Legislative and Judicial Actions
Art by Klaas Verplancke
Guidance on Audit Independence Rules
The Department of Labor has issued new guidance for retirement plan fiduciaries. Interpretive Bulletin 2022-01 addresses rules about auditor independence that apply to retirement plans governed by the Employee Retirement Income Security Act. As in its original, 1975, guidance, the DOL states that ERISA plans need to retain an “independent qualified public accountant,” on behalf of participants, to annually examine the plan’s financial statements in accordance with generally accepted auditing standards and to opine as to the statements’ and attendant schedules’ accuracy and adherence to accounting standards.
The new bulletin says the DOL has periodically been asked to clarify and update the auditor guidelines in order to adjust to changes in the accounting industry and address differences that have developed as other regulatory authorities change their auditor independence requirements.
Among the main revisions, an accountant or firm is now not disqualified from accepting a new audit engagement if that party or any related party—including, for example, shareholder employees or immediate family members—holds publicly traded securities of a plan sponsor during the period covered by the financial statements as long as all parties dispose of any holdings before the accountant signs initial paperwork or the actual work begins, whichever is first.
The DOL says this exception gives accountants a divestiture window, which opens when they and the new client reach an oral agreement or understanding that the accountants will perform the plan audit.
Other updates include a new definition of “office” for the purpose of determining who is a “member” of a given accounting firm and when an individual may be deemed to be “located in an office” of the firm participating in a significant portion of the audit.
Other updates include a new definition of “office” for the purpose of determining who is a “member” of a given accounting firm ….
The IRS Extends Some Plan Amendment Deadlines
The IRS has issued Notice 2022-45, extending the deadlines for amending eligible retirement plans, including individual retirement accounts and annuity contracts, to reflect certain provisions of the Coronavirus Aid, Relief and Economic Security Act or the Taxpayer Certainty and Disaster Tax Relief Act.
The new deadline for amending qualified nongovernmental retirement or 403(b) plans, including IRAs, for CARES Act Section 2202 and for Tax Relief Act Section 302 is December 31, 2025. These amendments allow qualified individuals to receive favorable tax treatment for having taken a coronavirus-related distribution or a qualified disaster distribution, respectively, from an eligible retirement plan.
The plan amendment deadline for CARES Act and Tax Relief Act provisions for a qualified governmental plan is 90 days after the close of the third regular session, counting from December 31, 2023, of the legislative body with the authority to amend the plan.
In general, 403(b) plans maintained by a public school follow this same formula. For 403(b) plans not maintained by a public school, the deadline for amendment is December 31, 2025.
Governmental plans under Internal Revenue Code Section 457(b) must comply by the later of two dates: the date arrived at by applying the same formula as that for qualified 403(b) plans or the first day of the first plan year starting no more than 180 days after the date the secretary of labor notifies the plan that it was administered in a way inconsistent with Section 457(b).
The deadline to amend the trust governing an IRA or the contract issued by an insurance company with respect to an individual retirement annuity is December 31, 2025.
Maryland Opens a State-Run Retirement Program
Maryland has officially opened its state-run retirement program, announced last year, to provide for employees of small businesses without an employer-sponsored retirement plan or emergency savings program.
The state found that nearly 1 million employees work full-time without access to either type of savings program at their job. Under the new Maryland law, established businesses that use an automatic payroll system must either offer a retirement plan or enroll their employees in the MarylandSaves program.
Businesses that sign up their workers before December 1 will be exempted from paying the state’s $300 annual report-filing fee for 2023, according to a press release from MarylandSaves. Employers will have no payment obligations or federal reporting requirements; additionally, the service will be provided to the employer at no cost.
The program will handle most of the administrative duties. Employers must register their business, upload payroll and employee information into the system, and then keep staff lists up to date and submit employees’ savings contributions.
The program is being administered by a team of providers including Vestwell and BNY Mellon, with investment options managed by BlackRock, Lincoln Financial Group, State Street Global Advisors and T. Rowe Price, the state announced.
Workers may start either a personal WorkLife savings account or a Roth individual retirement account funded automatically from payroll deductions.They may opt out at any time.
Judge Finds for Goldman Sachs in ERISA Suit
A district court judge has ruled for Goldman Sachs and its retirement committee in a summary judgment, which holds that they had not breached their fiduciary duty under the Employee Retirement Income Security Act to employees invested in the firm’s defined contribution retirement plan.
Leonid Falberg, an employee of Goldman Sachs from 1999 through 2008, filed a class action lawsuit in October 2019 alleging that the firm had breached its duties of prudence and loyalty by maintaining five specific proprietary mutual funds among the choices on its retirement plan investment menu. Falberg alleged that the funds underperformed and charged higher fees than reasonable alternatives and that his employer had continued to offer them anyway to benefit itself.
