Seth Gaudreau | The Wagner Law Group The Wagner Law Group 2026-06-08T20:22:13Z https://www.wagnerlawgroup.com/feed/atom/ WordPress /wp-content/uploads/sites/1101401/2021/06/cropped-wagner-fav-icon-2-32x32.png by The Wagner Law Group <![CDATA[Retaining an Independent Fiduciary to Address Prohibited Transactions or Enable Plan Fiduciaries to Appropriately Allocate Risk]]> https://www.wagnerlawgroup.com/?p=68012 2026-03-31T13:34:32Z 2025-08-30T13:22:58Z Retaining an Independent Fiduciary to Address Prohibited Transactions or Enable Plan Fiduciaries to Appropriately Allocate Risk - Marcia Wagner, Stephen Wilkes and Seth Gaudreau, 401(k) Advisor, July-August, 2025]]> by The Wagner Law Group <![CDATA[The Wagner Law Group’s Washington, D.C. Office Benefits Bulletin Newsletter]]> https://www.wagnerlawgroup.com/?p=67311 2025-08-14T19:08:59Z 2025-08-14T19:08:59Z
  • employee benefits provisions in the One Big Beautiful Bill
  • regulatory trends for our investment advisor/broker dealer clients; and
  • financial challenges facing public pension plans
    • ______________________________ Employee Benefits Provisions in One Big Beautiful Bill By Eric Keller Last month, President Trump signed the One Big Beautiful Bill (“OBBB”) into law.  This article briefly summarizes OBBB’s key employee benefits provisions, which are effective for taxable years beginning in 2026 unless otherwise noted. If you have any questions or would like more information regarding any of these provisions, please contact Eric Keller or the WLG attorney with whom you regularly work. Executive Compensation Section 4960 of the Internal Revenue Code (“Code”), which subjects certain tax-exempt organizations to excise taxes for remuneration in excess of $1 million (or certain excess parachute payments), is expanded to apply to all employees or former employees of the organization, rather than certain employees. Section 162(m), which disallows the tax deduction for remuneration in excess of $1 million paid to certain employees of publicly traded companies, is amended to apply entity aggregation rules for purposes of applying the limitation and allocating the deduction. Fringe Benefits The exclusion from gross income available under Code Section 129 for Dependent Care Assistance Program (DCAP) flexible spending accounts is increased to $7,500 (or $3,750 for married individuals filing separately) from $5,000. The exclusion from gross income for educational assistance programs under Code Section 127 (currently $5,250) is indexed, and the previously temporary provision that treats certain student loan repayments as qualifying education expenses is made permanent. The exclusion from gross income for qualified bicycle commuting expenses is eliminated. The previously temporary suspension of the employer deduction for moving expenses and the exclusion for employer-provided qualifying moving expense reimbursements is made permanent. High Deductible Health Plans (HDHPs) and Health Savings Accounts (HSAs) The previously temporary COVID-era safe harbor allowing HDHP coverage of telehealth services before patients have satisfied the deductible is made permanent. Direct primary care service arrangements will not be disqualifying coverage if the primary services are provided for a fixed fee that does not exceed $150 per month for individual or $300 for more than one person (adjusted for inflation). Bronze and catastrophic plans offered in the individual market on an Affordable Care Act exchange may qualify as an HDHP. Trump Accounts OBBB creates new tax-preferred accounts for children referred to as a “Trump Account”.  The account may be established for children under age 18 with contributions of up to $5,000 per year (indexed for inflation).  Distributions are generally prohibited until the child attains age 18. Employers may contribute up to $2,500 annually (indexed for inflation) to Trump Accounts of an employee or any employee dependent if the employer has adopted a separate written plan that satisfies specific requirements. Trump Accounts are subject to numerous restrictions and are generally treated as traditional IRAs under Code Section 408. There is a pilot program whereby the US Treasury will pay a one-time credit of $1,000 to the Trump Accounts of US citizen children born after 2024 and before 2029. ______________________________ Regulatory Trends for Our Investment Advisor/Broker Dealer Clients By Stephen Wilkes and Seth Gaudreau We have seen a shift towards alignment amongst the Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority (“FINRA”), and the White House. For example, last month, the SEC withdrew a series of proposed regulatory actions published between March 2022 and November 2023. The decision reflects the SEC's current regulatory priorities, and the Commission clarified that if it chooses to revisit these areas in the future, new proposed rules will be issued. The key driver at the SEC for this shift comes largely from the White House Executive Orders which emphasize less regulatory presence. For example, we have seen presidential orders that are titled “Unleashing Prosperity Through Deregulation” and “Ensuring Accountability for All Agencies”. The new Executive Orders mandate that each federal agency repeal 10 regulations for every new regulation that it adopts. And the incremental cost of any one agency’s new regulations for fiscal year 2025 must be less than zero, “significantly” less than zero to be more accurate. Further, the federal agency must demonstrate that each regulatory action complies with a rigorous cost-benefit analysis as in effect under all guidance, including such guidance as promulgated by the Office of Management and Budget.  The bottom line is that the SEC is clearly sensitive to current market and political forces and is making a significant pivot under SEC Chair Paul Atkins. Key Areas of Withdrawn Proposals: The withdrawn proposals covered fourteen different rule proposals, including:
    • Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8 (87 FR 45052 (July 27, 2022)): Amendments to the rules governing the exclusion of shareholder proposals under Rule 14a-8 of the Securities and Exchange Act of 1934 (Exchange Act).
    • Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers (87 FR 13524 (Mar. 9, 2022)): Rules addressing the use of predictive data analytics by broker-dealers and investment advisers.
    • Safeguarding Advisory Client Assets (87 FR 36654 (June 17, 2022): Proposals to enhance the safeguarding of advisory client assets including amendments to certain provisions of the current custody rule.
    • Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies (87 FR 13524 (Mar. 9, 2022): Rules requiring investment advisers, investment companies, and other market participants to adopt cybersecurity policies and procedures.
    • Enhanced Disclosures on Environmental, Social, and Governance (“ESG”) Investment Practices (87 FR 36654 (June 17, 2022)): Enhanced disclosure requirements for ESG investment practices by investment advisers and investment companies.
    • Outsourcing by Investment Advisers (87 FR 68816 (Nov. 16, 2022)): Rules prohibiting advisers from outsourcing certain services without meeting specific requirements.
    • Position Reporting of Large Security-Based Swap Positions (87 FR 6652 (Feb. 4, 2022), 88 FR 42546 (June 30, 2023), 88 FR 41338 (June 26, 2023)): Proposals for reporting large security-based swap positions.
    • Volume-Based Exchange Transaction Pricing for NMS Stocks (88 FR 76282 (Nov. 6, 2023)): Rules prohibiting volume-based transaction pricing for National Market S stocks.
    • Regulation Best Execution (88 FR 5440 (Jan. 27, 2023)): Proposals to enhance broker-dealers’ duty of best execution.
    • Order Competition Rules (88 FR 128 (Jan. 3, 2023)): Amendments to require certain orders to be exposed to competition in qualified auctions.
    • Regulation Systems Compliance and Integrity (SCI) (88 FR 23146 (Apr. 14, 2023)): Expansion of the definition of “SCI entity” and other amendments to Regulation Systems Compliance and Integrity.
    • Cybersecurity For Broker-Dealers, Clearing Agencies, Major Security-Based Swap Participants, The Municipal Securities Rulemaking Board, National Securities Associations, National Securities Exchanges, Security-Based Swap Data Repositories, Security-Based Swap Dealers, And Transfer Agents (88 FR 20212 (Apr. 5, 2023)): Rules requiring various market participants to address cybersecurity risks and report incidents.
    • Amendments Regarding the Definition of “Exchange” and Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, National Market System (NMS) Stocks, and Other Securities (87 FR 15496 (Mar. 18, 2022)): Amendments to the definition of “exchange” and regulations for alternative trading systems.
    • Amendments to the National Market System Plan Governing the Consolidated Audit Trail To Enhance Data Security (85 FR 65990 (Oct. 16, 2020)): Proposed amendments to enhance data security in the Consolidated Audit Trail.
    ERISA considerations for Plan Advisers Although the SEC’s recent actions do not require immediate action, the withdrawn proposals included rules that might have influenced fiduciary decision-making, such as those related to cybersecurity risks, outsourcing and ESG considerations, climate, cryptocurrency, and artificial intelligence. Fiduciaries and service providers must pay close attention to the SEC’s current regulatory agenda for future updates and rule proposals (in addition of course to DOL regulatory activity) and remain vigilant in upholding their statutory duties to protect the interests of plan participants and beneficiaries. ______________________________ Public Pensions Continue to Face Financial Challenges  By Israel Goldowitz Pension plans of state and local governments cover more than 25 million members. They have assets of more than $5 trillion and pay nearly $400 billion in benefits every year. These plans therefore have a major effect on capital markets and retiree spending as well as government finance and budgeting. With changes in the way governments deliver services, they also increasingly cover mixed public-private entities. Though new models have emerged, governmental plans are still mainly defined benefit plans. A defined benefit plan promises a benefit for life based on service and compensation, such as $30,000 per year with thirty years of service and final pay of $100,000 (or one percent of final pay per year or service). After the Great Recession, many government plans experienced significant financial strain. That led to less generous benefit promises for new hires and attempts to reduce benefits for current employees. An example is Chicago’s unsuccessful attempt to cut cost of living adjustments, intended to make the plan more sustainable for a greater “net benefit.” The Illinois Supreme Court held that taxpayers stood behind the pensions under the state Constitution, making any quid pro quo illusory. Other courts have disagreed, treating a more secure promise as a reasonable exchange for a less generous benefit. The outcome may depend on the scope of the state’s constitutional or statutory guarantees to public employees. The issue can be brought to a head in a Chapter 9 bankruptcy if a city or other political subdivision is authorized to file bankruptcy under state law. (States themselves cannot file bankruptcy, and only 27 states permit political subdivisions to do so). Examples include the City of Detroit, which reduced pension payments and eliminated cost of living adjustments as part of a grand bargain with lenders and other stakeholders, and the City of Stockton, which tried to withdraw from CalPERS and eventually cut pay and retiree medical benefits as an alternative. Well-funded plans can also present issues, as lawmakers look to surplus assets to cover budget gaps. Retirees, on the other hand, see a surplus as a source of security and possible gainsharing in the form of increased benefits or one-time payments. We were recently involved in such a case, where the legislative session expired with no clear resolution. Rules for funding public pension vary. In some states, annual contributions must be actuarially based. Required contributions have been rising, and in recent years they have generally been paid in full. But with increasing retiree to active member ratios and other strains, funded percentages have remained below 80 percent for the last decade and a half. ERISA and the Internal Revenue Code’s requirements generally do not apply to public plans. But many of the same structural changes are possible. For instance, plans can be closed to new hires and a defined contribution plan substituted; employee contributions can be imposed or increased; plans can be merged or can spin off assets and liabilities; and multiple-employer plans can charge an exit fee based on conservative actuarial assumptions. Even strong funding rules can be subject to interpretation or to override by balanced budget laws or limits on taxation. And even small changes (such as the interest rate) can have a large impact on contributions and the funded ratio. __________________________________________ The Wagner Law Group is well versed in these issues. We have advised clients, published articles, and spoken at pension and municipal finance conferences on these issues. Our Washington office is expert in funding rules and actuarial issues concerning defined benefit plans. Please contact us if we may be assistance in these areas.]]>         by The Wagner Law Group <![CDATA[The Wagner Law Group’s Washington, D.C. Office Benefits Bulletin Newsletter]]> https://www.wagnerlawgroup.com/?p=67384 2025-10-06T19:16:42Z 2025-04-30T19:12:34Z
  • Federal District Court Declares Current Regulatory Framework for Assessing Excise Taxes Under the Affordable Care Act’s Employer Mandate is Void and Unenforceable – by Eric Keller and Roberta Casper Watson
    • The practical effect of the court’s potentially earthshaking declaration would seem to be that, unless such declaration is overturned on appeal, employers have no liability to pay excise taxes under Section 4980H of the Internal Revenue Code and may file a refund claim for such taxes previously paid.  For more information, click here.
    • Popular Benefits-Related Tax Provisions May be Targeted to Raise Revenue for Federal Tax Cuts – by Eric Keller
    Some of the largest tax expenditures found in the Internal Revenue Code provide tax-favored treatment for a variety of popular employee benefit programs, such as the exclusion from income for employer-provided health insurance as well as tax-favored retirement plans and accounts and equity-based compensation arrangements.  One or more of these or other popular benefits-related tax provisions may be targeted to help pay for the expected extension of the Tax Cuts and Jobs Act of 2017 as well as the possible implementation of other tax cuts that have been championed by President Trump, such as excluding tips and Social Security payments from income taxes.  For more information, click here. On April 30, 2025, the American Bar Association (“ABA”) posted a summary of the May 1, 2024, meeting between representatives of the Pension Benefit Guaranty Corporation (“PBGC”) and representatives of the ABA’s Joint Committee on Employee Benefits (“JCEB”). For a summary of the key highlights of meeting, click here.
    • Retaining an Independent Fiduciary to Address Prohibited Transactions or Enable Plan Fiduciaries to Appropriately Allocate Risk – by Stephen Wilkes and Seth Gaudreau
    The retention of an independent fiduciary plays a critical role not only to resolve a conflict in a prohibited transaction sense, but to provide an appropriate method of effective risk allocation to Plan fiduciaries who must otherwise discharge investment and other transactional duties (often quite complex in nature) in a prudent fashion, e.g., PBM service arrangements. For more information, click here. 
    • Executive Compensation in Volatile Times: Advice for Privately-held Companies and Their Executives – by Mark Poerio
