Industry & Regulatory NewsClass Certification in Lawsuit Against TIAA Overturned
On December 1, 2022, the U.S. Court of Appeals for the Second Circuit has overturned a lower court decision to certify a class action complaint against Teachers
Insurance and Annuity Association of America (TIAA) asserting that it engaged in prohibited transactions and facilitated fiduciary breaches by servicing collateralized plan loans to participants for approximately 8,000 qualified retirement plans. The plaintiffs argue that TIAA improperly receives certain earnings on the investment of the collateral assets.
The lower court had previously certified participants who received approximately 500,000 loans. The Second Circuit ruled that the lower court had not properly evaluated whether the transactions were too individualized to be combined into a class action case. The case was remanded to the lower court for a ruling on this issue.
Industry observers are closely watching this case as it presents a new approach to retirement plan litigation.
Industry & Regulatory NewsBill Proposed to Amend Family Attribution Rules
Senator Mark Kelly (D-AZ) and co-sponsor Senator Bill Cassidy (R-LA) have introduced S. 5125 the Family Attribution Modernization Act. The proposal would modify controlled group rules under IRC 414(b) pertaining to family attribution as follows:
- Community property laws shall be disregarded for purposes of determining ownership
- Stock owned by minor children of the spouse under IRC 1563(e)(6) is not attributed when the exception to spousal attribution also applies under IRC 1563(e)(5). This generally occurs if the spouse – 1) does not directly own stock, 2) is not a director or employee, 3) no more than 50% of company earnings are derived from royalties, rent, dividends, etc., and 4) spousal rights to dispose of stock are not restricted or run in favor of minor children
- Stock owned in different corporations that is attributed to a child under section 1563(e)(6)(A) from each parent, and is not attributed to such parents as spouses under section 1563(e)(5), shall not by itself result in the corporations being a controlled group
To the extent these proposed changes result in a change in controlled group status, the transition rules under IRC 410(b)(6)(C) would apply. The disregarding of community property laws would apply under IRC 414(m) for affiliated service groups as well.
Industry & Regulatory NewsHardship Distributions May Be Permitted for South Carolina Hurricane Ian
The Federal Emergency Management Agency (FEMA) has issued a disaster declaration for Hurricane Ian in South Carolina, beginning September 25, 2022, and ending October 4, 2022.
Employers with qualified retirement plans may allow participants to take hardship distributions if
- they have incurred expenses and losses because of a FEMA-declared disaster, and
- their principal residence or place of employment at the time of the disaster is located in an area designated by FEMA as eligible for individual disaster assistance.
If the employer permits hardship distributions for expenses and losses related to a federally declared disaster, participants can check fema.gov/locations to determine if they are located in a disaster area designated for individual assistance.
The IRS may also issue relief related to this disaster for certain tax-related deadlines. Additional information can be found at irs.gov/newsroom/tax-relief-in-disaster-situations.
Industry & Regulatory NewsDOL Releases Updated VFCP
The Department of Labor (DOL) has released a proposed amendment to its Voluntary Fiduciary Protection Program (VFCP), along with a proposed amendment to Prohibited Transaction Exemption (PTE) 2002-51, to permit certain transactions identified in the VFCP transaction exemption.
The VFCP allows plan officials to avoid potential civil enforcement actions and civil penalties under ERISA if eligible transactions are voluntarily corrected in a manner that meets the program’s requirements. Correction of these transactions under the current Voluntary Fiduciary Correction Program requires plan officials to submit an application to EBSA for review and approval. According to a DOL press release, EBSA’s proposed changes will do the following:
- Clarify some existing transactions that are eligible for correction under the program.
- Expand the scope of other transactions currently eligible for correction and simplify administrative or procedural requirements under the program.
- Amend the associated prohibited transaction class exemption, known as PTE 2002-51.
Most notable among the proposed changes is the addition of a self-correction component. This feature will enable employers and other plan officials to notify EBSA electronically that they have self-corrected certain failures to send participant contributions and loan repayments to pension plans on time. The proposed self-correction component can be used only if the following conditions are met:
- Participant contributions or loan repayments to the plan must be remitted no more than 180 calendar days from the date of withholding or receipt.