Falberg further alleged a conflict of interest. The funds had begun to underperform in 2016, and, he maintained, the plan committee took an unreasonable amount of time to remove them from the lineup, doing so only after increasing ERISA litigation in the industry at large signaled that the plan might be at risk. The alleged conflict of interest and the mismanagement, Falberg claimed, were disloyal and imprudent, and therefore constituted a fiduciary breach under ERISA.
In July 2020, District Judge Edgardo Ramos of the U.S. District Court for the Southern District of New York, denied Goldman Sachs’ motion to dismiss. The firm subsequently moved for summary judgment, this February. Ramos approved this motion and ruled in Goldman Sachs’ favor, September 14.
According to the ruling, at a quarterly retirement committee meeting in September 2016, after the five challenged funds had begun to underperform, the committee asked its investment adviser, Rocaton, to explore alternatives. Goldman Sachs removed four of the funds that December and the last in June 2017. Additionally, two other proprietary funds, not challenged by the suit, were removed.
The ruling notes that Goldman Sachs, among plan investments, also offered nonproprietary funds, which underperformed its own. The ruling further points out that a conflict of interest is not a “per se breach,” and, as there was no evidence that Goldman Sachs privileged its funds over others, the conflict did not represent a breach to its duty of loyalty.
Falberg also had alleged that the Goldman Sachs plan does not employ an investment policy statement and that committee meeting minutes made only general mention of the investments.
Goldman Sachs countered that ERISA does not require plans to have an IPS and that having one is merely a best practice. The absence of an IPS does not necessarily mean that a firm is not monitoring investment options. Secondly, minutes are not a transcript of meetings and therefore not an indication that Goldman Sachs paid little attention to the funds. Detailed minutes are likewise not required by ERISA, and thus a lack of them does not constitute a breach.
The judge sided with Goldman Sachs on both arguments and noted that an expert witness called by Falberg had conceded that an IPS is not required by ERISA. The judge found that Goldman Sachs did not breach any fiduciary duty and closed the case.
… minutes are not a transcript of meetings and therefore not an indication that Goldman Sachs paid little attention to the funds. Detailed minutes are likewise not required by ERISA, and thus a lack of them does not constitute a breach.
3rd Circuit Backs J&J in Stock-Drop Appeal
The 3rd U.S. Circuit Court of Appeals has issued a new ruling in an Employee Retirement Income Security Act stock-drop lawsuit targeting Johnson & Johnson, thereby affirming the dismissal of the lawsuit as ordered by a district court in May 2020.
J&J offers an employee stock ownership plan as an investment option within its retirement savings program for employees. The ESOP invests solely in J&J stock, which declined in price following news reports of accusations that J&J had concealed that its baby powder was contaminated with asbestos. J&J has denied the allegation and any attempt at a cover-up, but the company has been embroiled in various lawsuits and investigations into the matter.
The plaintiffs, who are J&J employees who participated in the ESOP, alleged that the plan’s administrators, senior officers of J&J, violated their fiduciary duty of prudence by failing to protect the ESOP’s beneficiaries from a stock-price drop. According to the plaintiffs, those fiduciaries, being “corporate-insider fiduciaries,” should have seen the price drop coming, due to the baby powder controversy.
The U.S. District Court for the District of New Jersey granted J&J’s motion to dismiss the litigation, based on key precedent established in the Supreme Court decision in Fifth Third Bancorp v. Dudenhoeffer.
The new appellate ruling agrees, noting that, in Dudenhoeffer, the Supreme Court wrote, to bring such a claim, the plaintiff must plausibly allege “an alternative action that the defendant could have taken that would have been consistent with the securities laws,” and, further, “that a prudent fiduciary in the same circumstances would not have viewed [the proposed alternative action] as more likely to harm the fund than to help it.”
In this case, the plaintiffs proposed that the defendants could have used their corporate powers to make public disclosures that would have corrected J&J’s artificially high stock price earlier rather than later. Second, they proposed that the fiduciaries could have stopped investing in J&J stock and held all ESOP contributions as cash.
“The District Court rejected those alternative actions as failing the Dudenhoeffer test, and we agree,” the appellate ruling states. “A reasonable fiduciary in the defendants’ circumstances could readily view corrective disclosures or cash holdings as being likely to do more harm than good to the ESOP, particularly given the uncertainty about J&J’s future liabilities and the future movement of its stock price. We will therefore affirm the dismissal of the plaintiffs’ complaint.”
In explaining its decision, the appeals court pointed out that, under Dudenhoeffer, a stock-drop plaintiff must do more than allege a general economic theory for why earlier disclosure would have been preferable.
More Time to Comment on the QPAM Exemption Amendment
The Employee Benefits Security Administration of the Department of Labor announced it will hold an online public hearing on its proposed amendment to its Class Prohibited Transaction Exemption 84-14—aka qualified professional asset manager exemption, or QPAM.
EBSA is also extending the public comment period for the proposed amendment through October 11; a supplemental comment period will follow the hearing, which starts November 17. The DOL and EBSA received a letter from several interested persons requesting this extension.
