Compliance December 11, 2009

House Passes Sweeping Financial Reform

U.S. House lawmakers today approved an extensive financial reform measure—but the provision to give the Financial Industry Regulatory Authority (FINRA) more purview over advisers didn’t go through.

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The major financial reform, now on its way to the Senate, would, among other things, require hedge funds to register, beef up federal securities regulation, and impose executive compensation limits.

However, one thing it will not do is expand the power of FINRA to regulate investment advisers at broker/dealers. The amendment to expand FINRA’s reach was originally introduced by Representative Spencer Bachus (R-Alabama), and was scrapped today by a voice vote in the House, according to published reports.

Some industry organizations, such as the Financial Planning Association, have opposed giving FINRA more authority (see “FPA Wants to Curb FINRA Authority”). The proposal to strike the section that would have done so was proposed by Financial Services Committee Chairman Barney Frank (D-Massachusetts), and Rep. Frank Cohen, (D-Tennessee). It remains unclear what will happen next for regulation of investment advisers, according to reports.

Short of the FINRA amendment, the Wall Street Reform and Consumer Protection Act (H.R. 4173) passed the chamber on a 223 to 202 vote that came after months of debate and negotiations between Democratic and Republican leaders and pressure from lobbyists.

The Wall Street Reform and Consumer Protection Act would:

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  • require almost all advisers to private pools of capital—including hedge funds—to register with the U.S Securities and Exchange Commission (SEC) , and be subject to systemic risk regulation.
  • strengthen the SEC’s powers to regulate the securities markets and order a systemic study of the failures that led to not detecting the Bernard Madoff Ponzi scheme.
  • enable regulators to ban inappropriate or imprudently risky compensation practices, and require financial firms to disclose incentive-based compensation structures. It also gives shareholders a “say on pay,” or an advisory vote on pay practices including executive compensation and golden parachutes.

Describing the bill as “the largest overhaul of securities laws since the New Deal,” a Wall Street Journal report said the measure would give regulators new authority to identify and respond to systemic risks, break up or wind down the riskiest firms, and deal with abusive lending practices.

The bill’s most significant effect would be on the largest financial institutions, which would face intense new scrutiny on their operations and would be held to higher capital and liquidity standards, the news report said. The government would be allowed to break up even healthy large institutions that were considered a threat to the broader economy.

The Journal said Senate lawmakers are moving a parallel piece of legislation and that the chance of a bill reaching the President’s desk have considerably improved in the last several days.

Compliance December 11, 2009

IRS Delays Plan Amendment Timetable

The Internal Revenue Service (IRS) has given plan sponsors more time to adopt plan amendments to implement a variety of Pension Protection Act (PPA) requirements, including allowing participants to divest out of company stock.

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The IRS said in Notice 2009-97 released Friday that plans now have until the last day of the first plan year that begins on or after January 1, 2010, to have the amendments in place.  The extension, the agency said, is “In order to give plan sponsors time to adopt plan amendments that take into account recently issued final regulations and those that are expected to be issued in the near future…” http://www.irs.gov/pub/irs-drop/n-09-97.pdf

According to the tax agency, the extended deadline applies to amending:

  • single-employer defined benefit plans to meet the requirements of 401(a)(29) and 436, relating to funding-based limits on benefits and benefit accruals. Section 436, which was added by section 113(a)(1) of the PPA, imposes funding-based limits on benefits and benefit accruals under single-employer plans. The requirements of 436 generally apply to plan years that begin after December 31, 2007;
  • cash balance and other applicable defined benefit plans, within the meaning of 411(a)(13)(C), to meet the requirements of 411(a)(13) (other than 411(a)(13)(A)) and 411(b)(5), relating to vesting and other special rules applicable to these plans. Section 411(a)(13), which was added by section 701(b)(2) of PPA ’06, contains special rules for cash balance and other applicable defined benefit plans. Section 411(a)(13)(A) provides, in general, that an applicable defined benefit plan will not fail to satisfy the requirements of 411(a)(2), 411(c), or 417(e) solely because the present value of the participant’s accrued benefit under the plan equals the balance in the participant’s hypothetical account; and
  • applicable defined contribution plans, within the meaning of  401(a)(35)(E), to meet the requirements of 401(a)(35), relating to diversification requirements for certain defined contribution plans. Section 401(a)(35), which was added by section 901(a)(1) of the PPA, requires certain defined contribution plans to meet certain diversification requirements with respect to investments in employer securities. The requirements of 401(a)(35) generally apply to plan years that begin after December 31, 2007.

Cycle E Plans

IRS Notice 2009-98 contains the 2009 Cumulative List of Changes in Plan Qualification Requirements described in section 4 of Rev. Proc. 2007-44, 2007-2 C.B. 54.

The 2009 Cumulative List is to be used primarily by plan sponsors of individually designed plans that are in Cycle E. An individually designed plan is in Cycle E if it is a single employer plan where the last digit of the employer identification number of the plan sponsor is 5 or 0, or it is a 414(d) governmental plan for which an election has been made by the plan sponsor to treat Cycle E as the initial EGTRRA remedial amendment cycle for the plan.

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