    From tariffs to cash flows, small business owners may feel that mid-2025 warrants attention to how key employees are compensated and retained. For ideas on how to attract and retain key executives in volatile times, for more information, please click here. With the economy and the securities markets roiled by trade wars, many businesses are no doubt considering the possibility of a recession. We might also expect a major increase in bankruptcy filings. That may require consideration of how ERISA and the Bankruptcy Code interact. Judge Craig Goldblatt of the Delaware Bankruptcy Court has been conducting a master class in the Yellow Corporation Chapter 11 case. For a summary of the key rulings he has made to date, please click here. WLG’s Washington Office Welcomes Three Preeminent Attorneys The Wagner Law Group has expanded its Washington DC office with the arrival of three preeminent employee benefits attorneys: Joni Andrioff and Eric Keller who joined in February and Camille Castro who joined in April. Ms. Andrioff is recognized as a leader in the area of employee benefits and executive compensation law with over 35 years of working in partnership with employers, service providers, and ERISA fiduciaries. Mr. Keller has over 25 years of experiencing counseling employers, fiduciaries and service providers on the full spectrum of executive compensation and employee benefits law.  Ms. Castro brings over a decade of experience related to ERISA and pension plans, most recently as the PBGC’s Office of the Advocate. Ms. Andrioff and Mr. Keller are fellows of the prestigious American College of Employee Benefits Council, and Ms. Andrioff is the immediate past president of the ACEBC.  Our Washington Office has seven attorneys who are ACEBC fellows, two of whom are former ACEBC presidents.  The Wagner Law Group has 13 attorneys who are ACEBC fellows, more than any other law firm.]]>         by The Wagner Law Group <![CDATA[Retaining an Independent Fiduciary to Address Prohibited Transactions or Enable Plan Fiduciaries to Appropriately Allocate Risk]]> https://www.wagnerlawgroup.com/?p=66422 2025-04-30T17:59:56Z 2025-04-30T16:00:52Z By Stephen Wilkes and Seth Gaudreau The retention of an independent fiduciary plays a critical role not only to resolve a conflict in a prohibited transaction sense, but to provide an appropriate method of effective risk allocation to plan fiduciaries who must otherwise discharge investment and other transactional duties (often quite complex in nature) in a prudent fashion.  Under ERISA and the benefit plans it governs, certain financial transactions and activities require the appointment of an independent fiduciary to mitigate potential conflicts of interest or to ensure an additional level of independent oversight, enhancing the protections for plan participants and beneficiaries. While not explicitly defined in ERISA, the use of an “independent fiduciary” goes back many years to the days when the Department of Labor, in concert with the court, would require the appointment of a plan trustee or an otherwise independent fiduciary to take over a plan’s affairs as  part of a settlement arrangement – it was the appointment of a referee or fiduciary steward whose sole purpose was to act in the best interest of plan participants.  The concept of fiduciary independence is also outlined in various statutory and individual prohibited transaction exemptions.  The prohibited transaction exemption procedures, as amended in January 2024 (“PT Procedures”), currently provide a number of elements to the definition of an independent fiduciary (as well as an independent appraiser or auditor) for purposes of the prohibited transaction exemption application process, which underscore how the Department of Labor (“DOL”) currently defines “independent fiduciary” in its broadest sense. The Wagner Law Group, with experience serving as legal counsel or as an independent fiduciary in many situations, understands the critical role played by independent fiduciaries, their importance in safeguarding ERISA plans, and how they are used for ensuring compliance with prohibited transaction exemptions and otherwise to mitigate potential conflicts or provide appropriate risk management on behalf of plan fiduciaries. ERISA requires the appointment of an independent fiduciary in certain transactions involving plans governed by ERISA.  The qualifications and independence criteria for fiduciaries, based on the PT Procedures, include that independent fiduciaries must possess the necessary training, experience, and facilities to act on behalf of the plan while remaining free from relationships that could compromise their judgment. The DOL evaluates independence based on factors such as revenue sources and relationships with parties involved in the transaction. Additionally, the PT Procedures (which are quite specific and detailed) outline the information fiduciaries must provide when applying for individual prohibited transaction exemptions, including their qualifications, relationships with parties in interest, fiduciary insurance, and an acknowledgment of their fiduciary duties under ERISA. A specific statutory prohibited transaction exemption where independent fiduciaries are required involves transactions executed through electronic communication networks. The proper settlement and allocation of settlement proceeds is an example of where a prohibited transaction class exemption requires the use of an independent fiduciary. There have been many transactions or exemption applications where an independent fiduciary addresses or could address potential conflicts of interest (e.g., where companies offer employee ownership through company stock in their defined contribution plans, including 401(k) plans and employee stock ownership plans), as well as matters involving corporate insiders, tender offers, and excessive fees in health plans.  The Wagner Law Group’s most recent experiences where it has served as an independent fiduciary involved not only the traditional role of supporting an individual or class prohibited transaction exemption, but serving as the independent fiduciary on behalf of ERISA plans that are engaged in complex relationships with a pharmacy benefit manager (“PBM”). For more information about when and how an independent fiduciary may be required or otherwise serve the best interests of an ERISA plan, please contact Stephen Wilkes, Partner and Chief Legal Officer.   [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author]]]> by The Wagner Law Group <![CDATA[Department of Labor Updates Voluntary Fiduciary Correction Program]]> https://www.wagnerlawgroup.com/?p=67993 2026-03-30T20:40:16Z 2025-03-30T20:30:58Z Department of Labor Updates Voluntary Fiduciary Correction Program - Marcia Wagner, Barry L. Salkin, Seth F. Gaudreau and Stephen P. Wilkes, 401(k) Advisor, March, 2025]]> by The Wagner Law Group <![CDATA[DOL Updates Voluntary Fiduciary Correction Program]]> https://www.wagnerlawgroup.com/?p=65769 2025-01-24T13:58:08Z 2025-01-23T13:47:07Z
  • The DOL reserves the right to conduct an investigation into the reported transaction.
  • The lost earnings must be $1,000 or less.
  • No no-action letter will be issued. This may cause plans to continue to use the existing VFCP procedures.
  • The cost of correction may not be paid from plan assets, such as the plan’s forfeiture account.
  • Lost earnings must be calculated using the DOL calculator.
  • There is a 180-day deadline for delinquent contributions or loan repayments that must be remitted to the plan after withholding or receipt by the employer. This will likely present an issue for small employers who often do not realize during the plan year that this type of failure has occurred.
  • An electronically filed notice must be sent to the DOL containing the self-corrector’s name and email address; the plan name and number; the plan sponsor and its EIN; the principal amount and the amount of lost earnings; the loss date; the date paid to the plan; and the number of participants affected. In response, the DOL will provide an automatic acknowledgment.
    • The self-corrector must also prepare and collect the documents listed in a record retention checklist and provide them to the plan administrator and a plan fiduciary with knowledge of the transaction, and any plan official seeking relief must execute a penalty of perjury statement. There is no limit on the frequency with which this self-correction can be used. However, the DOL will evaluate the possible merit of adding additional requirements with respect to this issue. This new self-correction mechanism does not relieve a plan sponsor from reporting delinquent contributions on Form 5500, and filing amended returns may be necessary. No correction is available under VFCP for delinquent matching contributions. However, the DOL will not reject a late participant contribution self-correction if the delinquent matching contributions are corrected in the same manner as the late participant contributions. Finally, on the plus side of the ledger, applicants can correct delinquent participant contributions and loan repayments even if the application contains evidence of a criminal violation. This requires that the applicant certify that they did not participate in the criminal activity, the appropriate law enforcement agencies have been notified, and certain other conditions have been satisfied. The second new self-correction feature under VFCP involves certain eligible inadvertent failures related to participant loans available for self-correction under the Internal Revenue Service’s (IRS) Employee Plans Compliance Resolution System (EPCRS). (The SECURE 2.0 Act of 2022 expanded the ability of plan sponsors to self-correct “eligible inadvertent failures,” including certain plan loan failures.) A plan is eligible to use this self-correction component of VFCP, even if the plan is under investigation (as defined in VFCP), so long as the loan failure can be self-corrected under EPCRS. Four types of loan failures are covered under this self-correction component:
    • Loans whose term exceeds the maximum permitted under Code Section 72(p);
    • Loans that are defaulted due to a failure to withhold;
    • Loans for which the required spousal consent was not obtained; and
    • Loans that exceed the maximum number of loans available under the plan.
    The procedures are similar to those involved in the correction of late participant contributions and loan repayments, but there is no record retention checklist requirement. Other notable modifications made by the updated VFCP include additional correction options:
    • For prohibited loan transactions and prohibited purchase and sale transactions involving plans;
    • For sale and leaseback transactions to affiliates of the plan sponsor; and
    • Permitting service providers to submit a bulk application to address violations involving multiple plans.
    [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author]  ]]>         by The Wagner Law Group <![CDATA[FinCEN Beneficial Ownership Reporting Requirements Due by Year End for Many Organizations]]> https://www.wagnerlawgroup.com/?p=65522 2024-11-19T15:20:16Z 2024-11-18T15:12:49Z e.g., structural or financial decisions). There are exceptions for minor children (where the parent or guardian is reported as a beneficial owner); nominees; employees (excluding senior executive officers); future inheritors; and creditors. There is no maximum number of beneficial owners that an organization might need to report. If there is no one individual who directly or indirectly owns or controls 25% or more of the company, the company should report all individuals who exercise substantial control as beneficial owners. All companies required to report under the CTA, need to report at least one beneficial owner. Unless updated or corrected information needs to be provided, this is a one-time rather than an annual filling. What Needs to Be Done The CTA requires the collection of all beneficial owners' full legal names, birth dates, addresses, and unique identification numbers (i.e., passport, driver’s license number, or a unique identifier provided by federal, state, or local government). Submit the required information through FinCEN’s e-filing portal at https://boiefiling.fincen.gov/. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information (BOI) report. A reporting company created or registered during 2024 will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report. This 90-day deadline runs from the earlier of the date on which the company receives actual notice that its creation or registration is effective or the date on which a secretary of state or similar official first provides public notice of its creation or registration. A reporting company created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice of its creation or registration to file its initial BOI reports with FinCEN.  There is an extended filing deadline, for persons affected by Hurricanes Beryl, Debby, Frances, Helene, or Milton. What Entities Subject to the Requirement? The CTA reporting requirements apply only to “reporting companies” defined to include certain domestic and foreign entities. On the domestic side: corporations, limited liability companies (LLCs), business trusts in certain jurisdictions, and other entities created by filing a document with a secretary of state or similar office are subject to the requirement. On the foreign side, any non-domestic company registered to do business in the United States must file. Which Entities are Exempt? FinCEN has listed 23 exemptions to the BOI reporting requirements. Generally, entities exempt from filing beneficial ownership with FinCEN file similar information with other federal agencies, such as the Securities and Exchange Commission or the Internal Revenue Service. These exempt entities include, but are not limited to:
    • Publicly traded companies
    • Governmental authorities
    • Banks and credit unions
    • Investment companies and advisors
    • Subsidiaries of exempt entities: if a parent entity qualifies for a BOI reporting exemption, its wholly owned subsidiaries are typically exempt as well.
    • Tax-exempt entities
    • Large operating companies – companies with 20 or more full-time employees in the United States, an operating presence at a physical address within the United States, that filed federal tax or information returns for a prior year with $5 million or more in gross receipts or sales, excluding gross receipts or sales outside the United States – are exempt
    • Inactive businesses
    • Pooled investment vehicles managed by SEC-reporting entities, such as banks, credit unions, broker dealers in securities, investment companies, registered investment advisors, and venture capital fund advisers, are exempt. A pooled investment vehicle that is operated or managed by an advisor that is not registered with the SEC is not an exempt entity would not qualify the entity for the pooled investment vehicle exemption.
