Legislative and Judicial Actions

Art by Lia Tuia

FINRA Share-Class Sweep Highlights Importance of Cooperation

The Financial Industry Regulatory Authority (FINRA) announced the final results of its mutual fund waiver initiative—the agency’s aggressive multiyear effort to ensure member firms appropriately credit clients with the sales charge waivers due to them.

According to Susan Schroeder, an executive vice president in FINRA’s enforcement department, the initiative resulted in 56 settlements reached with member firms, totaling $89 million in restitution across some 110,000 charitable and retirement accounts.

Schroeder says all of the firms failed to waive mutual fund sales charges for the eligible accounts and to reasonably supervise the sale of mutual funds offering sales charge waivers. By way of context, Class A shares typically have lower fees than do Class B or C shares but require that customers pay those upfront. Many mutual funds waive their upfront charges on A shares for certain types of retirement accounts, and some waive them for charities.

According to FINRA, notwithstanding the common availability of such waivers, firms often neglect to apply them to mutual fund sales to eligible customers. FINRA enforcement staff say these sales disadvantage the customer by causing it to pay fees that are higher than necessary.

Trump Announces Nominee For Labor Secretary

President Donald Trump tweeted that he plans to nominate Eugene Scalia, son of late Assistant Supreme Court Justice Antonin Scalia, for the position of U.S. Secretary of Labor.

According to news reports, Trump has already offered Scalia the job and he has accepted. Department of Labor (DOL) Secretary Alexander Acosta resigned following controversy over his role in financier Jeffrey Epstein’s plea deal for crimes committed when Acosta was a U.S. attorney in Florida.

Scalia is currently a partner in the Washington, D.C., office of the law firm Gibson, Dunn & Crutcher. He was previously solicitor of the DOL, a job he filled through a recess appointment by then President George W. Bush—Scalia had not been confirmed by the Senate, at the time controlled by Democrats.

He may likely face confirmation issues again. According to news reports, Senate Minority Leader Chuck Schumer, D-New York, said, “President Trump has again chosen someone who has proven to put corporate interests over those of worker rights. Workers and union members who believed candidate Trump when he campaigned as pro-worker should feel betrayed.”

If confirmed as DOL secretary, the fate of the department’s fiduciary rule will be in question. The DOL has said a new rule could be issued by the end of the year. However, Scalia was part of the team that defended the Chamber of Commerce in its lawsuit against the previous DOL fiduciary rule. That rule was vacated by the 5th U.S. Circuit Court of Appeals.

Regs Would Provide Exception to ‘One Bad Apple’ Rule

The IRS has issued a notice of proposed rulemaking (NPRM) relating to the tax qualification of plans maintained by more than one employer.
These plans, maintained pursuant to Section 413(c) of the Internal Revenue Code

(IRC), are often referred to as multiple employer plans, or MEPs. The proposed regulations would provide an exception, if certain requirements are met, to how the IRS applies what it formally calls the “unified plan rule” and what the industry calls the “one bad apple rule.” This would protect a defined contribution (DC) MEP if one of the participating employers fails to satisfy a qualification requirement, or to supply information needed to show compliance with it.

The IRS explains that, currently, whether a MEP qualifies is based on the compliance of all employer members. Consequently, IRC Section 1.413-2(a)(3)(iv) provides that “the failure by one employer maintaining the plan (or by the plan itself) to satisfy an applicable qualification requirement will result in the disqualification of the MEP for all employers maintaining the plan.” Section 1.416-1, Q&A G-2, includes a similar rule. Here, a MEP’s failure to satisfy Section 416 with respect to employees of one participating employer means that all participating employers are maintaining a plan that is not qualified.

The agency notes that last August 31, President Donald Trump issued Executive Order 13847, titled “Strengthening Retirement Security in America.” The order directs the secretary of the Treasury to “consider proposing amendments to regulations or other guidance, consistent with applicable law and the policy set forth in … this order, regarding the circumstances under which a MEP may satisfy the tax qualification requirements …, including the consequences if one or more employers that sponsored or adopted the plan fail to take one or more actions necessary to meet those requirements.”

