Legislative and Judicial Actions

Art by Simone Virgini

Fraud Charges Trigger the Sale of Allianz Global Investors U.S.

Allianz Global Investors U.S., the U.S. asset management arm of German insurer Allianz SE, has settled charges from the Securities and Exchange Commission that the firm and three former senior portfolio managers conducted what the SEC called “a massive fraudulent scheme” that caused “catastrophic losses” for their strategy’s funds and the funds’ investors.

The scheme involved a trading strategy called Structured Alpha, which used complex options trading to earn returns for investors. However, the alleged perpetrators of the scam did not reveal the potential immense downside risks of this trading strategy to investors. In March 2020, when the COVID-19 pandemic caused markets to crash, the fraud came to light. The approximately 114 institutional investors that had purchased Structured Alpha Funds, and paid over $550 million in fees, lost more than $5 billion, according to the SEC press release.

As a consequence of pleading guilty, AGI U.S. is automatically and immediately disqualified from providing advisory services to U.S.-registered investment funds for the next 10 years and will exit the business. As a result of the ban, Allianz SE plans to sell most of the U.S. piece of Allianz Global Investors to Voya Financial Inc.

The institutional investors that sued or filed complaints against Allianz Global include Arkansas Teacher Retirement System, Blue Cross Blue Shield, Chicago Laborers Pension and Welfare Funds, Employees’ Retirement System of Milwaukee, J. Paul Getty Trust, Metropolitan Transit Authority Pension Funds, Raytheon and San Diego City Employees’ Retirement.

The SEC’s complaint, filed in the U.S. District Court in Manhattan, alleges that Structured Alpha’s lead portfolio manager orchestrated the multi-year scheme to mislead investors who purchased roughly $11 billion in Structured Alpha Funds. The SEC’s complaint further alleges that, with assistance from the co-lead portfolio manager and the portfolio manager, the lead manager manipulated numerous financial reports and other information provided to investors to conceal the magnitude of Structured Alpha’s true risk and the funds’ actual performance.

Allianz had marketed Strategic Alpha Funds as safe investments that would be protected from risk in multiple different scenarios.

Another Extension for ‘Physical Presence’ Relief

The IRS has extended, through December 31, temporary relief from the physical presence requirement for participant elections that must be witnessed by a plan representative, or by a notary public in states that permit electronic signatures.

According to Notice 2022-27, the extension is to respond to the continuing COVID-19 pandemic and to permit consideration of stakeholder comments.

The initial temporary relief, granted in Notice 2020-42, was also due to the pandemic and to related social distancing; it extended through December 31, 2020, assuming certain conditions were satisfied. Last June, the IRS issued Notice 2021-40, extending the relief through this June 30.

The Treasury Department and the IRS are currently reviewing the stakeholder comments to determine whether to retain the physical presence requirement without modification or whether to propose to modify it. If the two agencies decide to propose modification, they will do so only through the regulatory process, which will include the opportunity for further comment.

SEC Will Propose ESG and ‘Names Rule’ Regulations

The Securities and Exchange Commission voted to propose two regulations. The first is referred to as “ESG [Environmental, Social and Governance] Disclosures for Investment Advisers and Investment Companies.” According to the SEC fact sheet, the proposed rule and form amendments are designed to provide consistent standards for ESG disclosures and would apply to registered investment companies, business development companies, registered investment advisers and certain unregistered advisers.

The SEC would require, to some criticism, additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports and adviser brochures; by implementing a “layered, tabular disclosure approach” for ESG funds to allow investors to compare them at a glance; and by generally requiring certain environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investments.

The second regulation proposes amendments to the SEC’s fund “Names Rule.” The proposal seeks to modernize the “80 percent investment policy requirement.” This part of the broader “Names Rule” currently requires funds with certain names to adopt a policy to invest 80% of their assets in investments suggested by that name. The proposal would expand this requirement to apply to any fund name with terms suggesting that the fund focuses on investments that have—or on investments whose issuers have—particular characteristics. This would include, for example, fund names with terms such as “growth” or “value” and those indicating that the fund’s investment decisions incorporate ESG factors.

