Deals & People November 15, 2016

SEC Chair Will Step Down Ahead of Trump Appointments

Mary Jo White, who became the 31st Chair of the SEC in April 2013, will be one of the SEC’s longest serving Chairs.
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Securities and Exchange Commission (SEC) Chair Mary Jo White, after nearly four years as the agency’s head, announced that she intends to leave at the end of the Obama Administration.

Chair White, who became the 31st Chair of the SEC in April 2013, will be one of the SEC’s longest serving Chairs.

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In addition to completing the vast majority of the agency’s mandates under the Dodd-Frank Act and all of its mandates under the JOBS Act, Chair White’s leadership has advanced the agency’s mission through other critical rulemakings and built robust and effective frameworks for the SEC’s regulatory regimes going forward.

“My duty has been to ensure that the Commission implemented strong investor and market protections, and to establish an enduring foundation for future progress in the most critical areas—asset management regulation, equity market structure and disclosure effectiveness,” says White. “Thanks to the hard work and dedication of the SEC’s staff, we have accomplished both.”

Under her leadership, the SEC advanced more than 50 significant rulemaking initiatives, including:

  • Fundamental reforms to the money market fund industry;
  • A comprehensive framework for enhancing the effectiveness of corporate disclosure for investors; 
  • Major enhancements to transparency and risk management for asset-backed securities, which were a significant contributor to the financial crisis;
  • Strong operating standards for the clearing agencies that stand at the center of our financial system; and
  • Extensive reforms to the regulation of credit rating agencies and how they address conflicts of interest that can harm investors.
NEXT: Improved enforcement

To enhance accountability of those who violate the securities laws, White implemented the Commission’s first-ever policy to require admissions of wrongdoing in certain cases where heightened accountability and acceptance of responsibility is appropriate. Thus far, the Commission has required admissions from more than 70 defendants, including 44 entities and 29 individuals.

Under White’s leadership, the Commission made significant enhancements to its examination program, including increasing staff by about 20% by hiring new examiners where funding permitted and redeploying staff from other program areas to heighten focus on the fast-growing investment management industry. The exam program also increased its use of advanced quantitative techniques to enable examiners to detect misconduct by more quickly analyzing large amounts of data. The Commission also enhanced technology in its examination program through the National Exam Analytics Tool (NEAT), which enables examiners to analyze large volumes of trading data much more efficiently.

White serves as a member of the Financial Stability Oversight Council and on several other domestic and international organizations, including the International Organization of Securities Commissions, the Financial Stability Board, the International Financial Reporting Standards Foundation Monitoring Board, the Financial and Banking Information Infrastructure Committee, and the Federal Housing Finance Oversight Board.

White says, “It has been and will always be critical for this agency and the public that the SEC remain truly independent. That independence is crucial to our ability to protect investors, safeguard our markets and facilitate the capital formation that fosters innovation and the growth that is essential to our national economy.”

Compliance November 15, 2016

Second Suit Targets Edward Jones Over Self-Dealing Claims

Edward Jones is being accused by another set of plaintiffs of favoring the investments of its “preferred partners” in its 401(k) plan, enriching the firm at the expense of performance.
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A new proposed class action lawsuit filed against Edward Jones in the U.S. District Court of Missouri accuses the firm of a number of fiduciary breaches, including failing to adequately control investment costs on behalf of participants and favoring the use of funds provided by the investment advisory firm’s revenue-sharing partners.

The accusations match a previous suit filed by employees of Edward Jones, leveling similar claims that the firm favored the use of its business partners’ products within the plan for its own benefit.

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“An employee participating in a 401(k) plan is limited to the investment options selected by the plan’s fiduciaries,” the text of the complaint explains. “Here, the investment committee selected and maintained the investment options of fund companies who participated in revenue sharing, ‘shelf space,’ or other business arrangements with Edward Jones.”

According to plaintiffs, in selecting and maintaining the investment options of these “product partners,” or other companies which returned a benefit to Edward Jones, the defendants “engaged in a form of self-dealing and cost the plan participants millions of dollars.”

Specifically, plaintiffs allege that Edward Jones company and officials breached their fiduciary duties failing to prudently and loyally manage the plan’s investments—by selecting and maintaining the investment options of fund companies with whom Edward Jones maintained revenue sharing and/or other arrangements; selecting and maintaining the higher fee share classes of identical funds; offering a money market account with a high fee and significantly lower performance than a low fee stable value fund; and including and maintaining an unreasonable number of high risk investment options.

“These actions/inactions cost plan participants millions of dollars and run directly counter to the express purpose of ERISA plans, which are designed to help provide funds for participants’ retirement,” plaintiffs allege. Further, plaintiffs suggest that Edward Jones breached its fiduciary duties by “failing to adequately monitor other persons to whom management/administration of plan assets was delegated, despite the fact that Edward Jones knew or should have known that such other fiduciaries were imprudently allowing the plan to select and continue to offer plan participants the higher fee share class options of the identical funds, maintain a poor performing and high fee money market account, and select and maintain risky investment options.”

NEXT: Telling details from the complaint 

The action seeks to recover the losses that plaintiffs say defendants are liable for under ERISA Sections 409 and 502.

According to the text of the complaint, Edward Jones exercised discretionary authority with respect to management and administration of the plan and/or exercised authority or control over the management and disposition of the plan’s assets throughout the class period. The firm, according to plaintiffs, did not seek to offload any of its required fiduciary service to an external provider.

“Instead of delegating fiduciary responsibility for the plan to external service providers, Edward Jones chose to internalize certain vital aspects of this function to the Investment and Administrative Committees,” the complaint states. This is not problematic on its face, participants acknowledge, but they argue the plan committees actually worked with Edward Jones’ interest placed above that of the typical participant.

Plaintiffs go on to suggest that, throughout the proposed class period, Edward Jones “maintained revenue sharing and/or other business arrangements with certain mutual fund companies, both formal and informal, which led to new business partnerships in which Edward Jones granted access to the investment option selection process for the plan in return for consideration in the retail/client-side of their business.”

The argument continues: “Edward Jones, as an investment adviser, has the ability to recommend or not recommend any investment it deems suitable for its retail clients, because there is no fiduciary duty to retail clients at this time … As a result, Edward Jones can and has entered into arrangements with various mutual fund companies [including those on its 401(k) plan investment menu], so that it can receive a portion of the investment fees charged to its clients in return for recommending their partners’ products … However, retail clients are free to pick from a wide variety of investment options. In order to entice these mutual fund companies into these arrangements, Edward Jones used the captive market of their own 401(k) plan, in which the menu of investment options was totally controlled by Edward Jones and its employees appointed to the Investment Committee.”

According to plaintiffs, this would effectively “guarantee their business partners received investment management fees from plan participants, who would have few options but to investment in the mutual funds of Edward Jones’ business partners.”

By this method, plaintiffs claim Edward Jones and Jones Financial “profited by exploiting the captive market of the billions of dollars of assets under management in the plan.”

The full text of the complaint, including more detail about the specific investment options and pricing being challenged, is available here. 

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