In Practice March 11, 2020

Could Market Volatility (or Recession) Disrupt Record M&A Activity?

For some years now, advisory firm owners have enjoyed a sellers’ market that has spurred record merger and acquisition volumes.

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Scott Slater, merger and acquisition (M&A) specialist and a vice president of practice management and consulting for Fidelity Custody & Clearing Solutions, regularly speaks with PLANADVISER about the ongoing consolidation of the registered investment adviser (RIA) and independent broker/dealer (B/D) industries.

Back in January, Slater detailed how 2019 generated a record level of RIA and B/D M&A activity, based on the pressure for financial services firms to scale and the pervasiveness of prepared buyers who hold significant capital in a low interest rate environment. At the time, he suggested there was little reason to think 2020 wouldn’t continue the record-setting M&A pace.

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However, with the recent bout of severely negative market volatility that has some analysts wondering whether a recession has arrived, Slater says it is a good time for advisers to step back and reassess the M&A landscape.

“It is interesting because I think people in the industry actually saw some of this volatility coming,” Slater observes. “Of course, they didn’t foresee the specific cause or timing of the volatility—the coronavirus concerns and the oil market shock. But they knew the long run of positive markets we have experienced basically since the Great Recession couldn’t last forever.”

As such, Slater says, there was something of a flurry of M&A activity leading up to this current situation. Indeed, PLANADVISER has in late 2019 and early 2020 covered several important RIA-focused transactions, along with some mega deals, including the acquisition of Legg Mason by Franklin Templeton. 

“At the start of 2020, I believe, sellers knew we were at peak valuations,” Slater says. “Still, even if valuations have come down a bit based on the new market environment, I don’t believe that will significantly slow or halt the M&A activity we forecasted for 2020. Just remember the age of many of the owners of these firms and the competitive pressures they are facing.”

Slater projects that, even in the case of a mild economic downturn that lasts more than a few weeks, we will remain in a sellers’ market. On the other hand, should a longer-lasting and more severe recessionary event take place, buyers will potentially grow more selective as they contemplate potential transactions.

“We can learn from what happened to M&A activity back in December of 2018, when the market declined almost 20%,” Slater says. “At the time, there were a lot of deals that were basically halfway done, and the volatility actually led sellers to feel urgent to get their deal done. Ultimately the impact was muted, but that was a one-month market swoon. This could be a more significant and lasting volatility event.”

In terms of the deals that have happened so far in 2020, Slater says he continues to be impressed by the activities of what Fidelity considers to be “strategic acquirers.” In basic terms, these are firms that already have a strong set of services and an operational infrastructure in place and which want to quickly acquire access to new markets.

“One of the things we’ve been talking about quite a lot so far in 2020 is the need for attracting and retaining the best advisers and staff,” Slater says. “There is no question that, for a lot of the large, strategic acquirers, a big part of why they are entering into so many transactions is to capture top-level talent. This theme will certainly continue to shape M&A during 2020, whatever transaction level we end up seeing.”

Compliance March 11, 2020

Judge Finds CalSavers Not Preempted by ERISA

A federal judge dismissed the lawsuit and decided that granting the plaintiffs leave to amend would be futile.

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A lawsuit against California’s state-run auto-IRA program has been dismissed by a federal judge.

U.S. District Judge Morrison C. England Jr., in ruling on the question of whether the legislation establishing the CalSavers program is preempted by the Employee Retirement Income Security Act (ERISA), noted first that, per ERISA, it will “supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.” He also noted that an “employee pension plan” is “any plan, fund or program … established or maintained by an employer” that provides retirement income to employees.

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The plaintiffs assert that the CalSavers Board and Trust are employers because a “trust” is a “person” who is “acting indirectly in the interest of an employer.” The plaintiffs relied on a previous case in which a judge found that an association of construction employers that created and administered a trust offering health benefits could be an ERISA employer. However, since the CalSavers’ Trust is administered by the state-created board, not a group of employers, England declined to find that the board and trust are “employers” under ERISA.

England also found that actual employers have no discretion in the administration of CalSavers and do not make any promises to employees: Employers simply remit payroll deducted payments to the program and otherwise have no discretion regarding the funds. “The role of actual employers in CalSavers is limited to providing a roster of eligible employees, providing contact information of eligible employees, making payroll deductions and remitting such deductions,” the court order says. “Such ministerial duties do not rise to the level of an employee benefit plan established or maintained by actual employers.”

Turning to the question of whether the state statute establishing the CalSavers program “relate[s] to any employee benefit plan,” England noted that, “While CalSavers applies only when actual employers do not have an existing ERISA or employer-sponsored retirement plan, the program does not interfere with existing ERISA or retirement plans provided by actual employers.” He cited a previous court case that found, “Where a law is fully functional even in the absence of a single ERISA plan, it does not make an impermissible reference to ERISA plans.”

England addressed a reference to a 2016 U.S. Supreme Court decision in Gobeille v. Liberty Mut. Ins. Co., brought up by both the plaintiffs and in a statement of interest filed in the case by U.S. attorneys. In that case, a Vermont statute required health insurers, including ERISA plans, to disclose “payments relating to health care claims and other information relating to health care services” for a state database. The Supreme Court held the statute was preempted by ERISA because the disclosure requirement interfered with the nationally uniform plan administration and regulatory reporting domain of ERISA.

But England said Gobeille differs from the present matter because CalSavers does not impose additional reporting requirements on existing ERISA plans. The information provided by participating employers does not interfere with ERISA’s regulatory domain because reporting is only required where no ERISA or any other employer-sponsored retirement plan exists. “As such, there is no impermissible ‘connection with’ an ERISA plan which results in the preemption of CalSavers,” England concluded.

Unlike the previous time the case was dismissed, England decided that granting the plaintiffs leave to amend would be futile because their first amended complaint “is substantially similar to their original complaint.”

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