To address the rule’s application to derivative investments, the proposal would require a fund to use a derivative instrument’s notional amount, rather than its market value, for the purpose of determining the fund’s compliance with the 80% investment policy.

24th State Adopts the NAIC Annuity Transaction Framework

South Carolina has become the 24th state to adopt enhanced consumer protections that align with the standards finalized in 2020 by the National Association of Insurance Commissioners in its Suitability in Annuity Transactions Model Regulation.

The NAIC is a national standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, Washington, D.C., and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews and coordinate their regulatory oversight.

Under the leadership of Acting Director Michael Wise, the South Carolina Department of Insurance finalized and adopted the new rule that codifies the NAIC standards in the state. These standards align with those set out by the Securities and Exchange Commission’s Regulation Best Interest. In practice, this means the annuity transactions standards require best-interest service without mandating that all advisers to such transactions act in a fiduciary capacity.

One matter that could potentially complicate a widening implementation and enforcement of the NAIC’s suitability framework is the fact that the Joe Biden administration could choose to modify, update or even rescind Reg BI, though sources say this is far from a given. While such a move would not entirely derail what the states have done, given that the safe harbors often also cite the Investment Advisers Act or the Department of Labor fiduciary standards, the elimination of Reg BI could cause ambiguity in the various state-based conflict of interest rules.

IRS Raises HSA Limits for 2023

With the latest update of the U.S. Consumer Price Index showing a spike in the inflation rate to 8.5%—the largest 12-month increase since 1981—the new IRS limits on how much employees may contribute to their health savings account next year represents a larger hike than seen for a while.

For calendar year 2023, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan is $3,850, up $200 from this year’s limit. The annual limitation on deductions for an individual with family coverage under an HDHP is $7,750, an increase of $450 from this year’s limit. The limit for individuals was only increased by $50 going into 2022 from 2021, and by $100 for families.

The IRS defines an HDHP for calendar year 2023 as a health plan with an annual deductible that is not less than $1,500 for self-only coverage or $3,000 for family coverage, and for which annual out-of-pocket expenses—i.e., deductibles, co-payments and other amounts, but not premiums—do not exceed $7,500 for self-only coverage or $15,000 for family coverage.

IRS Provides Sample Wording for 403(b) Plan Provisions

The IRS has published a Listing of Required Modifications and Information Package for 403(b) preapproved plans. The information package contains samples of plan provisions that satisfy certain requirements of Internal Revenue Code Section 403(b) and related regulations. The IRS says it has prepared the package to assist providers that are drafting 403(b) preapproved plans and to accelerate the agency’s review of them.

The information package has been updated to reflect the 2022 Cumulative List of Changes issued by the IRS in January.

Although the package is intended to assist 403(b) preapproved plan providers in drafting plan documents, the IRS says insurance companies and custodians may also look to the language of the sample provisions when drafting terms of annuity contracts and custodial accounts that are required by IRC Section 403(b). The agency also notes that a 403(b) preapproved plan may use either a single plan document format or a basic plan document with an adoption agreement, and the sample provisions included in the package may generally be used with either format. However, it says, a plan design using a single document format will need to make appropriate adjustments.

John Hancock Defeats ERISA Tax Credit Lawsuit

Although it had allowed class certification in the case, a federal court in Florida has ruled in favor of the defense in a lawsuit filed against John Hancock Life Insurance Co. The lengthy order, which quotes both Albert Camus and Jean-Paul Sartre for rhetorical effect, declares that the plaintiffs’ claims are “inconsistent with the choices they made about their [Employee Retirement Income Security Act] plan and the party with whom they contracted to provide ERISA-related services.”

At issue was the retention by JHLIC of certain foreign tax rebates generated by group variable annuity contracts that the lead plaintiffs, representing the interests of a law firm’s 401(k) plan, had signed. The order concludes unequivocally that there was nothing disloyal about the firm “using, for itself, the foreign tax credits which only it, as the taxpayer, could use.”