    The full list of exempt entities can be found at https://www.fincen.gov/boi-faqs#C_2%20a. Potential Penalties for Non-Compliance FinCEN’s present focus is on educating the public, particularly small businesses, about the new BOI reporting requirements. Nonetheless, an entity that willfully fails to file (or files late), can be fined $500 a day for each day the violation continues or a one-time fine of $10,000, and/or the individuals responsible for complying with the FinCEN requirements could face imprisonment for up to two years. Impact on IRAs and Checkbook IRAs Standard IRAs generally do not have to comply with the new filing requirements, because IRAs are not required to inform states of their existence. Self-directed IRAs with check-writing privileges through an entity established by the IRA for administrative convenience – commonly known as “checkbook IRAs” – are subject to reporting. Checkbook IRAs are often established via a special purpose LLC. This allows the owners to invest directly into alternative assets without the need for custodian approval of each transaction. That being the case, an IRA-owned LLC (i.e., a checkbook IRA) is considered a business entity and will be required to report beneficial ownership. Establishing a checkbook IRA will now introduce additional government involvement. If you prefer minimal federal interaction, this may influence your decision to set up such an arrangement. Legal Challenges Although there have been various legal challenges to the CTA and the BOI reporting requirements none of these actions are expected to prevent the BOI reporting requirements from going into effect by the January 1, 2025, deadline. Please consult with the attorney with whom you work at The Wagner Law Group if you have any questions about the need to file or need assistance with filing. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author]]]>         by The Wagner Law Group <![CDATA[The Wagner Law Group’s Washington, D.C. Office: Experience, Savvy, And Leadership]]> https://www.wagnerlawgroup.com/?p=65377 2025-07-10T14:55:05Z 2024-10-31T20:51:01Z The Wagner Law Group’s Washington, D.C. Office has continued to grow, adding Michael Schloss, EBSA’s former Director of Enforcement and before that a career ERISA litigator with the Office of the Solicitor of Labor. The Washington Office now includes three former DOL lawyers and three former PBGC lawyers, as well as financial, actuarial and benefits experts, representing more than 250 years of Inside-the-Beltway experience. Harold Ashner has consistently been named a Super Lawyer and holds a Martindale-Hubbell – Peer Review Rating of AV® Preeminent™ 5.0. The same is true of Linda Rosenzweig. Harold, Mark Poerio, Linda, and Israel (Izzy) Goldowitz are listed in Best Lawyers in America©. The Washington Office includes five Fellows in the prestigious American College of Employee Benefits Counsel, Harold Ashner, Izzy Goldowitz, Mark Poerio, Susan Rees, and Linda Rosenzweig, among WLG’s total of 10 Fellows (surpassing even the largest firms). Izzy and Susan recruited judges for the College’s 2024 Ellen A. Hennessy Moot Court and served as judges. Members of the Washington Office continued to publish on timely and important Employee Benefits and Executive Compensation issues: Harold Ashner and Izzy Goldowitz published an alert titled Highlights of the 2023 PBGC Meeting With ABA’s Joint Committee on Employee Benefits, along with minutes of the meeting. Along with Brian Donahue and John Lowell of October Three, Harold and Linda Rosenzweig published Defined Benefits Plans: Underfunded Plans in the Bloomberg Law Guide to Retirement Plan Designs. Harold published Surprise—You Just Missed a PBGC Reportable Events Deadline! in the Journal of Pension Benefits. Izzy published How Employee Benefits Rules May Fare in the Post-‘Chevron’ World (PDF) in Bloomberg Tax. Seth Gaudreau published alerts titled:  Izzy Goldowitz and Linda Rosenzweig updated Employee Benefits in the Unionized Workforce, in ERISA: A Comprehensive Guide (9th edition), edited by Andrew (Drew) Oringer (WLG New York). Izzy published Employee Benefits In Bankruptcy: Update On Key Issues in the Association of Insolvency and Restructuring Advisors Journal with Dannae Delano, Withdrawal Liability Interest Rate Assumptions: The Battle Continues in the Bloomberg Tax Management Compensation Planning Journal, and an alert titled Court Upholds PBGC Denial of Special Financial Assistance to a Terminated Multiemployer Plan.  Mark Greenstein published an alert titled Longstanding Internal Revenue Service Position Called into Question, with Barry Salkin and Michael Schloss. Mark Poerio published Code Section 457(f) Conundrum: How to Handle Past Year Mistakes (from Vesting) with Barry Salkin in LexisNexis Practical Guidance and an alert titled New Fire for Enforcing Forfeiture-for-Competition Provisions, with Jordan Mamorsky (WLG Chicago) and Ban on Non-Competition Agreements – What Employers Need to Know and Do Now, along with several other WLG employment and executive compensation lawyers. Michael Schloss published: and alerts titled: Washington Office lawyers were in high demand as speakers at bar and other professional gatherings: Izzy Goldowitz spoke on Are Insolvency Laws Contributing to the Death of the Single-Employer Defined Benefit Plans? at the International Pension and Employee Benefits Lawyers Association’s Biennial, on ERISA at 50: How We Got Here and Where We are Headed for the Worldwide Employee Benefits Network, on Withdrawal Liability at D.C.’s ERISA Roundtable, on Working with PBGC at the Conference of Consulting Actuaries annual meeting, on Defined Benefit Plans and Bankruptcy at the Enrolled Actuaries annual meeting, and on defined benefit plans for an ACEBC ERISA history project. Mark Greenstein spoke at the U.S. Inventors conference as a member of the organization’s Policy Team. Mark Poerio spoke on Key Employee Incentives: From Design to Implementation for the CPAAcademy.org, and Avoiding Nonqualified Plan Traps: Key Considerations for ERISA Counsel and Employers for Strafford, and on a webinar titled FTC Bars Noncompetes: 7 Things Employees and Executives Must Know, and repeated his presentation on Key Employee Incentives: From Design to Implementation. Susan Rees spoke on Benefit Claims and Preparing for a DOL Cybersecurity Audit at the ABA JCEB ERISA Fiduciary Institute 2023, with Drew Oringer, on Cybersecurity Issues at the Joint TE/GE Council Employee Plans Annual Meeting, and on Multiple-Employer Plans Update at the ABA Tax Section Annual Meeting. Michael Schloss spoke on a webinar titled Surviving the New DOL Game Plan for Prohibited Transaction Exemptions with Steve Wilkes; and on DOL’s Retirement Security Rule for the Financial Planning Association. Washington Office members were often quoted in the media: Izzy Goldowitz in Why Some Ex-Workers at Bed Bath & Beyond Face 401(k) Losses (New York Times) and 3 Takeaways From The PBGC’s Latest Fiscal Health Checkup (Law360), Mark Greenstein in Judge Tosses Fossil-Fuel Divestment Suit Against NYC Pensions (FUNDfire) and New Republican Discrimination Bill Adds Little to Current Law: Lawyers (FUNDfire), and Michael Schloss, in 401(k) Advice Rule Puts New Fiduciaries in Litigation Crosshairs (PDF) (Bloomberg Law), Yellow: Pension Plan Unjustly Seeking ‘Free Money’ From Bankruptcy Case (FleetOwner), Merrill Edge in Hot Seat Over Rates Paid on IRAs (PDF) (Financial Planning), and Pension Benefits at Yellow Corp. Secured by Teamsters Fund Bailout This Year (Pensions & Investments). WLG’s Inside-the-Beltway expertise is not limited to lawyers in the Washington Office. Steve Wilkes (the firm’s Chief Legal Officer) has been involved in many of the firm’s webinars and publications involving ERISA fiduciary issues and related securities law issues that impact financial institutions. He also coordinates the firm’s federal lobbying/regulatory practice and, as a registered federal lobbyist, has represented clients on retirement plan legislative issues in Congress, as has Harold Ashner on PBGC issues. Steve leads the firm’s efforts in obtaining DOL prohibited transaction exemptions and in providing independent fiduciary service to comply with PTEs. Steve, Tom Clark (the firm’s Chief Operating Officer, practicing in WLG’s Boston and St. Louis offices), and founding partner Marcia Wagner (WLG Boston) have testified as experts before the DOL ERISA Advisory Council. Marcia served on the IRS Tax Exempt and Government Entities Advisory Committee and as Chair of its Employee Benefits Subcommittee. Marcia now serves on the Board of Governors of the ACEBC and on the Advisory Council to the Policy Board of Directors of the American Benefits Council. If you have questions about any of these materials, or need assistance with a legal, policy, federal agency, or litigation issue involving employee benefits or executive compensation, please contact a member of the Washington, D.C. Office or one of the other lawyers mentioned in this alert. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/HJA.jpg[/author_image] [author_info]Harold J. Ashner advises and represents clients on a wide variety of employee benefits matters, with an emphasis on PBGC issues. He served as Assistant General Counsel for Legislation and Regulations at PBGC, where he drafted or supervised virtually all regulations and policies issued by PBGC from 1988 until he left the agency in 2005.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Israel-Goldowitz-1.jpg[/author_image] [author_info]Israel Goldowitz has over 40 years of experience. He was the Chief Counsel for the Pension Benefit Guaranty Corporation (PBGC). He led the legal teams that helped save the pensions of such companies as Chrysler and American Airlines. [/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/11/Greenstein-Mark.jpg[/author_image] [author_info]Mark Greenstein is a seasoned ERISA attorney who comes to our firm after nearly 25 years in the Office of Policy and Research at the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA). During his tenure at the DOL, Mark analyzed complex legal issues arising under Title I of ERISA.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Mark-Poerio.jpg[/author_image] [author_info]Mark Poerio has been in private practice with a focus on executive compensation, employee benefits (especially ESOPs), and retirement plan fiduciary matters, not only from a tax and labor perspective, but also from a business, governance, tax, securities, and litigation perspective. [/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Susan-Elizabeth-Rees.jpg[/author_image] [author_info]Susan Rees has extensive experience with ERISA and other federal employment laws. In her capacity as a Division Chief for the Office of Regulations and Interpretations of the Employee Benefits Security Administration at the U.S. Department of Labor in Washington D.C., she provided advice to state and federal agencies, the public, and lawmakers and their staff, on ERISA interaction with state legislation involving all types of governmental plans and state retirement program alternatives.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Linda-Rosenzweig.jpg[/author_image] [author_info]Linda E. Rosenzweig has over 40 years of experience. Linda's broad-based practice covers the entire range of employee benefits matters. Linda advises clients on compliance and plan design of tax-qualified, non-qualified and welfare plans, as well as issues arising under ERISA, the Internal Revenue Code, Section 409A, the Multiemployer Pension Plan Amendments Act (MPPAA), COBRA, and HIPAA. She also works with clients to amend their plans and submit voluntary correction applications, implement reductions in force, and deal with service providers, including negotiating contracts.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/06/Michael-Schloss-photo-new.jpg[/author_image] [author_info] Michael Schloss is a highly sought-after speaker on a wide range of topics relating to Title I of ERISA and DOL activities and is the recipient of multiple awards for his service at the DOL, including the prestigious Alan D. Lebowitz Award, recognizing managers and supervisors who exemplify dedication, a distinguished career of excellence and commitment to mentoring future leaders.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author]]]> by WLG <![CDATA[Retirement Security Rule Stayed]]> https://www.wagnerlawgroup.com/?p=64680 2024-08-06T13:56:02Z 2024-08-01T20:04:36Z Chamber of Commerce v. Department of Labor. The DOL, in drafting the Retirement Security Rule and related prohibited transaction class exemptions, knew that any revision of the rules governing investment advice fiduciaries would be challenged in the Fifth Circuit and clearly attempted to address the concerns of the Fifth Circuit by narrowing the persons who could be treated as investment advice fiduciaries. However, both District Courts were unpersuaded and characterized the DOL’s position as arguing that the Chamber of Commerce  case was wrongly decided. To the extent that the District Court’s characterization of the DOL’s position is accurate, it is now an argument that must be made to the Fifth Circuit rather than a District Court. While both of these cases were decided without application of the Chevron doctrine, there is no indication in either District Court opinion that the decision would have been different had the Chevron doctrine applied. Further, the DOL did not rely on the Chevron doctrine. In either case, as of the date of this alert, the DOL’s 1975 rule (the so-called “five-part test”) for defining an investment advice fiduciary is back in place. It is thought likely, however, that the DOL will be appealing both District Court decisions, and there can be no assurance of the how the Fifth Circuit will decide. So, while it would be appropriate to place efforts to comply with the Retirement Security Rule on hold, our recommendation is to continue complying with the unamended version of PTCE 2020-02 and to monitor events before the Fifth Circuit. It is also possible that the results of the Presidential election could affect the eventual outcome. Stay tuned. [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2021/07/Barry-Salkin.jpg[/author_image] [author_info]Barry Salkin concentrates his practice in ERISA and employee benefits law. He has significant expertise drafting, amending and negotiating various ERISA and employee benefit plans, including defined benefit pension plans, profit sharing plans, 401(k) plans, as well as qualified and non-qualified deferred compensation programs.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author]]]> by WLG <![CDATA[Reg S-P Amended Around Cybersecurity]]> https://www.wagnerlawgroup.com/?p=64357 2024-06-17T19:27:24Z 2024-06-17T19:26:33Z [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author]   Last month, the Securities and Exchange Commission (“SEC”) adopted amendments to Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Customer (the “Amendments” can be found here). The Amendments address certain requirements for Covered Institutions handling data security incidents that affect customers’ nonpublic personal information. “Covered Institutions” under the Amendments are registered investment advisers, broker-dealers, registered investment companies, and transfer agents registered with the SEC, Comptroller of the Currency, Board of Governors of the Federal Reserve System, or Federal Deposit Insurance Corporation. The Amendments require Covered Institutions to: (i) develop and implement a written incident response program that reasonably responds to unauthorized access to or use of customer information; (ii) in connection with incidents involving such unauthorized access or use, provide notice to affected individuals no later than 30 days; (iii) establish, maintain, and enforce written policies and procedures designed to require oversight of service providers; and (iv) prepare and keep compliance records to document policies and procedures to better safeguard and dispose of customer information. Below is a brief description of additional requirements required under the Amendments. Written Incident Response Program As amended, a Covered Institution must adopt an incident response program with written policies and procedures reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information. The Amendments require an incident response program that identifies how the institution will:
    • Assess the nature and scope of a data breach and identify which customer information systems and customer information may have been affected.
    • Take steps to contain and control the data breach to prevent further unauthorized access to or use of customer information.
    • Notify each customer whose information was, or is reasonably likely to have been, accessed or used of the breach, unless after a reasonable investigation, it is likely that the sensitive customer information has not been, and is not reasonably likely to be used in a manner that would result in substantial harm or inconvenience.