As summarized by EBSA, the QPAM exemption amendment would provide “important protections” for plans and individual retirement account owners by clarifying that the exemption’s ineligibility provision applies to foreign convictions, including additional types of serious misconduct in the ineligibility provision. The amendment also provides for a one-year period for plans and individual retirement account owners to conduct an “orderly wind-down” if they chose to terminate their relationship with a newly ineligible QPAM. Further, the amendment updates the asset management and equity thresholds in the definition of “qualified professional asset manager.”
Carol McClarnon, a partner on the tax group of Eversheds Sutherland, called it “unexpected and worrying.” She said, while the stated objectives of the proposal appear to be sensible, “the actual conditions being proposed to attain these objectives reveal that the proposal would add significant costs and liability exposure to managers, perhaps even limiting the QPAM exemption as a viable solution.”
Puerto Rican Union Pension Plan Receives PBGC Relief
The latest plan to receive relief from the Pension Benefit Guaranty Corporation is the Gastronomical Workers Union Local 610 and Metropolitan Hotel Association Pension Fund. Based in San Juan, Puerto Rico, the pension covers over 2,600 participants in the hospitality industry. When the GWU Local 610 Plan became insolvent, a year ago June, the PBGC started providing financial assistance to it. In all, the plan will receive $28.3 million in aid, including interest to the expected date of payment to the plan.
7th Circuit Rules in Boeing MAX Case
The 7th U.S. Circuit Court of Appeals in Chicago, August 1, upheld a lower court’s dismissal of a case brought against Boeing in 2019 over the drop in Boeing’s stock price. The appeals court found that the Boeing defendants were not fiduciaries under the Employee Retirement Income Security Act, because an independent firm managed the company stock fund in the Boeing Co. Voluntary Investment Plan. The independent fiduciary, Newport Trust Co., had managed the employee stock ownership plan since 2007 and was not the subject of litigation.
“This decision has particular importance to plan sponsors and fiduciaries that have employer stock as an investment,” says Allison Itami, partner and co-chair of the plan sponsor group at Groom Law Group.
“It definitely supports the decision to use an independent fiduciary when there might be conflicts of interest about inside information.”
The court wrote that Boeing had clearly delegated to Newport decisions about the ESOP—including whether to allow the plan and employees to continue to hold employer stock—and whether to let employees keep making new investments in it.
In making those decisions, the court ruled, Newport was not a Boeing insider and not privy to inside information related to the two major crashes of Boeing 737 MAX series airplanes. “[Newport] was making decisions like any outside investor,” the judges wrote.
The plaintiffs had sued Boeing, its investment committee and some executives, arguing that Boeing’s leadership had known about the potential issues with the airplanes since 2010 and should have foreseen and addressed how those crashes would have led to the drop in Boeing’s stock price.
The plaintiffs argued that the continued provision of employer stock during the period represented an ongoing fiduciary breach since the defendants should have acted to protect plan participants’ balances.
Boeing’s share price fell by over $65 a share—i.e., from $442.54 to $375.21—over four days when the company’s planes were grounded in 2019.
The judges in the most-recent ruling wrote that, by delegating investment decisions in the ESOP to an independent fiduciary, “neither Boeing, nor the other defendants, acted in an ERISA fiduciary capacity in connection with the continued investments.” The judges said they recognized that Boeing delegated its fiduciary duty to eliminate claims about company insiders’ ind of interest.
“We see no legal barrier to such a delegation, and decades of ESOP stock-drop litigation have provided powerful reasons for employers and fiduciaries for ESOPs to take this step,” they wrote.
SEC Charges Firms With Recordkeeping Violations
The Securities and Exchange Commission announced, September 27, that it has charged 15 broker/dealers and one affiliated investment adviser with “widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications.”
According to the agency’s press release, a staff investigation uncovered pervasive off-channel communications. The firms cooperated with the investigation by gathering communications from the personal devices of a sample of the firms’ personnel, including senior and junior investment bankers and debt and equity traders.
From January 2018 through September 2021, the firms’ employees routinely communicated about business matters via text messaging on their personal devices and deleted the substantial majority of these off-channel communications, in violation of the federal securities laws, the release states.
It also says the firms, by eliminating these required records, likely deprived the SEC of off-channel communications in various agency investigations. The failings occurred across all of the 16 firms and involved supervisors and senior executives.
The firms admitted to and acknowledged the facts set forth in the SEC orders, and agreed to pay the penalties, over $1.1 billion in total; they have begun implementing pertinent improvements to their compliance policies and procedures, the release states.
Further, each firm was ordered to cease and desist from future violations of the relevant recordkeeping provisions and were censured, the release states. The firms also agreed to have compliance consultants conduct comprehensive reviews of their policies and procedures for retaining electronic communications found on personal devices and for addressing noncompliance.
Separately, the Commodity Futures Trading Commission has also announced settlements with the firms for related conduct.