have to decide whether to hear the case.
Claims in the consolidated lawsuit, which includes as plaintiffs both private fiduciary advisers as well as a group of prominent state attorneys general, suggest Reg BI fails to meet the clear demands established by Congress in the Dodd–Frank Act.
“One of the gaps that the Dodd–Frank Act sought to close concerned the standard of conduct applicable when individuals receive recommendations and advice on how to invest their money in markets,” the plaintiffs contend. “Investment advisers have traditionally been subject to a fiduciary standard, while brokers and dealers have not. Over time, the line between advisers and broker/dealers [B/Ds] has blurred, with an increasing number of broker/dealers performing many of the same services as investment advisers, without having to satisfy the same regulatory requirements in doing so.”
According to the plaintiffs, at first, the SEC heeded Congress’ mandate. Its staff studied the problem and prepared a report recommending the adoption of a universal standard of conduct, known as the “without regard to” standard.
“But last year, the SEC broke from Dodd–Frank’s requirements … by proposing a rule adopting neither a universal standard nor a ‘without regard to’ standard,” the plaintiffs allege. “Under the SEC’s so-called ‘best interest’ rule … a broker/dealer is permitted to take into account its own personal interests in providing recommendations and advice to investors on how to invest their life savings. This new rule means that broker/dealers may maintain harmful conflicts of interests while marketing themselves as trusted advisers acting in their client’s best interests.”
MIT ERISA Lawsuit Parties Settle
The plaintiffs and defendants in an excessive fee case against the Massachusetts Institute of Technology (MIT) have filed a joint motion to stay all trial dates, saying they have reached an agreement in principle to settle the case. No settlement details were announced. The motion says the plaintiffs anticipate needing 45 days to file a motion for preliminary approval of the settlement.In mid-September, the plaintiffs requested leave to file new evidence of MIT President Rafael Reif’s unique knowledge related to the case. Earlier in the month, U.S. District Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts moved forward most claims in the Employee Retirement Income Security Act (ERISA) lawsuit, but granted summary judgment to the defendants for a claim alleging a prohibited transaction between MIT and Fidelity Investments.
Is Arbitration Likelier for ERISA Complaints?
The 9th U.S. Circuit Court of Appeals issued, in August, an important ruling in Dorman v. Charles Schwab Corp. In sum, the Appellate Court decision stated that Schwab could enforce its retirement plan’s arbitration clause requiring participants to file individual claims and to waive class-action claims. Legal experts say the case raises questions that should give plan advisers pause before they recommend that their plan sponsor clients include an arbitration clause in their plan.The court ruled that the plan expressly said all Employee Retirement Income Security Act (ERISA) claims should be individually arbitrated and that the plan also included a waiver of class-action suits. Dorman’s original suit accused Schwab of breaching its fiduciary duties by including poorly performing Schwab-affiliated funds in the plan. He brought the suit on his own, seeking class-action remedy for the entire plan. The 9th Circuit’s decision is “significant because it is the first case in the nation to explicitly permit the implementation of an arbitration provision in a plan document,” says Nancy Ross, a partner at Mayer Brown. “However, the ramifications of this are still very much uncertain.”
DOL Sends Electronic Disclosure Rule to OMB
In mid-August, the Department of Labor (DOL) sent the Office of Management and Budget (OMB) a proposed rule relating to the providing of electronic disclosures to retirement plan participants. The title of the rule is “Improving Effectiveness of and Reducing the Cost of Furnishing Required Notices and Disclosures.” According to the DOL, the rule attempts to reduce the costs and burdens imposed on employers and other plan fiduciaries responsible to produce and distribute retirement plan disclosures required under Title I of the Employee Retirement Income Security Act (ERISA). It also aims to help make the disclosures more understandable and useful for participants and beneficiaries. It is being proposed in response to Executive Order 13847, Strengthening Retirement Security in America.The OMB has up to 60 days to review and act on the submission—but could act more quickly—after which the DOL would propose the rule in the Federal Register and provide a 60-day comment period for stakeholders. In this spring’s regulatory agenda, the agency had indicated it planned to issue a notice of proposed rulemaking (NPRM) on electronic delivery of disclosures, this coming December.
Supreme Court Asked to Review Retirement Plan Annuity Case
The plaintiff in a case alleging Great-West Life & Annuity Insurance Co. engaged in prohibited transactions has petitioned the U.S. Supreme Court to review the case. The plaintiff alleged that Great-West engaged in self-dealing transactions prohibited under Employee Retirement Income Security Act (ERISA) Section 406(b) and caused the plaintiff’s retirement plan to engage in prohibited transactions with a party in interest, in violation of ERISA Section 406(a). According to the complaint, Great-West had breached its general duty of loyalty under Section 404 by setting the credited rate of its Key Guaranteed Portfolio Fund—an annuity contract—for its own benefit rather than for the plans’ and participants’ benefit. It also allegedly set the credited rate artificially low, retaining the difference as profit, and charged excessive fees.The 10th U.S. Circuit Court of Appeals agreed with a district court ruling that Great-West was not a fiduciary in this matter and that the plaintiff had not adduced sufficient evidence to impose liability on Great-West as a nonfiduciary party in interest.
In his petition to the Supreme Court, the plaintiff says Great-West’s conduct violates ERISA’s clear rules barring parties in interest from using plan assets—i.e., the fund contract—to benefit themselves. He points out that the Supreme Court previously held, in Harris Trust & Sav. Bank v. Salomon Smith Barney, that where a party in interest violates those rules, plan participants can force them to disgorge their ill-gotten gains. Multiple courts of appeals have held the same.
The plaintiff says the 10th Circuit “flouted that rule, holding that disgorgement was unavailable because the plan asset at issue was the fund contract—not specific property over which petitioner could himself assert title.” So, the question presented to the high court is: May an ERISA plan participant or beneficiary seek disgorgement of unreasonable profits derived from a plan contract from a nonfiduciary party in interest?
ERISA Complaint Questions the Use of Alternatives in Custom TDFs
As it awaits the results of a Supreme Court appeal on another case scrutinizing its investment decisions, Intel Corp. now faces an additional lawsuit questioning the fees and performance of custom target-date funds (TDFs) offered to its defined contribution (DC) retirement plan participants. The lawsuit, filed in the U.S. District Court for the Northern District of California, suggests that a number of Intel defendants breached their fiduciary duties by investing billions of dollars of employees’ retirement savings in “unproven and unprecedented investment allocation strategies featuring high-priced, low-performing illiquid and opaque hedge funds.”The complaint further states that Intel defendants failed to properly monitor the performance and fees of either the custom TDFs or of a custom multi-asset portfolio with a fixed-allocation model that is also available to participants.
Additionally, the complaint states, Intel defendants failed to provide adequate disclosures associated with the custom investment options’ “heavy allocation” to hedge funds and private equity, and either misinformed or failed to inform participants about the allocation mix represented in their account balances and the allocation strategy of the custom options.
“As a result of these imprudent decisions and inadequate processes, defendants caused the plans and many participants in the plans to suffer substantial losses in retirement savings,” the complaint alleges.
As to the first lawsuit Intel is facing, that, too, questions the company’s decisions in offering custom investments. In November 2015, plaintiffs filed what has now proved to be a long-running complaint that similarly alleges fiduciary failures by various Intel defendants.