      The Amendments allow the incident response program to be tailored based on the size and complexity of the institution and the nature and scope of its activities. A Covered Institution’s program should be reasonably designed to include oversight, due diligence, and monitoring of service providers to ensure that the Covered Institution itself notifies affected individuals. A “service provider” refers to any person or entity that receives, maintains, processes, or has access to customer information through the services it provides directly to a Covered Institution. Covered Institutions must establish written policies and procedures reasonably designed to ensure oversight of their service provider’s compliance with the rule. A service provider must notify the covered institution as soon as possible but no later than 72 hours after becoming aware of a breach. Notification Requirements Covered Institutions are required to provide a clear and conspicuous notice to each affected individual by a means designed to ensure that the individual can reasonably be expected to receive actual notice in writing. The notice must be provided within 30 days after the Covered Institution becomes aware that unauthorized access to or use of customer information has occurred or is reasonably likely to have occurred (subject to national security, public safety, and other exceptions). The notice must include details about the incident, the breached data, and how affected individuals can respond to the breach to protect themselves (e.g., reviewing account statements for suspicious activity or instituting fraud alerts and credit monitoring). However, the notification is not required if a Covered Institution determines that the sensitive customer information has not been, and is not reasonably likely to be, used in a manner that would result in substantial harm or inconvenience. “Customer Information” The Amendments broaden and more closely align Reg S-P’s safeguard rule and disposal rule so that they both apply to all “customer information,” which covers any record containing nonpublic personal information in any form that is in the possession of a Covered Institution regardless of whether such information pertains to individuals with whom the covered institution has a customer relationship or the customers of other financial institutions where such information has been provided to the covered institution. The Amendments also expand the applicability of Reg S-P’s safeguards rule and disposal rule to transfer agents registered with the SEC. Recordkeeping The Amendments require Covered Institutions to prepare and maintain: (i) written policies and procedures about administrative, technical, and physical safeguards for the protection of customers under the incident response program; (ii) written documentation of any detected unauthorized access to or use of customer information and any response; (iii) written documentation of any investigation and determination made regarding whether notification to affected individuals is required; (iv) written policies, procedures, and any related contracts with service providers adopted pursuant to the Amendments; and (v) written policies, procedures to address the proper disposal of consumer information and customer information. Annual Delivery of Privacy Notice Exception Before the Amendments, Reg S-P generally required that Covered Institutions send annual notices to customers regarding their privacy practices. The Amendments introduce an exception to the annual privacy notice requirement, provided that certain conditions are met. To qualify for the exception, the institution must (i) only share nonpublic personal information with nonaffiliated third parties when an exception to third-party opt-out applies, and (ii) has not made any changes to its policies and practices regarding the disclosure of nonpublic personal information since the most recent disclosure sent to customers. Compliance Date The Amendments were published in the Federal Register on June 3, 2024. Larger entities (as defined in the Amendments) will have until December 3, 2025, to comply, while smaller entities (as defined in the Amendments) will have until June 3, 2026. Key Takeaways Covered Institutions should be prepared for an increased risk of enforcement action related to customer information and cybersecurity. Covered Institutions should consider the following steps:
    • Examine and update existing compliance programs, policies, and procedures to ensure that they comply with new requirements of Amendments within either 18 or 24 months (as applicable).
    • Review service provider agreements to ensure that there is sufficient oversight for compliance. Further, confirm that service providers have the necessary policies and procedures in place to protect customer information from unauthorized access or use and to meet the notification requirements, as applicable.
    • Identify other applicable federal or state laws associated with cybersecurity incidents and compare them to the requirements under Reg S-P, as amended.
    ]]>         by WLG <![CDATA[Attention Investment Managers: QPAM Matters for Immediate Review]]> https://www.wagnerlawgroup.com/?p=64098 2024-07-16T15:08:03Z 2024-05-06T20:09:25Z [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author] The Department of Labor (the “Department”) issued its final amendment (the “Amendment”) to Prohibited Transaction Class Exemption 84-14 (the “QPAM Exemption”) on April 3, 2024. The QPAM Exemption is relied on by “qualified plan asset managers” (“QPAM”) managing assets of employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and other plans described in Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”) (collectively “plans”).  The QPAM Exemption, subject to what the Department views as protective conditions, permits qualified plan asset managers of investment funds holding plan assets to engage in transactions with parties in interest to the plans and IRAs invested in the fund. The Amendment introduces new requirements for entities seeking to rely on the QPAM Exemption and expands the categories of crimes and misconduct that could result in loss of the exemption. The Amendment takes effect on June 17, 2024.  What is the QPAM Exemption? Under both ERISA and the Code, plan fiduciaries have a fiduciary duty to manage plan assets in the best interest of participants and beneficiaries. They are required to avoid prohibited transactions, which happen when a plan fiduciary causes the plan to engage in a sale or exchange, leasing of property, loan or extension of credit, or furnishing of goods, services, or facilities between the plan and a “party in interest”, unless there is an individual or class exemption covering the transaction. Many large fiduciary investment managers rely on the QPAM Exemption to perform investment functions for their client plans. This exemption provides relief for many transactions between the QPAM (registered investment advisers, banks, savings and loan associations, and insurance companies) and parties in interest to a plan or a plan fiduciary.  Key Changes introduced by the final QPAM Amendment Some of the most significant items in the Amendment are: Notification Requirement. Effective June 24, 2024, the Amendment requires QPAMs to provide an email notification to inform the Department of the QPAM’s legal name and any other name under which it operates within 90 days of the QPAM’s reliance on the exemption. There is also a 90-day correction period for inadvertent failures to provide the initial notice (or any update due to a name change). The Department will maintain a list of these entities on its publicly available website. Those managers relying on the QPAM Exemption will have until September 15, 2024, to notify the Department. Ineligibility Due To Prohibited Misconduct and Criminal Convictions. The Amendment clarifies and expands the types of misconduct that could result in a QPAM being ineligible to rely on the QPAM Exemption. The Amendment does not change the current list of crimes that result in QPAM ineligibility, but clarifies that foreign convictions that are “substantially equivalent to the listed disqualifying U.S. federal and state crimes” are also disqualifying crimes. However, certain misconduct in a country included on the U.S. Department of Commerce’s list of “foreign adversaries,” as updated from time to time, is not treated as a disqualifying crime. The Amendment also provides that a QPAM will become ineligible to rely on the exemption if it engages in “prohibited misconduct.” This includes: (i) if the conduct of the QPAM (or its affiliates or owners of 5% or more of the QPAM) is subject to a non-prosecution agreement (“NPA”), deferred prosecution agreement (“DPA”)” with a U.S. federal or state prosecutor or regulatory agency, or other criminal or civil settlements if the allegations describe one of the QPAM Exemption’s disqualifying crimes; (ii) intentional violations or a systematic pattern of violations of the QPAM Exemption’s conditions; and (iii) providing materially misleading information to the Department and certain other regulators in connection with the conditions of the Exemption. The Department removed the foreign equivalent of NPAs or DPAs as an ineligibility trigger but added a requirement that a QPAM notify the Department within 30 days after a QPAM, any affiliate, or any owner, direct or indirect, of a 5% or more interest in the QPAM (i) enters into a foreign equivalent of a DPA or NPA or (ii) participates in prohibited misconduct. Transition Period. The Amendment provides a QPAM that becomes ineligible due to criminal conviction or prohibited misconduct with a one-year transition period. During this time, the QPAM may continue to rely on the QPAM Exemption with respect to plan clients for which it was already relying on the exemption as of the ineligibility date, so long as the QPAM provides appropriate written notice to the Department and each of its plan clients and meets certain other requirements in the Amendment. During this period, the QPAM may apply for an individual exemption from the Department to continue to operate as a QPAM after the transition period ends. The Amendment contains provisions regarding the process for requesting an individual prohibited transaction exemption if ineligibility under the QPAM Exemption occurs. Increased Assets Under Management and Shareholder Equity Ownership Thresholds. The Amendment increases the assets under management and shareholder capital requirements for QPAM eligibility to ensure that the exemption is only available to institutions large enough to withstand being unduly influenced by parties in interest. The thresholds will be adjusted annually, no later than January 31, to account for inflation. Recordkeeping Requirement. A QPAM will be required to maintain records for six years from the date of a transaction to ensure the QPAM will be able to demonstrate, and the Department will be able to verify, compliance with the exemption conditions. QPAMs are also required, to the extent permitted by law, to provide the records “to any authorized employee of the Department or the Internal Revenue Service or another federal or state regulator; any fiduciary of a plan invested in an Investment Fund managed by the QPAM; any contributing employer and any employee organization whose members are covered by a plan invested in an Investment Fund managed by the QPAM; and any participant or beneficiary of a plan and an IRA Owner invested in an Investment Fund managed by the QPAM.” Exclusive Authority Requirement. A QPAM may not act as a rubber stamp or mere independent approver of a fully negotiated transaction. However, it may delegate certain responsibilities to a sub-adviser so long as it retains sole authority with respect to planning, negotiating, and initiating the transaction. Key Considerations The Amendment includes clarifying guidance and introduces stricter qualification and compliance obligations for asset managers relying on the QPAM Exemption. It is essential for existing QPAMs and asset managers to familiarize themselves with the Amendment and the requirements and conditions of the QPAM Exemption, including considering the following:
    • Preparing their one-time notice to the Department of Labor, confirming their status at QPAM@dol.gov within 90 days of June 17, 2024. QPAMs should also establish a process for future updates or changes in a business entity's legal or operating names relying on the exemption.
    • Reviewing and updating their policies and procedures to ensure they align with the new requirements set by the Amendment, explicitly addressing concerns regarding the maintenance of the QPAM's independent authority.
    • Evaluating their current financial status by December 31, 2024, to confirm the satisfaction of the increased equity and AUM thresholds. If applicable, they should also develop a strategy to meet the updated criteria for future increases.
    • Reviewing record-keeping practices to ensure they maintain the required records for six years and that they are accessible for examination.
    • Developing an internal process for monitoring events that could trigger ineligibility, such as foreign convictions or agreements with prosecutors.
    For ERISA clients, QPAMs should review any investment management agreements and other related agreements for any applicable provisions that may require amendment.]]>         by WLG <![CDATA[Merger and Acquisition Considerations for Employee Benefit Plans]]> https://www.wagnerlawgroup.com/?p=63547 2026-06-02T12:41:16Z 2024-02-27T15:27:12Z By Seth Gaudreau and Stephen Wilkes In the context of mergers and acquisitions, an acquisition target’s qualified retirement plans, health plans, executive compensation arrangements, and benefit programs (referred to collectively as "benefit programs") can all be a source of significant liabilities. These benefit programs are promises that the target has made to its employees, and the buyer must ascertain whether it is liable to fulfill them and, if so, the dollar value of those promises. Potential issues exist if the plans have been incorrectly drafted or operated. In order to avoid any complications and liabilities, the parties need to understand the best deal structure based on the benefit programs requirements and perform due diligence to carefully address any issues under both the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code early in the transaction. Deal Structure The transaction's structure can determine the parties' approach to the benefit programs and associated liabilities. Where the buyer intends to acquire the seller's business through a stock sale or a merger, a myriad of issues must be addressed. Generally, in a stock sale or the merger of the target into the buyer, benefit liabilities remain with the target or are automatically transferred to the buyer or its acquisition subsidiary. In a merger, generally, the surviving entity assumes the target's benefit programs liabilities, so it is imperative that the buyer knows what liabilities it is assuming. In either of the scenarios above, the parties need to understand their options, including but not limited to taking on the seller's plan and operating it as a stand-alone plan, merging the seller's plan into the buyer's existing plan, terminating the seller's plan, or freezing the plan. The forgoing options raise individual questions that need to be carefully analyzed and can change the structure of a deal and its terms. Where the transaction is an asset sale, generally, the buyer only assumes benefit program liabilities if it takes affirmative steps to do so. An asset deal may require a less extensive due diligence review of a company's benefit programs; however, concerns still exist with certain benefit programs regarding withdrawal liability and/or successor employer liability which courts and regulators may apply regardless of the deal structure. Due Diligence In order to consider all of the available options and avoid unintended liabilities, the buyer should review every current employee plan that makes up a benefit program. Whether looking at the overall value of a business or its benefit programs, the goal of due diligence is to vet all issues early in the deal, provide the best chance for a smooth transition, and avoid costly post-transaction corrections. The following are areas of consideration for due diligence review:
    • The buyer should understand the seller's corporate structure, affiliated entities, and potential controlled group issues.
    • All benefit program materials must be reviewed to comply with current laws and ensure they have all required amendments. Further, whether the plan sponsor reserves the right to terminate or amend the plan and whether a plan provides for accelerated vesting or any other consequence resulting from the transaction that could increase liabilities should be determined.
    • Whether the target has maintained proper fiduciary practices, including administering and operating the benefit programs accordingly, including whether the benefit programs been reviewed for qualification defects that may require corrections.
    • Defined contribution plans have unique attributes that must be reviewed to determine the potential impact on the employees and the transaction. Aspects such as non-discrimination testing results should be analyzed for potential liability.
    • Defined benefit plans promised benefits, obligations and funding levels need to be reviewed.
    • In the case of a multiemployer pension plan, the buyer should determine if there is withdrawal liability based on the plan's unfunded vested liability, and the portion of such liability allocable to the seller.
    • All correspondence, inquiries, or examination notices to or from government agencies, such as the Internal Revenue Service, Department of Labor, or Pension Benefit Guaranty Corporation., and whether the target company is aware of potential regulatory audits.
    • Review of health plan issues, including potential COBRA matters, as the Internal Revenue Service has regulations for determining the COBRA liabilities of buyers and sellers.
