Legislative and Judicial Actions
Art by Connor Robinson
Full 9th Circuit OKs Panel’s Pro-Arbitration Decision
A three-judge panel of the 9th U.S. Circuit Court of Appeals issued a major decision in August that was taken to have shifted the standing of mandatory arbitration provisions used in operating Employee Retirement Income Security Act (ERISA)-governed retirement plans. The panel concluded that a previous, precedent-setting 9th Circuit decision, which held that ERISA claims are generally not subject to arbitration provisions, is “no longer good law” in light of interim Supreme Court rulings. The underlying case, Dorman v. Charles Schwab Corp., was initially filed in 2017. In January 2018, a district court judge denied a motion by Charles Schwab that sought to mandate that the suit proceed via individual arbitration, rather than as an ERISA class action in federal court. This denial kicked off the appeals process, which led to the three-judge panel’s pro-arbitration ruling this summer. Now, the full 9th Circuit has backed the panel’s ruling. Technically speaking, the full court has been advised of the plaintiff’s/appellee’s petition for a rehearing en banc, and no judge of the court has requested a vote on said petition. Thus, the appellee’s petition for rehearing en banc has been denied.
MIT to Pay $18.1mm in Lawsuit Settlement
The details of the proposed settlement in the Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed by retirement plan participants at the Massachusetts Institute of Technology (MIT) are now public. District Court Judge Nathaniel M. Gorton of the U.S. District Court for the District of Massachusetts previously moved forward most claims in the suit but granted summary judgment to the defendants for a claim alleging a prohibited transaction between MIT and Fidelity Investments. The settlement agreement includes dozens of specific provisions, to which MIT plan fiduciaries will have to adhere. In entering the settlement agreement, the defense admits no wrongdoing or liability, while the class of plaintiffs agrees to forego future litigation of the matters at hand.
Corporate America ‘Campaigns’ for SECURE Act Passage
A group of more than 90 CEOs and senior executives from leading American corporations and business groups has issued a public letter calling on the U.S. Senate to pass the Setting Every Community Up for Retirement Enhancement Act, commonly referred to as the SECURE Act. The plea, addressed both to Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer, comes some months after the U.S. House passed its version of the SECURE Act with a nearly unanimous and bipartisan vote. Since that time and for a number of reasons, the SECURE Act has remained stalled in the Senate, despite the fact that the vast majority of senators have voiced support for the bill’s passage in its current form. In their letter, American business leaders suggest that, if the act is not signed into law, more than 700,000 small- business workers will be unable to save for retirement at work; more than 4 million workers in private-sector pension plans will be at risk of losing future benefits; 1,400 religiously affiliated organizations will be at risk of losing access to their defined contribution (DC) retirement plans; and more than 18,000 children and spouses of fallen service members will continue to be economically disadvantaged by unfair taxation on their survivor benefits.
IRS May Update Tables Used to Calculate RMDs
The IRS has issued a notice of proposed rulemaking to provide guidance for using life expectancy and distribution period tables. These tables are employed to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, as well as certain other tax-favored employer-provided retirement arrangements. An executive order signed a year ago August 31 had directed the secretary of the Treasury to examine the life expectancy and distribution period tables that are cited in regulations pertaining to taking RMDs from retirement plans. It also asked the secretary to determine whether the tables should be updated to reflect current mortality data and whether such updates should be made annually or otherwise periodically. The purpose of such updates would be to increase the effectiveness of tax-favored retirement programs by allowing retirees to retain savings in these programs longer—i.e., for their later years—the executive order said. The life expectancy and distribution period tables in the proposed regulations have been developed based on mortality rates for 2021. These rates were arrived at by applying mortality improvement through 2021 to the experience table mortality rates used to develop the 2012 Individual Annuity Mortality tables; those are the most recent such tables.
State Insurance Regulators Toughen the Standards for Annuities
As the June 20, 2020, enforcement date for the Securities and Exchange Commission (SEC)’s Regulation Best Interest (Reg BI) approaches, the National Association of Insurance Commissioners (NAIC) is updating its own suitability standards, which apply to the sale and service of annuities. Since 2003, state insurance regulators have overseen annuity sales to ensure products sold to consumers are suitable for them based on a review of their needs. The NAIC’s “Suitability in Annuity Transactions Model Regulation (#275)” serves as a basis for this regulatory framework.
Model #275 sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. Since the model’s original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA). Most states have enacted the Model #275 updated version. According to the Insured Retirement Institute (IRI)’s chief legal and regulatory affairs officer, Jason Berkowitz, all signs indicate that the NAIC’s revised Model #275 will attempt to hold state-regulated insurance producers to a higher standard, which he says is a “best interest standard.”
Another Recordkeeper Faces Self-Dealing ERISA Lawsuit
Prudential faces a self-dealing lawsuit filed by participants in its defined contribution (DC) retirement plan. The suit alleges various fiduciary breaches under the Employee Retirement Income Security Act (ERISA). Filed in the U.S. District Court for the District of New Jersey, the ERISA complaint names as defendants the Prudential Insurance Co. of America, the Prudential Employee Savings Plan Administrative Committee, the Prudential Employee Savings Plan Investment Oversight Committee, and some 20 “John and Jane Does.” At a high level, the suit alleges that the Prudential defendants put the interests of the company ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.” According to plaintiffs, as Prudential itself performs all recordkeeping and administrative functions for the plan, plus manages a significant number of its investments, it receives additional revenue in the form of direct participant fees and indirect fees via revenue sharing. Prudential did not return a request for comment.
SEC Seeks to Modernize Adviser Advertising Rules
The U.S. Securities and Exchange Commission (SEC) voted in November to propose a set of amendments meant to modernize the advertising rules and restrictions applying to advisers under the Investment Advisers Act of 1940. According to SEC Chairman Jay Clayton, the proposed amendments are intended to update the advertising rules to reflect changes in technology, the expectations of investors seeking advisory services, and the evolution of industry practices. The rule amendments are detailed in summary form on the SEC’s website, and the full rulemaking language will appear soon in the Federal Register. In essence, Clayton explained, the proposed amendments to the advertising rule would replace the current broadly drawn limitations with principles-based provisions. The proposed approach would also “permit the use of testimonials, endorsements and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement’s intended audience.”
MSSB Share Class Calculator Errors Lead to Settlement With the SEC
Morgan Stanley Smith Barney (MSSB) has agreed to settle litigation filed by the U.S. Securities and Exchange Commission (SEC). Background information included in litigation documents shows that, according to MSSB, from at least July 2009 through December 2016, in selecting the most economical share class for certain retirement plan and charitable organization brokerage customers, it used “share class limits, [a share class selection calculator,] and other tools” designed to offer customers the least costly mutual fund share class. The SEC alleged that three issues harmful to customers had occurred. For one, the calculator had two operating errors whereby it sometimes recommended less than the most beneficial share class. Second, MSSB sometimes had bypassed the calculator for less effective tools.
The three actions represent violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, pertaining, respectively, to obtaining money or property by any untrue statement of material fact and engaging in business that operates as a fraud or deceit in offering or selling securities. MSSB provided the following statement to PLANADVISER: “We are pleased to have resolved this matter and have corrected the systems issues that were the cause.”