Legislative and Judicial Actions
Art by Nadja Zinnecker
➜ SCOTUS Issues Limited Ruling in IBM v. Jander
The Supreme Court has ruled in Retirement Plans Committee of IBM v. Larry W. Jander, remanding the case back to the 2nd U.S. Circuit Court of Appeals. In mid-2019, IBM asked the high court to hear the case after the 2nd Circuit reversed the company’s district court win. Plaintiffs allege that IBM imprudently managed company stock investments in one of its retirement plans; their lawsuit is a classic example of stock drop litigation.
“The question presented in this case concerned what it takes to plausibly allege an alternative action that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it,” the decision explains. “It asked whether Dudenhoeffer’s ‘more harm than good’ pleading standard can be satisfied by generalized allegations that the harm of an inevitable disclosure of an alleged fraud generally increases over time. … The 2nd Circuit did not address these arguments, and, for that reason, neither shall we,” the Supreme Court ruled. “We are a court of review, not of first view.”
➜ PIMS Consents to FINRA Censure for Inadequate Supervision
The Financial Industry Regulatory Authority (FINRA) has published a letter of a waiver and consent acceptance, entered into by member firm Prudential Investment Management Services (PIMS). FINRA says a lapse in sufficient supervision led to Prudential retirement plan clients being supplied with inaccurate investment expense ratio and performance information.
“Throughout the period of these violations, PIMS did not have supervisory systems or written supervisory procedures reasonably designed to achieve compliance with the content standards of FINRA’s advertising rule by ensuring that its communications to customers about retirement plan investments and related investment options were accurate,” the letter states.
As part of this matter, PIMS has consented to a censure and a fine in the amount of $1 million. In addition, the firm has agreed to retain at its own expense one or more qualified independent consultants “not unacceptable to FINRA” to conduct a comprehensive review of the adequacy of the firm’s compliance with FINRA rules 2210(d)(1)(A) and (B), and 3110(a) and (b), in connection with the violations described.
➜ Settlement Agreement Reached in Northrop Grumman
A settlement agreement has been reached in a case accusing Northrop Grumman and its 401(k) administrative and investment committees of various breaches of Employee Retirement Income Security Act (ERISA) fiduciary duties. While denying all liability for the claims made in the lawsuit and maintaining that they are without any fault or liability, the defendants have agreed to pay a gross settlement amount of $12,375,000 to resolve all claims.
According to the original complaint, the defendants—including Northrop—“acted to benefit themselves and Northrop by paying plan assets to Northrop purportedly for administrative services Northrop provided to the plan, which were not necessary for administration of the plan or worth the amounts paid. Defendants also caused the plan to pay unreasonable recordkeeping fees to the plan’s recordkeeper and mismanaged the plan’s emerging markets equity fund.”
The plaintiffs also accused the plan and its administrative and investment committees of allowing its recordkeeper to receive fees from an agreement with Financial Engines to provide participants with investment advice.
In February 2018, most counts in the case were dismissed against the company, with the court finding that Northrup Grumman was not a fiduciary with respect to the acts alleged.
➜ Settlement Agreement Includes Review of Investments
Defendants in a lawsuit alleging self-dealing by fiduciaries of the M&T Bank 401(k) plan have reached a settlement agreement. According to the original complaint, in 2010, eight of the plan’s 23 designated investment alternatives were M&T Bank proprietary mutual funds that cost significantly more than similar funds and performed worse.
Rather than remove these overpriced and underperforming funds, the defendants expanded their proprietary fund offerings in 2011, after M&T purchased Wilmington Trust and added six of Wilmington’s expensive, poor-performing mutual fund offerings, the complaint said.
Under the terms of the proposed settlement, M&T Bank or its insurers will pay a gross settlement amount of $20,850,000 into a common fund for the benefit of class members.
The settlement also includes a number of non-monetary terms. M&T Bank has agreed that an independent investment consultant will review the proprietary mutual funds in plan and provide a written opinion regarding whether those funds should be retained; the defendants will issue a request for information to multiple potential recordkeepers to obtain the best combination of recordkeeping pricing and services available to the plan, plus several other provisions.