    The preceding is an introductory discussion of selected matters that parties to a merger or acquisition need to consider. It is not intended to be a comprehensive review. Evaluating all the moving parts is critical when deciding how to proceed with a target's benefit programs. Our transactional capability and expertise extend not only to matters surrounding transaction execution (e.g., identifying plans and arrangements; identifying liabilities; evaluating and otherwise dealing with risk allocation; and attending to transitional matters) but also to adding value with creative approaches to complex questions involving employment contracts, severance agreements and equity-based and other executive compensation.]]>         by WLG <![CDATA[SEC Matters to Consider in the New Year: 2024 Exam Priorities and Off-Channel Enforcement Actions]]> https://www.wagnerlawgroup.com/?p=63402 2024-07-16T15:11:22Z 2024-01-30T15:39:49Z [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/Seth.jpg[/author_image] [author_info]Seth F. Gaudreau concentrates his practice in ERISA business litigation, and investment management law. Within the ERISA field, he conducts research on all matters relating to employment law, which covers qualified and unqualified benefit plans, welfare plans, and retirement plans.[/author_info] [/author] [author] [author_image timthumb='on']https://www.wagnerlawgroup.com/wp-content/uploads/sites/1101401/2023/04/StephenWilkes.jpg[/author_image] [author_info]Stephen Wilkes heads the firm's Investment Management Law practice. He also is a Practice Group leader for the firm's ERISA Fiduciary Compliance and Independent Fiduciary practices. Steve advises a national client base of mutual funds, CIFs, private funds, registered investment advisers, insurance companies, broker dealers, wealth management firms, banks, trust companies, third-party platform providers, Taft Hartley Funds and plan sponsors on ERISA, tax, and related securities law issues. [/author_info] [/author] Since taking office, Chair Gary Gensler has pursued a robust agenda and expectations are high for another year of regulatory scrutiny.  Below we discuss recent actions the U.S. Securities and Exchange Commission (“SEC”) has taken with respect to certain of its priorities. As this is not an exhaustive list of SEC actions/priorities, it is important for firms to carefully evaluate topics that may apply to them and consider whether their compliance programs and policies and procedures meet relevant standards. 2024 Examination Priorities Considerations for Investment Adviser The SEC’s Division of Examinations (the “Division”) issued its annual examination priorities for 2024 (found here), in October this year.  Previously the Division’s exam priorities were released near the start of the calendar year.  The Division noted the short interval of eight months since the publication of the fiscal year 2023 priorities, and that several areas of focus from last year will remain as priorities for the Division in fiscal year 2024. The Division highlighted new, notable and significant focus areas for examination, along with other perennial priorities.  The following provides a summary of notable upcoming examination priorities. Duty of Care and Duty of Loyalty The Division will focus examinations on the fiduciary duty of care and a duty of loyalty advisers owe to clients including 1) serving the best interest of its clients and not subordinate its clients’ interest to its own and 2) eliminating or making full and fair disclosure of all conflicts of interest such that a client can provide informed consent to the conflict. Generally, the Division will focus on:
    • Investment advice meeting fiduciary standards with respect to complex products (e.g., derivatives and exchange-traded funds (“ETFs”), high cost and illiquid products (e.g., variable annuities and nontraded REITs), unconventional investment strategies that purport to address the change in interest rates, and investment advice provided to certain types of clients, including older investors and those saving for retirement;
    • Conflicts of interest and the process advisers use to address, mitigate or eliminate the conflicts of interest and whether the investment advice was provided in a client’s best interest;
    • Economic incentives that an adviser and its personnel may have to recommend products, services, or account types (including incentivized revenue arrangements, use of affiliated firms to perform brokerage and other client services, share class selection and similar issues, and recommendation of proprietary products); and
    • Disclosures made to investors include all material facts relating to the conflicts of interest associated with the applicable advice sufficient to allow a client to provide informed consent to the conflict.
     Compliance Programs The Division will continue its focus on advisers’ compliance programs, including whether the investment advisers’ policies and procedures address aspects of the advisers’ business, compensation structure, services, client base, and operations, and address applicable market risks. Compliance program reviews will also assess whether the policies and procedures are sufficient to support compliance with advisers’ fiduciary obligations. The Division’s focus will include compliance policies and procedures with respect to one or more of: (1) portfolio management processes; (2) disclosures made to investors and regulators; (3) proprietary trading by the adviser and the personal trading activities of supervised advisory personnel; (4) safeguarding of client assets; (5) the accurate creation and maintenance of required records; (6) safeguards for the privacy protection of client records and information; (7) trading practices; (8) marketing advisory services; (9) processes to value client holdings and assess fees based on those valuations; (10) business continuity plans; (11) selecting and using third-party and affiliated service providers; (12) branch office oversight; and (13) obtaining informed consent when advisers implement material changes to advisory agreements. Specific focus areas will include:
    • Marketing Practices. Whether advisers have adopted and implemented reasonably designed written policies and procedures to prevent violations of the Investment Advisers Act of 1940 (“Advisers Act”) and the rules thereunder, including reforms to the Marketing Rule and Form ADV disclosures. Focused on whether disseminated advertisements include any untrue statements of a material fact, are materially misleading, or are otherwise deceptive and, as applicable, comply with the requirements for performance (including hypothetical and predecessor performance), third-party ratings, and testimonials and endorsements
    • Compensation Arrangements. Assessment of the advisers’ compensation arrangements, including: (1) the fiduciary obligations of advisers to their clients, including registered investment companies, particularly with respect to advisers’ receipt of compensation for services or other material payments made by clients and others; (2) alternative ways that advisers try to maximize revenue, such as revenue earned on clients’ bank deposit sweep programs; and (3) fee breakpoint calculation processes, particularly when fee billing systems are not automated.
    • Valuation. Examination of advisers’ recommendations to clients to invest in illiquid or difficult to value assets, such as commercial real-estate or private placements.
    • Safeguarding. Examination of advisers’ controls to protect clients’ material non-public information, particularly when multiple advisers share office locations, have significant turnover of personnel, or use expert networks.
    • Disclosure. Disclosure assessments on the accuracy and completeness of regulatory filings, including Form CRS, with a focus on inadequate or misleading disclosures and registration eligibility.
    Additional Risk Areas Applicable to Advisers Information Security and Operational Resiliency. Cybersecurity remains a priority of the Division, affecting multiple market participants, including investment advisers. The Division will review firms’ practices designed to prevent interruptions to mission critical services and to protect investor information, records, and assets. Their reviews will focus on cybersecurity policies and procedures, internal controls, staff training, governance practices, and responses to cyber-related incidents, as well as issues associated with reliance on third-party vendors or unauthorized use of third-party providers. Crypto-Assets and Emerging Financial Technology. Crypto assets and emerging financial technology are areas that remain high on the Division’s list of concerns. The Division continues to closely watch crypto assets and their associated products and services, focusing on the offer, sale, recommendation of, advice regarding, trading in, and other activities in crypto assets and related products. With respect to emerging financial technology, the Division remains focused on certain services, including automated investment tools, artificial intelligence, and trading algorithms or platforms, and the risks associated with the use of emerging technologies and alternative sources of data. Examinations of Advisers to Private Funds. Advisers to private funds remain a significant portion of the population and the Division will prioritize specific topics such as: (1) portfolio management risks from market volatility and higher interest rates; (2) adherence to contractual requirements regarding limited partnership advisory committees or similar structures, including any contractual notification and consent processes; (3) accurate calculation and allocation of fees and expenses at both the fund level and investment level, including valuation of illiquid assets, the calculation of post-commitment period management fees, adequacy of disclosures and the potential offsetting of fees and expenses; (4) due diligence practices for consistency with policies, procedures, and disclosures, particularly with respect to private equity and venture capital fund assessments of prospective portfolio companies; (5) conflicts, controls and disclosures regarding private funds managed side-by-side with registered investment companies, and use of affiliated service providers; (6) Compliance with Advisers Act requirements regarding custody, including accurate Form ADV reporting, timely completion of private fund audits by a qualified auditor and the distribution of private fund audited financial statements; and (7) policies and procedures for reporting on Form PF, including upon the occurrence of certain reporting events. Consistent with the Division’s practices, it will continue to prioritize examinations of advisers that have never been examined, including recently registered advisers, and those that have not been examined for a number of years. Although this year’s examination priorities address similar concerns from prior years, there was the notable absence of matters pertaining to environmental, social, and governance (“ESG”).  It is expected that the SEC will continue to focus on ESG-related issues.  As discussed below, another area that was not specifically addressed but has continued to be an area of scrutiny and enforcement actions by the Division is off-channel communications. Recent SEC Off-Channel Communications Enforcement Settlements Although off-channel communications were not directly addressed in the SEC’s 2024 Exam Priorities, recent enforcement actions show this is an area in which scrutiny will continue. At the end of September, the SEC announced settlements (found here) with five broker-dealers, three dual registered broker-dealers and investment advisers, and two affiliated investment advisers (collectively referred to as “firms”) for widespread and longstanding failures to maintain and preserve electronic communications. Specifically, the SEC focused on off-channel communications for securities-related business practices that cannot be or are not preserved by the firms. Off-channel communications generally include text messages, social media, and other messaging platforms, such as Slack or WhatsApp.  The 10 firms agreed to pay approximately $79 million in combined penalties. This announcement falls in line with the previous SEC settlement announcements against financial institutions for similar violations of their recordkeeping obligations and retention of business-related electronic communications transmitted by firm employees outside of a firm’s recordkeeping system. The SEC stated that they uncovered “pervasive and longstanding off-channel communications, in which the broker-dealer firms admitted that, from at least 2019, their employees communicated through personal text messages about the business of their employers, and the investment adviser firms admitted that their employees sent and received off-channel communications related to recommendations made or proposed to be made and advice given or proposed to be given.”  Both the broker-dealer and the investment adviser firms failed to maintain or preserve the substantial majority of their off-channel communications in violation of their respective requirements under the Securities Exchange Act of 1934 (“Exchange Act”) and the Advisers Act. The failures involved employees at multiple levels of authority, including supervisors and senior managers.  Further, the broker-dealer and the investment adviser firms failed to adequately enforce policies and procedures that may have prevented off-channel communications and failed to reasonably supervise employees within their respective requirements under the Exchange Act and the Advisers Act. Along with the monetary penalties, the firms agreed to retain independent compliance consultants, among other things, to conduct comprehensive reviews of their policies and procedures relating to the retention of electronic communications found on personal devices and their respective frameworks for addressing non-compliance by their employees with those policies and procedures. Off-Channel Communications Takeaways These enforcement actions are the result of a continuing effort under SEC Chair Gary Gensler, which started in December of 2021 when JP Morgan admitted to similar recordkeeping failures. An area of focus under these actions continues to be off-channel communications by senior employees, including, among others, senior management or executives, group heads, supervisors responsible for supervising junior employees, managing directors, and partners. In the press release, the SEC specifically made note of three self-reporting entities that were assessed a significantly smaller penalty of $2.5 million. Referencing these entities, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement stated that “[t]here are real benefits to self-reporting, remediating and cooperating.”  Currently, the SEC seems to be indicating that financial firms that self-report will be treated more leniently than those that do not self-report. It is clear that this will be a continued area of focus for enforcement actions, and firms need to review their policies and procedures, specifically how they retain and monitor their employees’ electronic communications, to ensure compliance with their recordkeeping obligations.]]>         by WLG <![CDATA[SEC Speaks to Importance of Naming Convention]]> https://www.wagnerlawgroup.com/?p=63097 2024-01-09T16:45:41Z 2023-11-30T20:11:11Z By Seth Gaudreau and Stephen Wilkes SEC Commissioner Crenshaw reminded us last year that, despite the poetic beauty of Shakespeare’s observation that, “A rose by any other name would smell as sweet”, names really do matter in the investment world. At the end of September, the Securities and Exchange Commission ("SEC”) adopted amendments (the “Amendments”) to the “Names Rule” (found here), Rule 35d-1 under the Investment Company Act of 1940, as amended. The SEC’s intent was to modernize the Names Rule, as well as related disclosure and reporting requirements. Originally adopted in 2001, the Names Rule was designed to prevent registered investment companies and business development companies (referred to collectively as “funds”) from using names that are deceptive or inconsistent with the fund’s investments. The Amendments:
    • broaden the scope of the funds that must comply with the current requirement to adopt a policy to invest at least 80 percent of their assets in accordance with the investment focus the fund’s name suggests;
    • Provide enhanced disclosure and reporting requirements related to terms used in fund names; and
    • Establish additional recordkeeping requirements

