In Practice January 5, 2016

Cetera Finds New Independence Amid RCS Debt Deal

Among the many business units of the stressed RCS Capital Corp. is Cetera Financial Group, which provides investment and brokerage services for a significant number of U.S. retirement plan advisers.
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Form 8-K SEC fillings from RCS Capital Corporation show the company has successfully negotiated an agreement to restructure as much as $500 million in debt via Chapter 11 bankruptcy.

As part of the deal, the firm says it’s also reached an agreement in principle with the majority of first- and second-lien lenders to invest another $150 million toward one of its subsidiary companies, Cetera Financial Group, which will be reestablished post-bankruptcy under a new company heading.

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RCS expects the restructuring and additional investment to position Cetera for “long-term profitable growth under its existing senior management team,” which will continue to be led by R. Lawrence Roth as CEO. The filings suggest Cetera’s member broker/dealer firms “will not be involved with the contemplated Chapter 11 filing.” Further, the firm says it will implement a “retention program for Cetera Financial Group-affiliated advisers and key employees made up of cash and equity in restructured RCS Capital.”

On the downside of the debt deal, RCS Capital investors are facing the prospect of a “reduction of indebtedness and preferred stock in excess of $500 million,” highlighting the significant difficulties that have emerged for the RCS parent company in the year or so since it first scooped up Cetera in a bid to create one of the largest broker/dealer networks in existence. Followers of financial industry media will have read of the firm’s lasting difficulties in overcoming allegations of accounting malpractice that emerged shortly thereafter.

RCS Capital further announces in the 8-K filing the sale of its Hatteras business unit, “continuing progress toward sale or wind-down of remaining non-core assets.” The firm says its senior secured lenders have agreed to pursue an expedited schedule for the company’s emergence from Chapter 11.

According to the filing, “RCS Capital’s expectation is that Cetera’s current employees, advisers and trade vendors will not be affected by RCS Capital’s bankruptcy. As such, it is expected to remain business-as-usual for Cetera’s employees as well as the advisers and the institutions that Cetera supports.”

NEXT: Implications and effects downplayed 

In a statement accompanying the filing, Roth says his goal as CEO of the reemerged Cetera company will be to leverage the $150 million in new investments to enhance technology, drive ongoing adviser growth and deliver service enhancements within the Cetera platform. The filing notes Cetera and RCS Capital’s lenders “have agreed in principle that the reorganization will protect the current deferred compensation arrangements.”

The restructuring and new investment is still subject to the negotiation and execution of definitive documentation, regulatory, court and other approvals, but the firm says obtaining the approval of the requisite first- and second lien-lenders is “expected to be completed during the second quarter of 2016.” 

Roth concludes that the restructuring plan “defines the path for transforming Cetera into a private, independently run organization that is dedicated exclusively to the financial advisers and financial institutions we support. The restructuring marks a fresh start that will place the issues of the past months firmly behind Cetera, while providing the financial adviser network with the capital and operational structure to profitably grow its market leadership.

“Thanks to its autonomous operating and financial structure within the RCS Capital framework, Cetera has generated sufficient capital funding and solid cash flows from our well-established broker/dealer firms,” he adds. “We expect to use the anticipated $150 million of new working capital obtained through this agreement to further cement Cetera’s market position as a dynamic, forward-thinking, and adviser- and client-driven provider of investment advice to retail clients. Given this important context, we emphasize to the advisers and institutions we support that we do not expect the proposed restructuring of RCS Capital to impact the existing deferred compensation plans or other related compensation plans at Cetera, which are expected to remain in effect in their current form.”

Data & Research January 4, 2016

Private Sector Could See Public Retirement Plan

A public retirement plan that would expand access to workplace savings for private-sector workers is viable, a Connecticut study says.
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The Connecticut Retirement Security Board (CRSB) has submitted a report to the General Assembly recommending a number of initiatives to the legislature and the governor to address the issue of private-sector workers in Connecticut without access to a workplace savings plan.

The board was formed in 2014 to address the growing retirement crisis in Connecticut, with the goal of conducting a market feasibility study for implementing a public retirement plan and was required to report its findings by January 1.  

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The report details a proposed program account structure, governance and enforcement elements, a program model and the financial feasibility of such a program.

The program would likely serve, at a minimum, almost 600,000 Connecticut residents who have no access to workplace-based retirement savings. According to Connecticut-specific data from the Schwartz Center for Economic Policy Analysis at The New School, between 2000 and 2010, employers offering a retirement plan declined, from 66% to 59%. In other words, four out of 10 workers who live in Connecticut lack access to a retirement plan at work.

In developing a program model, the board focused on the policy goals of increasing retirement security through a low-cost prefunded retirement savings program that requires a minimal amount of financial sophistication, according to the report.

Businesses that currently already offer a 401(k) plan or other workplace-based retirement savings option to all employees would be unaffected by the proposed program. Participating employers would not have to contribute to the program—only provide a payroll deduction mechanism for employees to contribute. Employee participation in the savings program would be voluntary, using an auto-enrollment and an opt-out.

NEXT: Self-sustaining within two years

The program would need approximately $1 billion in assets to become financially self-sustaining, according to the financial analysis. At a 6% default contribution rate and auto-enrollment (with an opt-out provision), the program should reach that self-sustaining threshold at the end of year two, and repay any estimated upfront costs and ongoing annual expenses between the third and fifth years.

Other findings in the report are:

  • Individual retirement accounts (IRAs) are feasible and suitable legal structures for the program, particularly for account portability. The board recommends offering traditional and Roth IRAs.
  • The board recommends the legislature create an implementing board to oversee an independent entity responsible for managing the program, one that operates “with a maximum of transparency and reports to the legislature annually.”
  • The program should be made available to all employees, including part-time employees, at the Connecticut location of a business or nonprofit organization that offers enrollment in the program, provided the employee has worked at that entity for at least 120 days.
  • Individuals participating in the retirement program should be able to see their investments, performance, account activity and balances through a website.

The market and financial feasibility study of the program structure found it is financially feasible in most cases and meets all criteria identified for financial viability, including self-funding, attractive economics for third-party service providers, and reasonable fees for program participants (expected to be at or below 1%).

On the heels of the board’s market research and broad input from the public, academics and the business community, there is a practical way to help address Connecticut’s growing retirement gap in the state of Connecticut, says Kevin Lembo, state comptroller. “There is an entire generation of employees, many of them lifelong hard-working middle class people, who are headed to retirement financially unequipped, in part due to lack of access to a workplace-based retirement savings option,” Lembo says. “This is a problem, not only for those individuals and families who are financially forced to delay retirement indefinitely, but for our entire state and economy.”

The full report can be downloaded here.

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