- Lost earnings must not exceed $1,000 calculated from date of withholding or receipt.
- The plan or self-corrector must not be under investigation as defined in the program.
- Self-correctors must use the program’s online calculator to calculate lost earnings and an online web tool to complete and file the self-correction component notice. Self-correctors must also complete and retain the self-correction retention record checklist.
Comments on the proposed changes can be made within 60 days of publication in the Federal Register. The proposals will be reviewed, and additional details provided.
Industry & Regulatory NewsPBGC Extends Comment Period for Withdrawal Liability Proposed Rule
The Pension Benefit Guaranty Corporation (PBGC) is extending the comment period for a proposed rule that would provide interest rate assumptions that may be used by a plan actuary in determining a withdrawing employer’s liability under a multiemployer plan. PBGC published the proposed rule in the Federal Register on October 14, 2022, with a comment period that was scheduled to end on November 14, 2022. After receiving a request to extend the comment period to provide a total of at least 60 days from October 14, 2022, PBGC is extending the comment period through December 13, 2022. Release of the proposed rule was previously announced.
Industry & Regulatory NewsPBGC Proposes Modifications to Form 5500 Schedule R and SB Reporting
The Pension Benefit Guarantee Corporation (PBGC) has submitted to the Office of Management and Budget an information collection request and extension related to Form 5500 series annual reporting requirements. Specifically, the request proposes modifications to Schedule R, Retirement Plan Information, and Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information.
Industry & Regulatory NewsSEC Re-Proposes Mutual Fund “Hard Close”
The Securities and Exchange Commission (SEC) has released a proposed rule titled “Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting.”
Industry & Regulatory NewsSEC Adopts Rules to Enhance Proxy Voting Disclosures
The Securities and Exchange Commission (SEC) has finalized rules to amend Form N-PX, Annual Report Of Proxy Voting Record of Registered Management Investment Company, to enhance the information mutual funds, exchange-traded funds (ETFs), and certain other funds currently report annually about their proxy votes and to make that information easier to analyze. The rule and form amendments will also require institutional investment managers subject to the Securities Exchange Act of 1934 to report annually on Form N-PX how it voted proxies relating to executive compensation matters.
The rule is effective July 1, 2024.
Industry & Regulatory NewsAuto-Portability Legislation Introduced in House
Representatives Brad Schneider (D-IL) and Ron Estes (R-KS) have introduced HR 9252, Advancing Auto-Portability Act, to reduce retirement leakage by allowing automatic rollovers of certain accounts to follow workers to another employer plan.
Industry & Regulatory NewsSEC Proposes Requirements for Investment Advisor Outsourcing
The Securities and Exchange Commission (SEC) has released a proposed rule to prohibit investment advisers from outsourcing certain services or functions without first meeting due diligence and ongoing monitoring requirements related to the “covered function”. A covered function is a function or service that is
- necessary to provide advisory services in compliance with federal securities laws, and
- if not performed or performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services.
The SEC is providing examples of potential covered function categories an adviser may wish to consider in the amendments they are proposing to Form ADV, Section 7.C of Schedule D. Covered functions listed would include: Adviser/Subadviser; Client Services; Cybersecurity; Investment Guideline/Restriction Compliance; Investment Risk; Portfolio Management; Portfolio Accounting; Pricing; Reconciliation; Regulatory Compliance; Trading Desk; Trade Communication and Allocation; and Valuation.
The proposal would also require advisers to obtain reasonable assurances that a third party recordkeeper will meet four standards which address the third party’s ability to
- adopt and implement internal processes for making and/or keeping records that meet recordkeeping rule requirements applicable to the books and records being maintained on behalf of the adviser;
- make and/or keep records that meet all of the requirements of the recordkeeping rule applicable to the adviser;
- provide access to electronic records; and
- ensure the continued availability of records if the third party’s relationship with the adviser or its operations cease.
Comments should be received on or before 30 days after publication in the Federal Register or December 27, 2022, whichever is later.