    Expansion of Scope of the 80 Percent Investment Policy Requirement

    The Amendments broaden the scope of the Names Rule’s 80% investment policy which requires funds whose names suggest a focus in a particular type of investment, or investment in a particular industry or geographic region, to adopt a policy to invest at least 80% of the value of their assets in investments that match the fund’s name. The Amendments require a fund to adopt an 80% Investment Policy if its name suggests a focus in investments that have, or whose issuers have, “particular characteristics.” The SEC did not define the term “particular characteristics,” but it anticipates the Amendments will cover fund names that refer to or contain terms such as “growth” or “value” or that refer to a thematic investment focus, including terms indicating that the fund’s investment decisions incorporate one or more ESG factors. The SEC did not distinguish between a type of investment and an investment strategy because a fund name “might connote a particular investment focus and result in reasonable investor expectations regardless of whether the fund’s name describes a strategy as opposed to a type of investment.” For funds that have names with multiple elements, the 80% investment policy must incorporate all the elements of the name, individually or in the aggregate. The Amendments generally will not apply to certain names that have historically been interpreted as being outside the scope of the Names Rule, including global, international, or intermediate term (or similar) bond without an additional term that suggests an investment focus such as “fixed income” or “growth.”

    Enhanced Prospectus Disclosure, Form N-PORT Reporting, and Recordkeeping

    The Amendments require a fund subject to the 80% rule to disclose in its prospectus the terms used in its name that are covered under the amended Names Rule. This includes the criteria the fund uses to select the investments that each term used in the fund’s name describes. Funds will have flexibility to use “reasonable definitions” of the terms that their name uses, provided that the meaning of such terms is consistent with plain English or established industry use. Funds subject to the 80% rule (excluding money-market funds and business development companies) will be required to disclose on their quarterly Form N-Port, the definitions of terms used in their names, the value of their 80% baskets, and each investment that is included in the 80% basket. Finally, the Amendments require funds to maintain written records documenting their compliance with the 80% rule for at least six years following the creation of each record, with the first two years of recordkeeping being in an easily accessible place.

    Temporary Departures from a Fund’s 80 Percent Investment Policy

    The Amendments add a new requirement for a fund to review the positions included in its “80% basket” at least quarterly. However, they retain the current Names Rule requirement for a fund to invest in accordance with its 80% investment policy “under normal circumstances,” and for the 80% investment policy to apply at the time a fund invests its assets. The Amendments include specific time frames, generally 90 days, for getting back into compliance if a fund departs from its 80% investment policy as a result of drift or in other-than-normal circumstances.

    Unlisted Closed-End Funds and Business Development Companies and Unit Investment Trusts

    The Amendments generally prohibit a registered closed-end fund or business development company (“BDC”) whose shares are not listed on a national securities exchange from changing its 80% investment policy without a shareholder vote, unless (1) the fund conducts a tender or repurchase offer with at least 60 days’ prior notice of the policy change, (2) that offer is not oversubscribed, and (3) the fund purchases shares at their net asset value. The 80% Investment Policy and recordkeeping requirements only apply to Unit Investment Trusts (UITs) at the time of initial deposit of securities.

    Derivatives

    Under the Amendments, funds must use the notional amount of a derivatives instrument to check compliance with the 80% investment policy, with some modifications, rather than its market value. Notably, certain currency hedges are excluded from this compliance calculation. Additionally, the Amendments clarify which derivative instruments can be included in a fund’s 80% basket. The SEC advised that a fund “generally should consider whether the derivative provides investment exposure to any explicit input that the fund uses to value its name assets, where a change in that input would change the value of the security.”

    Modernization of Notice Requirement

    The Amendments retain the current rule’s requirement that, unless the 80 percent investment policy is a fundamental policy of the fund, 60 days’ notice must be provided to fund shareholders of any change in the fund’s 80 percent investment policy. The Amendments update the notice requirement to expressly address funds’ use of electronic delivery and incorporate additional specificity about the content and delivery of the notice.

    Effective Date

    The Amendments are effective for all registered funds, including existing funds, 60 days after publication of the final rule in the Federal Register. All funds falling within the newly expanded scope of the Names Rule, which the SEC expects to be at least 75% of all U.S. registered investment funds, will need to be in compliance (which could entail changing their names, adopting an 80% policy, etc.) by the following dates, depending on their size:
    • Larger Entities (funds that have net assets of $1 billion or more as of the most recent fiscal year): 24 months after the Amendments’ effective date.
    • Smaller Entities (funds that have net assets of less than $1 billion as of the most recent fiscal year): 30 months after the Amendments’ effective date.

    Conclusion

    A key aspect of the Amendments is the lack of guidance around what qualifies as an ESG factor and to what extent a fund should incorporate ESG factors in its investment process if it does use an ESG-related term in its name. Notably, the Amendments did not adopt changes in the proposed amendments to the Names Rule that would have deemed the name of an integration fund (i.e., a fund that integrates ESG alongside non-ESG factors) materially misleading if it included ESG terminology in its name. Nonetheless, we believe these Amendments are likely to result in increased compliance costs and oversight. Fund companies should begin to review their existing fund line-up to determine the impact that the Amended Rule 35d-1 will have on their funds.]]>         by WLG <![CDATA[Significant Changes Made to IRS Employee Plans Compliance Resolution System]]> https://www.wagnerlawgroup.com/?p=62239 2023-07-20T12:18:55Z 2023-07-20T12:08:20Z By Dannae Delano, Seth Gaudreau and Barry Salkin The SECURE 2.0 Act of 2022, Division T of Public Law No. 117-328 (“the Act”) includes dozens of provisions that affect retirement plans and retirement plan sponsors.  This alert focuses on several changes related to the correction procedures that plan sponsors can use for the correction of errors in administering retirement plans. These changes include expansion of the IRS’s Self-Correction Program (“SCP”) for retirement plan failures under the Internal Revenue Service’s (“IRS”) Employee Plans Compliance Resolution System (“EPCRS”), changes related to recovery of inadvertent benefit overpayments, and a permanent safe harbor correction method for elective deferral failures related to automatic enrollment arrangements in certain retirement plans.  In addition, the IRS has also issued the first guidance implementing these changes (“Notice 2023-43”) that clarifies that the changes are immediately applicable (with certain exceptions, including corrections by IRA custodians and trustees) and provides interim guidance that will remain in effect until EPCRS is updated. EPCRS Self-Correction Program Expansion The ability of plans sponsors to “self-correct” is not new. The EPCRS SCP allows certain compliance issues to be self-corrected by plan sponsors without the need to make a submission to the IRS or obtain IRS approval.  Generally, self-correction has only been available for insignificant failures and failures that are corrected within a few years of the failure.  Under the Act, SCP now allows for any “eligible inadvertent failure” to be self-corrected, if the failure: (i) is corrected within a reasonable time after it is discovered; (ii) is not identified by the IRS before the plan sponsor has taken actions that demonstrate a commitment to self-correction; and (iii) is not egregious, related to the diversion or misuse of plan assets, or directly or indirectly related to an abusive tax avoidance transaction. As was previously required and often overlooked, to qualify for the new SCP, the plan must have “established practices and procedures” designed to prevent failures. Prior to the Act, EPCRS allowed certain participant loan errors to be corrected without reporting the error on Form 1099-R, only if the error was submitted for IRS approval using the Voluntary Compliance Program (“VCP”) (or Audit CAP if the error is discovered on audit). The Act specifically authorizes self-correction of inadvertent failures related to plan loans to participants.  Further, if the EPCRS plan loan correction rules are followed, the Department of Labor (“DOL”) must treat self-corrected participant loan errors as satisfying the applicable requirements under its Voluntary Fiduciary Correction Program (“VFCP”).  Previously, participant loan error corrections could only be submitted to the DOL’s VFCP for approval after the IRS had issued a compliance statement on the correction. Under the Act, the current EPCRS guidance (“Rev. Proc. 2021-30”) is required to be updated within two years of enactment. Notice 2023-43, provided in a question-and-answer format, is intended to assist taxpayers by providing interim guidance in advance of an update to Rev. Proc. 2021-30.  Notably, the guidance confirms that failures that occurred before SECURE Act 2.0 was enacted on December 29, 2022, may be corrected in accordance with the new rules.  The guidance is not comprehensive and does not address the recovery of plan overpayments, correction of automatic contribution errors, or any elements over which the DOL has authority. The Notice focuses on the following issues:
    • A plan sponsor may self-correct an eligible inadvertent failure before Rev. Proc. 2021-30 is updated if certain conditions are satisfied and certain exceptions do not apply;
    • A custodian of an individual retirement account described in section 408(a) of the Internal Revenue Code, or an individual retirement annuity described in section 408(b) (an IRA) may not correct an eligible inadvertent failure under EPCRS before Rev. Proc. 2021-30 is updated; and
    • Interim interpretive guidance that applies with respect to corrections of eligible inadvertent failures.
    The guidance under which a plan sponsor may self-correct an eligible inadvertent failure under section 305 of the Act, provided certain exceptions do not apply, is as follows:
    • Section 305 of the Act allows for errors not identified by the Secretary before any actions occurred that demonstrate a specific commitment to implement a self-correction with respect to the eligible inadvertent failure. The guidance clarifies the following related to self-correcting non-identified inadvertent failures:
      • A plan sponsor should document the intended correction at the beginning of the correction process.
      • A specific commitment is a facts and circumstances consideration so a plan sponsor must demonstrate it is actively pursuing the self-correction.
      • Under examination means it has been identified by the Secretary, but an insignificant failure may still be corrected while under examination.
    • Section 305 of the Act provides that a self-correction must be completed within a reasonable period after the failure was identified. The guidance clarifies the following regarding what a reasonable period is:
      • Reasonable period is a facts and circumstances consideration, but for failures that are not employer eligibility failures, it includes the end of the 18th month after the plan sponsor identifies the failure. In certain circumstances, this could result in a shorter correction period than under prior law.
      • For eligibility failures, the sponsor must cease all contributions to the plan as soon as practicable but no later than the last day of the 6th month after the failure is identified.
    • Section 305 of the Act requires that a failure not be egregious, not directly or indirectly relate to an abusive tax avoidance transaction, and not relate to the diversion or misuse of plan assets. There is no specific guidance provided but Notice 2023-43 identifies certain failures that are ineligible for self-correction, as discussed below.
    • Section 305 of the Act provides that self-correction must satisfy all the provisions applicable to self-correction in the current EPCRS with certain exceptions. The guidance clarifies the following requirements for self-correction:
      • Most current EPCRS rules apply.
      • Nine inadvertent failures are not eligible for self-correction until EPCRS is updated, including:
        • Failure to adopt a written plan document
        • A significant failure in a terminated plan
        • Any amounts or coverage testing failure insufficiently corrected as provided under Rev. Proc. 2021-30
        • Use of a plan amendment to correct an operation failure if the amendment is less favorable to the participant or beneficiary than the original plan terms
      • Existing recordkeeping requirements for self-correction apply.
      • Certain current EPCRS rules no longer apply:
        • Qualified and 403(b) plans are no longer required to have a determination letter
        • Certain nondiscrimination and employer eligibility failures are no longer prohibited from being self-corrected
        • Prohibitions from self-correcting loan failures do not apply
        • The time limits to self-correct a significant plan failure no longer apply
    Plan sponsors may rely on the Notice until Rev. Proc. 2021-30 is updated pursuant to the Act. During this period, if a self-correction was completed by a plan sponsor on or after December 29, 2022, and before May 25, 2023, the plan sponsor may apply a good faith, reasonable interpretation of section 305 of the Act in completing the self-correction. A plan sponsor that completed a self-correction during this period in a manner that accords with Notice 2023-43 will be treated as having applied a good faith, reasonable interpretation of section 305 of the Act. Recovery of Retirement Plan Overpayments Previous IRS guidance mandated that plan fiduciaries take reasonable steps in their attempt to recover overpayments made to plan participants and beneficiaries, and there were also fiduciary implications under Title I of ERISA with respect to recovery of overpayments.  The Act grants plan fiduciaries the discretion not to seek recoupment of “inadvertent benefit overpayments” made to participants or beneficiaries.  If the plan fiduciary attempts recovery, the Act includes the following limitations on the ability to recover overpayments:
    • No interest or fees may be sought from the participant.
    • If the plan fiduciary seeks to recover overpayments of a non-decreasing annuity by reducing future benefit payments: (i) the reduction must cease after the plan has recovered the full dollar amount of the overpayment; (ii) the amount recouped each calendar year may not exceed 10 % of the full dollar amount of the overpayment; and (iii) future benefit payments may not be reduced to below 90 % of the periodic amount otherwise payable under the terms of the plan. Alternatively, if the plan fiduciary seeks to recover overpayments of a non-decreasing annuity through one or more installment payments, the payments that may be required in a calendar year may not exceed the benefit reductions that would be permitted for the year under the preceding sentence.
    • If the plan fiduciary seeks to recoup past overpayments of a benefit other than a non-decreasing annuity, the plan fiduciary must satisfy requirements to be developed by the Secretary of Labor.
    • Efforts to recover overpayments are: (i) not accompanied by threats of litigation, unless the responsible plan fiduciary makes a determination that there is a reasonable likelihood of recovering an amount greater than the cost of recovery, and (ii) not made through a collection agency or similar third party, unless the participant or beneficiary ignores or rejects efforts to recover the overpayment following either a final judgment in federal or state court or a settlement between the participant or beneficiary and the plan.
    • Recoupment of past overpayments to a participant may not be recovered from any beneficiary of the participant, including a spouse, surviving spouse, former spouse, or other beneficiary.
    • Recoupment may not be sought if the first overpayment occurred more than three years before the participant or beneficiary is first notified in writing of the error, except in the case of fraud or misrepresentation by the participant or beneficiary.
    • The participant or beneficiary may contest the recoupment under the plan’s claims procedures.
    • The plan may consider hardship to the participant or beneficiary.
    The above limitations are not applicable if the participant or beneficiary is “culpable” for the overpayment. A participant or beneficiary is culpable if the individual bears responsibility for the overpayment based on misrepresentations or misstatements or knows that the overpayments were materially in excess of the correct amount. While this provision of SECURE 2.0 is very granular, it still leaves many open questions, including the threshold question of what constitutes an inadvertent benefit overpayment Safe Harbor for Correction of Employee Elective Deferral Failures The Act makes permanent a safe harbor, already included in EPCRS, for correcting certain elective deferral failures in 401(k) plans and 403(b) plans with automatic enrollment and/or automatic escalation features. Under the safe harbor, no corrective contributions for reasonable administrative errors are required for the missed elective deferrals if, generally, correct deferrals start within 9½ months after the end of the plan year in which the failure begins (or the first pay date in the month following the month the participant notifies the plan sponsor of the error), corrective contributions are made for any missed matching contributions, and a notice is provided to the affected participant within 45 days after correct deferrals begin. Unlike the existing safe harbor, under the Act the correction method may be used to correct errors that relate to former employees and remains available even after the IRS identifies the error.  The permanent safe harbor is effective with respect to errors for which the correction deadline is after December 31, 2023. Plan sponsors should make self-correction a priority given the new and expanded opportunities to self-correct plan qualification issues.  In addition, intended corrections should be documented early on in the correction process to ensure the requirements for self-correction are met. Taking advantage of the expanded opportunities to self-correct will allow plans to remain qualified without requiring expensive VCP filings or the risk of fixing the issues found while the plan or plan sponsor is under examination by the IRS.  We will continue to keep our clients and readers informed on EPCRS updates to help plan sponsors capitalize on all self-correction opportunities.]]>         by WLG <![CDATA[SEC’s Recent Marketing Rule Risk Alert Identifies Additional Areas of Focus During Compliance Examinations]]> https://www.wagnerlawgroup.com/?p=62159 2023-07-03T11:59:23Z 2023-06-30T16:35:14Z found here) focused on its examination of investment advisers (specifically including advisers to private funds) under Rule 206(4)-1 (the “Marketing Rule”) of the Investment Advisers Act of 1940. The Risk Alert follows the SEC’s September 19, 2022, Marketing Rule risk alert (found here) which focused on policies and procedures, substantiation requirement (such as whether advisers have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements), performance advertising, and books and records requirements. The Division will be reviewing the above areas as well as continuing to focus, in its exams, on the Marketing Rule’s General . According to the Risk Alert, the Division’s examinations will focus on compliance with the Marketing Rule’s requirements regarding: (i) the use of testimonials and endorsements in an advertisement; (ii) the use of third-party ratings in an advertisement; and (iii) the completion of Form ADV. Testimonials and Endorsements The Division will focus on advisers’ use of testimonials and endorsements in an advertisement, including whether: (i) the provided disclosures are clear and prominent and effectively communicate whether the person giving the testimonial or endorsement (the “Promoter”) is a client or investor;  if applicable, that the Promoter is compensated; and of material conflicts of interest; (ii) oversight conditions are met, such as whether advisers have a reasonable basis for believing that the testimonials or endorsements comply with the Marketing Rule; (iii) where required, written agreements are entered into with Promoters; and (iv) advisers have compensated ineligible persons for testimonials or endorsements, if the adviser knew or reasonably should have known the person was ineligible.

