Legislative and Judicial Actions
➜ SEC Approves Shareholder Proposal
A divided Securities and Exchange Commission (SEC) voted on September 10 to adopt amendments to its shareholder proposal rules, which govern the process by which a shareholder can have a proposal included in a company’s proxy statement for consideration by the company’s other shareholders. The SEC notes it has maintained the long-standing $2,000 minimum ownership threshold, but the amendments would require that, to take advantage of that ownership threshold, a proponent must have held the shares for at least three years, to demonstrate long-term investment in the company. Under the amended rules, to put forward a proposal before this three-year period, an individual or entity must hold $15,000 of the company’s securities for at least two years, or $25,000 for at least one year.
Critics of the rule amendments say the new framework will make it significantly harder for smaller shareholders to put forward proposals. Notably, the rule amendments provide for a transition period so shareholders currently eligible at the $2,000 threshold will remain so “[as] long as they continue to maintain at least their current holdings through the date of submission (and … the date of the relevant meeting).”
➜ Fiduciaries of Mutual of Omaha Plan Settle
Parties in a lawsuit accusing Mutual of Omaha Insurance Co. and its subsidiary United of Omaha of self-dealing in the former’s 401(k) plan have agreed to settle. The settlement agreement calls for a cash payment of $6.7 million as compensation to a class of participants. The original complaint alleged that the 401(k)’s fiduciaries violated their fiduciary duties by selecting numerous investment options not to benefit the plan or its employees, but because they paid fees to Mutual of Omaha or its subsidiaries.
The memorandum in support of the motion for preliminary approval of the settlement agreement says the $6.7 million cash payment “represents a substantial recovery.” The defendant’s attorneys say that substantiating the plaintiffs’ claims regarding excessive administrative fees would have required detailed and expert examination of the parent company’s operations, and the financial records supporting the cost of those. “Proving plaintiffs’ claims regarding the Guaranteed Account would have been even more complex and time-consuming,” the memorandum states.
➜ DOL Proposes a Rule on Benefit Plan Proxy Voting
The Department of Labor (DOL) has proposed a rule that revisits how fiduciaries should apply the prudence and exclusive purpose duties under the Employee Retirement Income Security Act (ERISA) with respect to proxy voting and exercise of other shareholder rights. The proposed rule amends the department’s long-standing investment duties regulation. The DOL says it has issued sub-regulatory guidance and individual letters over the years affirming that, in voting proxies and in exercising other shareholder rights, plan fiduciaries must consider factors that may affect the value of the plan’s investments and not put unrelated objectives ahead of participants’ and beneficiaries’ best interests as to their retirement income.
The agency says previous communications it published may have led to some confusion or misunderstandings. The proposal is designed to address those issues through a notice and comment rulemaking process that will build a public record. The DOL will then use this to develop an improved investment duties regulation with the goal of ensuring that plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.
The proposal includes provisions that would articulate general duties requiring fiduciaries to vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan. It also prohibits them from voting any proxy unless the fiduciary prudently determines that the matter does have an economic impact on the plan. To assist fiduciaries in complying with these duties, the proposal also sets forth “permitted practices” under which the plan fiduciary may adopt certain proxy voting policies and parameters reasonably designed to serve the plan’s economic interest.
The comment period ended on October 5.
➜ Sulyma Joins a Second Lawsuit Against Intel Corp.
Christopher M. Sulyma, a former participant in two retirement plans sponsored by Intel Corp., and whose original Employee Retirement Income Security Act (ERISA) lawsuit was heard by the U.S. Supreme Court, has reiterated his claims, joining another suit that questions underlying investments in the plan’s target-date funds (TDFs). The more recent suit was filed a year ago August by Winston R. Anderson.
During the plaintiff’s original case, filed in 2015, Intel argued that the suit was not filed within ERISA’s shorter, three-year, statute of limitations, which applied because the plaintiff had “actual knowledge” of the use of the underlying investment options in the TDFs. Intel based its actual knowledge argument on the fact that investment disclosures were posted on a website that the plaintiff had visited.
In February, the Supreme Court, ruling that Sulyma’s case could move forward, found that although ERISA does not define the phrase “actual knowledge,” its meaning is plain. Actual knowledge is only established by genuine, subjective awareness of the relevant information being considered—not by the mere possession of documents or the theoretical availability of information in print or digital disclosures sent to would-be litigants, the high court said.
The new, combined lawsuit challenges the use of hedge funds and private equity investments as underlying funds in custom TDFs offered in Intel’s defined contribution (DC) retirement plans.
➜ Comments Sought on Form 5500
The IRS is soliciting comments concerning the Form 5500 Annual Return/Report of Employee Benefit Plan. Proposed changes include adding a new box for plan sponsors to check, on Form 5500, Form 5500-SF and Form 5500-EZ if the sponsor has retroactively adopted an initial plan under the Setting Every Community Up for Retirement Enhancement (SECURE) Act Section 201. Also proposed is whether to add check-boxes to Form 5500-EZ Part IB, to request an extension of time.
Comments are invited on: whether collection of such information is necessary for the agency to properly perform its functions—e.g., does the information have practical utility; whether the agency’s estimate of the burden that collecting information places on the plan sponsor is accurate; ways to enhance the quality, utility and clarity of the information to be collected; ways to minimize the burden of the collection of information or other forms of information technology (IT); and estimates of capital or startup costs and costs of operation, maintenance and purchase of services to provide information. The comment period ends on November 2.
➜ SEC Issues a Risk Alert
The Securities and Exchange Commission (SEC) has published a new Risk Alert, highlighting the hacking technique known as “credential stuffing.” As the agency explains, credential stuffing is an evolving cyberattack method that uses compromised client login credentials, obtained from the dark web, to try to log in to the website of an SEC-registered investment adviser (RIA) or broker/dealer (B/D)and its customer accounts. This can result in the loss of customer assets and unauthorized disclosure of sensitive personal information. The agency’s Office of Compliance Inspections and Examinations (OCIE) has observed in recent examinations an increase in the number of such cyberattacks using various forms of this strategy.
The SEC warns that, as hackers become more and more sophisticated, credential stuffing is emerging as a more highly effective way for them to gain unauthorized access than by traditional brute-force password attacks. The Risk Alert covers a number of strategies that firms have adopted to try to stymie these types of attacks, including the use of multifactor authentication, which requires multiple verification methods to authenticate the person seeking to log in to an account. The strength of authentication systems is largely determined by the number and type of factors, the SEC says.
➜ Church Plan Case Reaches $25 Million Settlement
A settlement agreement has emerged in the Employee Retirement Income Security Act (ERISA) lawsuit known as Smith v. OSF Healthcare System. This conclusion to the church plan lawsuit comes only after multiple rulings in district and appellate courts. The plaintiffs in the case are a class of former employees and participants in one of OSF’s pension plans. Their lawsuit argued that OSF was inappropriately relying on the “church plan exemption” included in ERISA, which provides that retirement plans run by “principal-purpose” religious organizations do not have to meet certain participant protection standards and funding requirements demanded of corporations and most other employers sponsoring tax-qualified pensions.
Specifically, the plaintiffs alleged that OSF, in violation of ERISA, relied on the exemption to allow its plans to become severely underfunded. They alleged that the OSF pension plan’s holding assets are sufficient to fund only roughly 56% of accrued benefits.
OSF admits no wrongdoing, but the hospital system agrees to pay a sum of $25 million to better fund the plan, to be paid in equal annual installments over the next five years. The agreement permits a maximum attorneys fee of $1.75 million for the class counsel. The settlement agreement also provides certain nonmonetary relief.
Art by Tilda Rose