➜ Annuity Transaction Suitability Rules Advance
The Life Insurance and Annuities Committee of the National Association of Insurance Commissioners (NAIC) voted to advance its revised Suitability in Annuity Transactions model regulation for final consideration. The NAIC is the United States’ standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Jason Berkowitz, the Insured Retirement Institute (IRI)’s chief legal and regulatory affairs officer, says he is confident the full NAIC executive committee and plenary will vote to adopt the revised suitability model regulation early this year.
“This revised model regulation will advance consumer protection with a best interest standard for insurance producers,” says Berkowitz, noting that the institute advocated for the inclusion of the Regulation Best Interest (Reg BI) safe harbor. “Throughout this process, insurance regulators at NAIC working-group and committee level have worked in an open, transparent manner to craft a model that is generally consistent with Regulation Best Interest and the right approach to provide strong consumer protection.” Provisions of Reg BI take effect on July 1.
➜ J.P. Morgan Settles Share Class Upcharge Challenge
J.P. Morgan Securities (JPMS) has submitted an order of settlement to the Securities and Exchange Commission (SEC) to resolve the market regulator’s allegations that it failed to provide discounts to certain qualified clients. SEC documents show that the regulator will accept the settlement order, in which JPMS neither admits nor denies the SEC’s findings.
According to an SEC investigation, from at least January 2010 through December 2015, J.P. Morgan Securities “disadvantaged certain retirement plan and charitable organization brokerage customers who maintained accounts at JPMS by failing to ascertain that they were eligible for a less expensive share class, and recommending and selling them more expensive share classes in certain open-end registered investment companies when less expensive share classes were available.”
In determining to accept the settlement offer, the SEC considered remedial acts promptly undertaken by JPMS and cooperation afforded the commission staff, including that JPMS voluntarily identified and converted eligible customers into a lower-priced share class and repaid eligible customers, including through reimbursement of transactions outside the relevant period.
Specifically, the firm had identified approximately 16,734 eligible clients that paid a total of $16,283,277 in upfront sales charges and higher ongoing fees and expenses. The SEC says JPMS has issued payments—including interest—to approximately 16,335 accounts, representing approximately 98% of eligible customers, by crediting the accounts of current customers and mailing reimbursement checks or otherwise directing payments as instructed by former customers. JPMS also has converted all eligible customers holding Class B and Class C shares to Class A shares with the lowest expenses for which they are eligible, at no cost to the customers.
➜ Wilmington Trust Settles ESOP Lawsuit
Financial services firm Wilmington Trust has agreed to settle a lawsuit alleging that it caused and engaged in prohibited transactions under the Employee Retirement Income Security Act (ERISA) related to a sale of ISCO Industries stock to participants in its employee stock ownership plan (ESOP).
According to the complaint, on December 20, 2012, ISCO and/or its prior owner(s) sold 4 million shares of common stock in the company to the ESOP in exchange for a 25-year note of $98 million, accruing 2.4% annual interest. As of December 31, 2012, the ISCO shares purchased by the ESOP were revalued by an independent appraiser at $39 million—a decrease of more than 60%.
The motion for preliminary approval of the settlement agreement says, “Wilmington Trust denies these allegations; denies any wrongdoing or liability; and has vigorously defended itself in this action. Wilmington Trust does not admit wrongdoing of any kind regarding the ESOP transaction or this action.” Nevertheless, Wilmington Trust has agreed to pay $5 million into a settlement fund. The court document argues that “a settlement of $5,000,000—approximately $12,000 per participant before fees and other costs are applied—is a good result for the Class.”
The motion cites as one reason for settlement “probable costs, in both time and money, of continued litigation.” The case has continued since a recommended decision was made in August 2017 that favored Wilmington Trust.
Chief U.S. Magistrate Judge Mary Pat Thynge of the U.S. District Court for the District of Delaware found that the plaintiffs lacked standing for subject matter jurisdiction because they did not allege an economic injury. Thynge’s recommendation allowed for the parties to serve and file specific written objections within 14 days after being given a copy of her report.
A review of the docket for the case shows those were filed, as well as many other motions over the more than two years since.