    Takeaways          

    This is an area that will warrant special attention from advisers as the “promoter” concept is expansive and may encompass relationships with solicitors, finders, investor referral networks or programs, and lead-generation firms.

    Third-Party Ratings The Division is focusing its exams on advisers’ compliance with the Marketing Rule’s requirements for the use of third-party ratings in advertisements, including whether:
    • The adviser provides, or reasonably believes that the third-party rating provides, clear and prominent disclosures of: (i) the date on which the rating was given and the period of time on which the rating was based; (ii) the identity of the third party that created and tabulated the rating; and (iii) if applicable, the fact that compensation has been provided directly or indirectly by the adviser in connection with obtaining or using the third-party rating.
    • The adviser has a reasonable basis for believing that questionnaires or surveys used in preparation of third-party ratings are structured to make it equally easy for a participant to provide favorable and unfavorable responses and are not designed or prepared to produce any predetermined result.

    Takeaways

    The SEC is focusing on third-party endorsements and advisers need to follow their relevant procedures and flag for review any disclosures relating to rating, rankings, or awards used in any “advertisement.”

    Form ADV The Division will review whether an investment adviser has accurately responded to the new Marketing Rule-related questions on their Form ADV annual amendments. Conclusion Risk alerts are not specific observations from examinations or as interpretive guidance. However, they do provide advisers with an opportunity to reflect on their practices, policies and procedures, and to implement appropriate modifications to their compliance programs.              ]]>         by WLG <![CDATA[SEC Issues New Guidance For Investment Advice Obligations]]> https://www.wagnerlawgroup.com/?p=61959 2023-05-22T17:38:13Z 2023-05-22T17:38:13Z Staff Bulletin (the “Bulletin”) reiterating the care obligation standards of conduct for broker-dealers and investment advisers when providing investment advice and recommendations to retail investors under Regulation Best Interest (“Reg BI”) and the Investment Advisers Act of 1940 (“IA Fiduciary Standard”), respectively. Similar to earlier bulletins from the Staff, the Bulletin is styled as a Q&A and focuses on compliance with firms’ and financial professionals’ care obligations when forming a reasonable belief that their investment advice and recommendations are in the retail investor’s best interest. The Bulletin addresses the care obligations’ three overarching and intersecting components:
    • understanding the potential risks, rewards, and costs associated with an investment or investment strategy,
    • having a reasonable understanding of the specific retail investor’s investment profile, and
    • having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor’s best interest.
    The Staff also address recommendations or advice involving complex or risky products and dual registrants and the “heightened scrutiny” that should be applied by firms and financial professionals. The “heightened scrutiny” for recommendations or advice involving complex or risky products may present challenges and uncertainty for certain types of investors and increased due diligence. Understanding the Investment or Investment Strategy The Staff’s first Q&A expresses its view, that firms and their investment professionals need to understand the investments and investment strategies in order to form a reasonable basis that the recommendation or advice is in a retail investor’s best interest. In the Staff’s view reasonableness depends on the facts and circumstances of the specific terms and features of an investment or investment strategy. The Bulletin provides a non-exhaustive list of factors, “that may be relevant to consider as part of evaluating the potential risks, rewards, and costs of an investment or investment strategy.” These factors are not only relevant at the start of the relationship but should be considered on an ongoing basis. Further, firms and financial professionals need to consider the overall potential costs, including direct and indirect costs that could be borne by the retail investor. Recommending the lowest cost option does not inherently satisfy the care obligation and both firms and financial professionals need to consider costs beyond those disclosed on a trade confirmation or account statement. These includes aspects of potential costs, such as: commissions, markups or markdowns, and other transaction costs; sales loads or charges; advisory or management fees; other fees or expenses that may affect a retail investor’s return (such as Rule 12b-1 fees, other administrative and service fees, revenue sharing, and transfer agent fees); the trading and other costs associated with an investment strategy (such as the need to continually buy and sell options or futures contracts or pay margin interest, daily rebalance fees, and any structural features of the investment that could magnify investor losses); the costs of exiting an investment or investment strategy (such as deferred sales charges or liquidation costs); any relevant tax considerations; and the likely impacts of those costs over the retail investor’s expected time horizon. Financial professionals cannot satisfy their own care obligations by solely relying on a firm’s approved list of investments. Financial professionals are responsible for understanding an investment or investment strategy before they advise or recommend an investment or investment strategy.  Understanding the Retail Investor’s Investment Profile Under the Staff’s view, in order to form a reasonable basis belief that a particular investment or investment strategy is in the best interest of a particular retail investor, both firms and their financial professionals need to make a reasonable effort to ascertain a retail investor’s “investment profile.” The investment profile needs to be complete, up-to-date, and materially accurate and should contain a retail investor’s financial situation, investment objectives, and other information and characteristics of that retail investor. This requirement depends on the specific facts and circumstances of the particular situation, including considering the nature and characteristics of the investment or investment strategy at issue. The Staff provides a non-exhaustive list of considerations, such as: the investor’s financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objective and financial goals; and any other information the retail investor may disclose in connection with the recommendation or advice. An investment profile is not a once-and-done exercise and firms will need to make a reasonable effort to ascertain whether the investor’s investment profile has changed and to ensure that they have sufficient information to make a recommendation or provide advice in the retail investor’s best interest. The Staff believes firms and investment professionals should generally decline to provide recommendations or advice until they obtain the necessary investor information. In addressing a retail investor’s tax status, the Staff believes that a firm and its financial professionals should consider whether the tax-advantaged option covered by their recommendation or advice is in the best interest of the retail investor based on the retail investor’s investment profile. Various tax advantage and strategies are factors that should be considered but do not alone provide a reasonable belief that a particular recommendation or particular advice would be in the retail investor’s best interest. Considering Reasonably Available Alternatives The SEC has made it clear that the consideration of reasonably available alternatives is an inherent aspect of making a “best interest” recommendation. Further, the Staff views Reg BI and its statements about broker-dealers with respect to consideration of reasonably available alternatives as a useful framework for investment advisers to consider in satisfying their care obligations when providing investment advice. The consideration of reasonably available alternatives should be undertaken early in the process and not after the firm or financial professional has already formulated its recommendation or advice. In the context of mutual funds, reasonably available alternatives goes beyond just a share class consideration and investments and investment types that are reasonably available to investors through the firm should be considered to determine whether they could achieve the investor’s investment objectives. As part of their care obligations firms need to have and implement on an ongoing basis, a reasonable process for establishing and understanding the scope of such reasonably available alternatives. The Staff states that, “[a]though the specific steps may vary, as a general matter the staff believes the process of developing a recommendation or advice should begin by considering a broader array of investments or investments strategies that are generally consistent with the retail investor’s investment profile, and then narrowing to a smaller universe of potential investments or investment strategies as the analysis is more focused on meeting the best interest of a particular retail investor.” This process should include policies and procedures that firms’ investment professionals are trained on. Specifically, firms and their financial professionals need to address the scope of alternatives that should be considered and the factors that need to considered in order to establish a reasonable basis to believe that their recommendation or advice is in the retail investor’s best interest. The Staff also addressed responses for firms with open architecture and alternatively, a limited menu of investments. The Bulletin addresses the different considerations firms and financial professionals should undertake dependent on the scope of the investments available to investors. The scope of alternative investments and investment strategies that might be considered will depend on the facts and circumstances, including the nature of the firm’s business, the retail investor’s investment profile, the scope of its relationships with its customers and clients, and the reasonable availability of alternative investments or investment strategies. The unique features and benefits of alternatives considered do not need to be an exact match, so long as the risks, rewards and costs associated with the alternatives recommendation or advice is reasonably consistent with the retail investor’s best interest and the investor’s investment profile. As with most aspects of a recommendation or advice the Staff believes “documentation demonstrating that the financial professional considered reasonably available alternatives can be particularly important where a recommendation may seem inconsistent with a retail investor’s investment objectives on its face and/or poses conflicts of interest for the firm or the financial professional.” Special Considerations: Complex or Risky Products Although there is nothing in Reg BI or the IA Fiduciary Standard that prohibits the recommendation of, or advice about, complex or risky products, the Staff states that firms and financial professionals should consider whether less complex, less risky or lower-cost alternatives can achieve the same objectives for their retail customers as part of their overall reasonable basis analysis. The SEC believes that complex or risky products would require a “heightened scrutiny.” These products include, inverse or leveraged exchange-traded products, investments traded on margin, derivatives, crypto asset securities, penny stocks, private placements, asset-backed securities, volatility-linked exchange-traded products, and reverse-convertible notes. The heightened scrutiny includes additional information such as, whether the retail investor has an identified, investor-specific trading objective that is consistent with the product’s description in its prospectus or offering documents, and/or has the ability to withstand heightened risk of financial loss. These are not determinative, firms and their financial professionals must still have a reasonable basis to believe that, based on the overall relevant facts and circumstances, the investment is in a retail investor’s best interest. A firm’s due diligence process around these products should be ongoing and its policies and procedures should be specifically designed to address recommendations of, or advice about, complex or risky products. Special Considerations: Recommendations and Advice by Dual Registrants As with most determination whether Reg BI or the IA Fiduciary Standard applies to a dual registrant will depend on a facts and circumstances analysis, with no one factor being determinative. The Staff addresses certain factors they may use to determine the applicable standards but also states that although the standards “may differ in some respects and be triggered at different times, in the staff’s view they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors” and that “[r]egardless of the firm’s or financial professional’s capacity, [it] should obtain and evaluate enough information about the retail investor and the investment or investment strategy being recommended to have a reasonable basis to believe a recommendation or advice is in the best interest of that retail investor and that [the] recommendation is not based on materially inaccurate or incomplete information.” These considerations include considerations around whether a brokerage or advisory account is appropriate. Conclusion and Considerations Firms should evaluate their policies and procedures to ensure the firm’s and its financial professionals’ compliance with the Staff’s recommendations in the Bulletin. Firms should focus on appropriate processes for implementing and documenting recommendations and advice that it and its financial professionals provided to retail investors. Firms that recommend or advise on complex or risky products for retail investors should particularly take note of the Staff’s recommendations regarding these products. The care obligation is an objective evaluation turning on the facts and circumstances of the particular recommendation or advice and the investment profile of the particular retail investor at the time the recommendation is made or when the advice is provided. While the Bulletin is not “a rule, regulation, or statement of the Commission” broker-dealers and investment advisers may wish to consider this guidance (and the previous guidance) in light of continued focus on the Reg BI and the IA Fiduciary Standard when reviewing their policies and procedures, their business models and their relationships with retail investors.]]>         by WLG <![CDATA[DOL “Clarifies” Guidance on the Bonding Requirements to PEPS and Their Pooled Plan Providers]]> https://www.wagnerlawgroup.com/?p=58945 2023-08-20T12:59:50Z 2022-11-30T19:45:17Z Information Letter from Eric Berger, Chief, Division of Coverage, Reporting and Disclosure, in the Office of Regulations and Interpretations of the Employee Benefit Security Administration (“EBSA”) of the Department of Labor (“Department”), addressed the bonding requirements under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) applicable to a pooled employer plan (“PEP”) established under the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). Specifically, the Information Letter clarifies three important points:
    1. The SECURE Act did not expand the bonding requirements under section 412 of ERISA applicable to PEPs to include fiduciaries or other persons who handle “plan assets” of the PEP, but do not “handle funds or other property” of the PEP within the meaning of section 412 of ERISA;
    2. The employees of employers who participate in the PEP do not have to be bonded while collecting and transmitting participant contributions from their employers to the PEP; and
    3. Independent contractors to a plan or a plan sponsor (such as the PEP’s pooled plan provider) are required to be bonded under section 412 of ERISA if handling funds or other property of the PEP.
    Background Section 412 of ERISA requires that “every person who handles funds or other property” of an employee benefit plan be bonded to protect the plan against the risk that plan assets could be lost in the event of fraud or dishonesty on the part of persons that “handle” them. The bond must provide protection to the plan against loss by reason of acts of fraud or dishonesty on the part of fiduciaries or plan officials handling plan funds or property.  In previous Field Assistance Bulletins, the Department has clarified that plan fiduciaries must be bonded only if they “handle” funds or other property of the plan and do not fall within one of the exceptions to section 412 of ERISA.  In determining whether a person is handling plan funds or property, the Department has focused on whether the person’s duties and activities are such that there is a “risk” that plan funds or other property could be lost in the event of fraud or dishonesty by the person to be bonded.  Those persons charged with the duty of receipt, safekeeping or disbursement of plan funds will generally be deemed to present such a risk and, therefore, must be bonded. Information Letter

