SS&C Technologies Sued Over Profit Sharing Plan Investment in Valeant Pharmaceuticals

SS&C Technologies acquired DST Systems, so the new lawsuit is similar to a previous one against DST for failing to diversify assets in its profit sharing plan.

Employees of SS&C Technologies, which acquired DST Systems this year, and several former employees of DST Systems have sued the firms and other defendants, claiming violations of the Employee Retirement Plan Security Act (ERISA) in relation to an investment in the DST Systems Profit Sharing Plan, a segment of the firm’s 401(k) plan.

As in a previous lawsuit, the complaint states that a portion of the plan’s assets are invested in the DST Systems Inc. Master Trust. The investment manager of the Master Trust was and/or is defendant Ruane, Cunniff & Goldfarb & Co. Inc. Ruane is, and/or at pertinent times was, also the distributor and adviser to the Sequoia Fund Inc., which, in turn, was a client of DST. Participants could not exercise control of their investments in the profit sharing plan.

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According to the complaint, DST recently disclosed that, in contravention of the fiduciary obligations owed by those with discretion and control over the profit sharing plan, it was not properly diversified. In fact, rather than minimize the risk of large losses to the plan, the complaint said, the plan’s fiduciaries caused and/or allowed plan assets to be invested imprudently in the stock of Valeant Pharmaceuticals International Inc., such that, as the value of Valeant stock dropped from a high of approximately $258 per share on or about July 31, 2015, to $15.41 per share on or about January 10, 2016, the plan, and all participants, suffered enormous losses. “The failure to diversify was the result of a defective and inappropriate process abusive of the lawful discretion afforded defendants,” the complaint states.

At the end of 2014, approximately 30% of the profit sharing plan consisted of Valeant stock. This amounted to approximately 15% of the combined 401(k) and profit sharing plan’s assets and constituted a clear breach of the defendants’ duty to diversify plan assets in an appropriate and prudent manner, the plaintiffs allege.

The complaint lays out how Valeant pursued a particularly risky and potentially dubious growth strategy, which clearly did not meet the plan’s purported investing criteria or the criteria of an objectively prudent fiduciary. In addition, the complaint says, prudent fiduciaries would have known that Valeant was a volatile and risky stock. Valeant made public its aggressive strategy and was the subject of intense industry scrutiny and speculation about whether its aggressive growth strategy, accounting, and business were legitimate.

In addition, the plaintiff alleges, while a plan fiduciary acting with the care, skill, prudence, and diligence of a prudent person would have elected not to retain and/or continue to retain defendant Ruane as an investment manager, in light of its demonstrable imprudence in failing to adequately diversify the profit sharing plan and in buying the stock of a volatile, risky and unsustainable business, the defendants, acting with objective imprudence, continued to retain Ruane even as the Valeant stock plummeted and the plan experienced enormous losses.

The complaint also says that not only did the DST Defendants retain Ruane, they continued to follow the advice of Ruane, knowing that such advice was flawed and unsuitable. In addition, Ruane is the distributor and adviser to the Sequoia Fund Inc.—under which the plan invests in Valeant—which, in turn, is a client of DST (DST serves as the registrar and shareholder servicing agent for the Sequoia Fund Inc.). Thus, DST receives, and has received, compensation from a fund for which Ruane is the adviser. The complaint alleges a plan fiduciary acting with the care, skill, prudence, and diligence of a prudent person would have avoided this conflict of interest.

The Walt Disney Company and FMC Corporation have also been sued over the Sequoia Fund’s investment in Valeant Pharmaceuticals.

Stradley Ronon Reviews SEC Regulation Best Interest

Regulation Best Interest lays out the core loyalty and disclosure duties of advisers and broker/dealers—and how these can be satisfied.

Stradley Ronon on Thursday presented a detailed webinar exploring the Securities and Exchange Commission (SEC)’s Regulation Best Interest proposal, including analysis of the key themes to emerge in industry comment letters.