SunTrust Wins Long-Running ERISA Suit

The U.S. District Court for the Northern District of Georgia’s Atlanta Division has ruled once again in an Employee Retirement Income Security Act (ERISA) lawsuit filed against SunTrust Bank.

The underlying lawsuit alleges that the bank’s 401(k) plan engaged in corporate self-dealing at the expense of plan participants. The lead plaintiff suggests that plan officials violated their fiduciary duties of loyalty and prudence by selecting a series of proprietary funds that were more expensive and performed worse than others they could have chosen—and by repeatedly failing to remove or replace them.

In 2014, the 11th U.S. Circuit Court of Appeals had previously ruled in this matter. Although it had disagreed with the District Court’s initial dismissal
of certain claims based on ERISA’s three-year statute of limitations, it found all of the claims were nonetheless time-barred by the act’s six-year statute of limitations.

The latest ruling out of the Georgia District Court comes on the defendants’ motion for summary judgment on Count VIII of the plaintiffs’ second amended consolidated class-action complaint. In its ruling, the District Court granted summary judgment on behalf of the defense.

Case documents show that Count VIII alleges certain defendants “were aware that their predecessor fiduciaries had breached their duties in selecting funds and thus breached their own duties by failing to take adequate steps to remedy, within the class period, their predecessors’ breaches in selecting the funds at issue.”

Although it ultimately sides with the defense, the decision goes into significant detail about the lack of specifics included in committee meeting minutes with respect to genuine deliberation over the investment menu during the class period. The decision also includes substantial details from the depositions of numerous individual fiduciary defendants.

Adidas Suit Focuses on Passive Funds

Participants in the Adidas Group 401(k) Savings and Retirement Plan have filed a proposed class-action lawsuit against Adidas America over the plan’s administrative and investment fees.

According to the complaint, from 2013 through 2017, the administrative fees charged annually to plan participants were greater than approximately 75% of the plan’s fees per participant when those were calculated as cost per participant. And for each of the years cited but two, the fees were greater than 80% of per-participant fees when calculated as a percent of total assets.

The complaint includes tabular depictions of the Adidas plan’s fees calculated in two ways: as cost per 401(k) plan participant/beneficiary and as a percentage of total plan assets. In the latter, the percentage was compared with a representative group of plans having 5,000 to 9,999 participants and plans having assets that exceed $500 million. The difference between Adidas’ fees and the average of its peer benchmarks for those years, based on total participants, is $6,242,659. The difference based on plan assets is $6,078,234.

The lawsuit contends that the plaintiffs had no knowledge of how the fees charged to and paid by Adidas plan participants compared with market norms. The participants also allege that the plan’s fees were excessive when held up against comparable mutual funds not offered by the plan. A chart in the complaint shows how the three-year return of investments in the Adidas plan lineup compared with similar investments.

Plaintiff’s Attorney Predicts Victory in Thole v. U.S. Bank

The U.S. Supreme Court (SCOTUS) has agreed to take up Thole v. U.S. Bank, a pension-focused case arising under the Employee Retirement Income Security Act (ERISA). Oral argument is expected to occur late this year.

As one of the lead plaintiffs’ attorneys in the case, Karen Handorf, a partner at Cohen Milstein and chairwoman of the firm’s employee benefits and ERISA practice group, says she is gratified to see the Supreme Court take up this matter. She says she believes the case will help determine whether the millions of Americans whose pensions are held in defined benefit (DB) plans have the right to sue their plans’ fiduciaries for mismanaging assets.

Presently, participants cannot establish that they have suffered an actionable harm unless the pension faces severe funding issues making it likely to face insolvency.

U.S. Bank declined to comment on the matter, noting it is the firm’s policy not to publicly discuss active litigation.

Specifically, the Supreme Court has been asked to weigh: “1) Whether an ERISA plan participant or beneficiary may seek injunctive relief against fiduciary misconduct under 29 U.S.C. [U.S. Code] Section 1132(a)(3) without demonstrating individual financial loss or the imminent risk thereof;
and 2) whether an ERISA plan participant or beneficiary may seek restoration of plan losses caused by fiduciary breach under 29 U.S.C. Section 1132(a)(2) without demonstrating individual financial loss or the imminent risk thereof.”