    1. The SECURE Act did not expand the bonding requirements under section 412 of ERISA applicable to PEPs to include persons who handle plan assets or who are fiduciaries of the PEP, but who do not “handle funds or other property” of the PEP.

    The Information Letter addressed the SECURE Act provision that seemed to apply to PEP fiduciaries or other persons who handle “assets” of the PEP, whether or not the person “handled funds or other property” of the PEP within the meaning of section 412 of ERISA.  According to the Information Letter, the Department does not view the SECURE Act as expanding the bonding requirements for PEPs in this manner.  In the Department’s view, the appropriate reading of the SECURE Act provision is that the normal ERISA section 412 rules that govern the bonding requirements should apply to PEPs.

    2. The employees of employers who participate in the PEP do not have to be bonded while collecting and transmitting participant contributions from their employers to the PEP.

    The Department’s interpretation of the regulation at 29 CFR 2580.412-5(a) in conjunction with section 3(44)(A)(i) of ERISA concluded that participant contributions prior to transmittal to the PEP are not considered plan “funds or other property.” As such, in the Department’s view, employees of employers participating in a PEP who assist in collecting and transmitting participant contributions to the PEP would not by reason of such conduct be required to be bonded under section 412 of ERISA because they would not be handling “plan funds or other property.” As with most Department interpretations, the Information Letter stated that this is not a steadfast rule and that certain circumstances may lead to a different interpretation.

    3. The Information Letter further rejected the position that a PEP sponsor would not need to provide section 412 of ERISA bonding coverage to any independent contractor administrator or manager of the PEP or the sponsor organization such as the PEP’s pooled plan provider.

    Here the Department reiterated that the bonding requirements of section 412 of ERISA apply to “every” person who handles funds or property of an employee benefit plan within the meaning of the regulations. According to the Information Letter, these bonding requirements are not limited to trustees, officers, administrators or managers and there is no exception for independent contractor administrators or managers of the plan or plan sponsor. Citing existing guidance, the Information Letter states that plan officials required to be bonded “will usually include the plan administrator and those officers and employees of the plan or plan sponsor who handle plan funds by virtue of their duties relating to the receipt, safekeeping and disbursement of funds.” FAB 2008-04, Q-5. However, “plan officials may also include other persons, such as service providers, whose duties and functions involve access to plan funds or decision-making authority that can give rise to a risk of loss through fraud or dishonesty.” Id. According to the Information Letter, applying these basic rules, the pooled plan provider would be required to ensure that an independent contractor administrator or manager who handles plan funds or other property is properly bonded. The Information Letter notes that proper bonding could include being covered by the bond of the PEP or by a separate bond obtained by the independent contractor administrator or manager that names the plan as an insured and meets the other requirements for bonds under section 412 of ERISA.]]>         by WLG <![CDATA[A Guide to the SEC’s Reg BI Bulletins]]> https://www.wagnerlawgroup.com/?p=58169 2022-08-29T14:51:26Z 2022-08-25T14:50:30Z A Guide to the SEC’s Reg BI Bulletins - Stephen Wilkes and Seth Gaudreau, PLANADVISER, August 25, 2022 (PDF)]]> by WLG <![CDATA[SEC Provides Further Guidance in its Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Conflict of Interest]]> https://www.wagnerlawgroup.com/?p=58076 2022-10-03T12:42:05Z 2022-08-24T20:23:10Z Staff Bulletin (the “Bulletin”) providing further fiduciary standards guidance for broker-dealers and investment advisers under Regulation Best Interest (“Reg BI”) and the Investment Advisers Act of 1940 (“IA Fiduciary Standard”), respectively.  Like an earlier bulletin from the Staff (see the May 29, 2022 SEC Staff Bulletin found here), the Bulletin is styled as a Q&A and focuses on standards of conduct that are “drawn from key fiduciary principles that include an obligation to act in a retail investor’s best interest and not to place their own interests ahead of the investor’s interest.” The Bulletin defines conflict of interest, under Reg BI and the IA Fiduciary Standard, as an interest that might incline a broker-dealer or investment adviser- consciously or unconsciously -to make a recommendation or render advice that is not disinterested. The Staff further states that firms need to take a proactive approach that is not only robust and ongoing but is tailored to each conflict and not merely a “check the box” exercise. The Bulletin provides a summary of the conflict of interest rule under Reg BI and the IA Fiduciary Standard.  The Staff’s Q&As focus on the following topics: Identifying Conflicts of Interest, Mitigating Conflicts of Interest, Product Menus, and Disclosing Conflicts of Interest.  Below are the key takeaways from each section. Identifying Conflicts of Interest The Staff’s first Q&A expresses its view that “[a]ll broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors.”  The Staff feels that the economic incentives for firms and financial professionals to recommend various products and services that may not be in a retail investor’s best interest create substantial conflicts of interest.  The Staff also clarifies that under Reg BI not only must broker-dealers establish, maintain, and enforce written policies and procedures reasonably designed to identify all conflicts of interest, they must also identify conflicts of interest on an ongoing basis. The Bulletin provides two nonexhaustive lists of best practices, which should be used under a firm’s “culture of compliance” to identify common sources of conflicts of interest, and further identifies steps firms can use to mitigate such conflicts of interest. Firms should review these lists in tandem and identify areas of concern that they may need to address. Further, disclosures alone do not satisfy the obligation to act in the retail investor’s best interest and those conflicts should (or must) be mitigated or eliminated, if they conflict with the firm’s and the financial professional’s obligation to act in a retail investor’s best interest in light of the investor’s objectives. Eliminating and/or Mitigating Conflicts of Interest Reg BI “requires broker-dealers to have written policies and procedures reasonably designed to identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation that are based on the sales of specific securities or specific types of securities within a limited period of time.”  Under the IA Fiduciary Standard, conflicts of interest must be fully and fairly disclosed to allow a client to provide informed consent; if such informed consent cannot be obtained, then the conflict needs to be eliminated.  The Bulletin provides a generalized example that  firms with compensation and incentive programs, based on benchmarks, quotas, or other performance metrics, whose benefits (or conversely, the drawbacks) are seen to influence a financial professional’s decision regarding a retail investor’s interests, will be scrutinized by the SEC.  The Staff, has concerns that the level of rewards (or conversely, the penalties) associated with these programs calls into question whether they comply with Reg BI and the IA Fiduciary Standard. Firms should consider whether such programs need to be reduced or eliminated. The Staff feels that conflict of interest mitigation measures need to be specific to the nature and significance of the specific incentives provided to the firm or its financial professionals under a firm’s business model. The Bulletin provides a nonexhaustive list of potential factors that need to be considered. The Bulletin addresses conflicts of interest concerning compensation arrangements, and lists various best practices that may lead to conflict of interest identification and potential mitigation methods.  A key to the factors and mitigation methods, according to the Staff, is that “[a]lthough industry practice may be a useful guide, the sufficiency of any mitigation of conflicts of interest is not assessed by comparison to industry practice alone.” Firms need to be able to demonstrate periodic review and testing of policies and procedures that are reasonably designed to disclose, mitigate, or prevent conflicts that impact a firm’s or financial professional’s ability to place the retail investor’s interest ahead of its own.  The Staff further states that, “it may be difficult for a firm to demonstrate compliance with the applicable standard of conduct without documenting the measures it takes to mitigate conflicts of interest and any such periodic assessment of its policies and procedures undertaken by the firm.” Product Menus The Bulletin specifically addresses “Product Menus” and the conflicts of interest that may arise from advice and recommendations that are limited to a certain menu of products, which may include proprietary products, a specific asset class, or products that pay revenue sharing or feature similar third-party arrangements.  The Staff feels that firms should consider establishing a review process for the products they offer (or that are offered by an affiliate).  Broker-dealers not only need to identify and mitigate any conflicts associated with such products, under Reg BI they also need to identify and disclose any material limitations placed on the securities or investment strategies.  The Staff views the example of the product review process it provided as equally applicable to limitations placed on investment strategies and investment advisers. Disclosing Conflicts of Interest The Staff reiterates its position that disclosures cannot be a simple “check the box” exercise.  Specific conflicts need to be disclosed in “plain English” and tailored to a firm’s business models and compensation structures, as well as to the different products offered.  The Staff warns that generalized disclosures that a conflict “may” exist is not a sufficient disclosure where a conflict exists.  In cases where the nature and extent of the conflict make it difficult to convey the material facts or effects of the conflict, then it cannot be fully and fairly disclosed and a firm should consider mitigation or elimination of the conflict.  The Staff further provided best practices and a nonexhaustive list of examples that need to be disclosed, at a minimum, when conflicts concern compensation or other benefits, including compensation or other benefits from proprietary products and third party compensation.  A firm’s obligation to act in a retail investor’s best interest is not satisfied by the disclosure of the existence and/or the potential effects of a conflict of interest In the final Q&A, the Staff reiterates that “addressing conflicts is not a ‘set it and forget it’ exercise” and firms need to monitor conflicts of interest over time and periodically assess the adequacy and effectiveness of their policies and procedures to ensure compliance with Reg BI and the IA Fiduciary Standard.  They further state the importance of documenting the measures a firm has taken to address and monitor conflicts of interest, in order to show that the firm and its financial professionals are not placing their interests ahead of retail investors. Key Themes to Consider
    • The SEC is reiterating standards of conduct for handling conflict situations under the Investment Advisers Act of 1940 and Reg BI – and focusing on compensation and proprietary products as examples. This may be a shot across the bows to highlight upcoming future activity by the SEC.
    • Conflicts must be identified and monitored – then mitigated if not eliminated pursuant to a robust set of written policies and compliance procedures.
    • Compensation conflicts are subject to a broad view, and not necessarily purely sales- related.
    • Limited menu product offerings and proprietary products should be governed by established product review processes.
    • Finally, the staff bulletin provides a roadmap to the informal thinking and insights that underlie official SEC guidance – and should be compared carefully with existing policies and procedures to identify potential weaknesses or areas for improvement.
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