The webinar featured a diverse panel of regulatory experts, including Sarah Bessin, associate general counsel with the Investment Company Institute; David Grim, partner with Stradley Ronon; Helen Rizos, senior vice president and deputy general counsel for Fidelity Investments; and Larry Stadulis, co-chair of the fiduciary governance team at Stradley Ronon.

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The panel agreed that the ongoing SEC activity on its proposed Regulation Best Interest should be a core area of focus for registered investment advisers (RIAs) and broker/dealers (B/Ds). While they spoke about the important influence of the Department of Labor (DOL)’s fiduciary rule saga on the SEC’s own regulatory activities, they explained how the roots Regulation Best Interest actually stretch as far back as 1995.

That year, Daniel Tully, then chairman and CEO of Merrill Lynch & Co., led an SEC-assembled committee in the publication of a report on advisory industry compensation practices. The “Tully Report,” now more than two decades old, voiced many of the same conclusions and concerns that current SEC chair Jay Clayton points to as the primary drivers behind Regulation Best Interest.

As the panel discussed, it was already known in the 1980s and 90s that retail investors, broadly speaking, can be easily confused about the differences between “investment advisers” and “broker/dealers.” The confusion is by all appearances just as prevalent, if not more significant, today.

For this reason, SEC Regulation Best Interest seeks to more clearly delineate the different standards and obligations of advisers and B/Ds. According to the panel, the B/D standard at this stage is not a fiduciary one. The adviser standard as restated in Regulation Best Interest is closer to the fiduciary approach taken by the DOL, but it has key differences that are inherent to the SEC’s own strengths and limitations as a securities-focused regulator.

According to the panel, there are some key concepts that will serve well as a jumping off point for coming into compliance with all the nuances of Regulation Best Interest as it is proposed—and with the various interrelated regulatory projects the SEC is working on alongside its best interest rule, such as the Customer Relationship Summary Form.

In no particular order, the panel emphasized the following concepts: Avoid compensation thresholds that disproportionately increase compensation through incremental sales increases; minimize compensation incentives for employees to favor one type of product over another, especially when it comes to proprietary or preferred provider products; consider establishing differential compensation criteria based on more neutral factors, such as the time and complexity of the work involved; and eliminate compensation incentives within comparable product lines.

The panel next offered a summary of the comment letters that have been submitted by industry stakeholders on Regulation Best Interest. Generally speaking there is broad support for the SEC to take the lead on a best interest standard for broker/dealers that will create more consistency across retirement and other retail accounts. Some comments urged SEC to coordinate closely with DOL, suggesting DOL should issue exemptions for financial professionals subject to SEC standards of conduct. Many spoke about the importance of getting positive affirmation that SEC standards of conduct would preempt inconsistent state law standards.

Some comment letters said the SEC is going too far and instead proposed that disclosure and client consent can be an effective means of satisfying broker/dealers’ loyalty obligations. They argued broker/dealers or investment advisers should not be precluded from using disclosure to limit the scope of their advice to a defined universe of products. They also argued it is not necessary to distinguish between conflicts of interest based on financial incentives and all other conflicts of interest.

The panel discussion concluded with a breakdown of the minimal, moderate and significant anticipated impacts of Regulation Best Interest as it is currently formulated. Minimal impact areas include the manner in which investment companies are regulated under the 1940 Act; the manner in which investment companies are managed and operated under the 1940 Act; board oversight of investment companies; and prospectus and shareholder communication disclosures.

Moderate impact areas, the panel said, include scheduled sales charge variations; use of multiple share classes; distribution arrangements under Rule 12b-1; and clean shares.

Major impact areas, according to the panel, will be individual retirement account (IRA) rollovers; non-cash compensation in connection with sales contests and promotions; compensation that incents the sale of one type of product over another, such as proprietary or preferred provider funds; increased emphasis on sales materials that do not include an actual recommendation; financial incentive conflicts arising from the receipt of revenue sharing or other payments from third parties; integrated fund product lineups specifically engineered to minimize financial incentive conflicts; the recommendation of complex investment company products to unsophisticated retail customers; and continued migration from B/D to adviser models.

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