Keep Your Eye on the Prize
For ERISA plan fiduciaries who thought they were being responsible and addressing participants’ demands by including investments in employee retirement plans that also support non-financial objectives, such as environment, social and corporate governance (“ESG”) goals, the Department of Labor (“DOL”) has weighed in. And they don’t necessarily agree.
In a proposal announced June 23, 2020, the DOL would seek to amend sections 404(a)(1)(A) and (B) of ERISA (the “Proposal”) to make clear that plan fiduciaries must focus first and foremost on maximizing potential investment returns and minimizing investment risks in the plan. All other non-pecuniary objectives must be subordinate.
The Proposal recognizes the increasing proliferation of ESG-focused investment vehicles and cites numerous concerns facing plan fiduciaries whose apparent good intentions might undermine the true objective of ERISA plans— maximizing retirement funds. These issues include a lack of uniformity in defining an ESG investment, vague and/or inconsistent rating systems, inaccurate or incomplete disclosures, reduced returns, potentially greater risks, and higher fees. While recognizing the purported opportunity to further social causes that may be important to individual plan investors, the Proposal notes that “Providing a secure retirement for American workers is the paramount, and eminently-worthy, ‘social’ goal of ERISA plans”.[i]
The proposal seeks to codify the following points:
- A plan fiduciary’s evaluation of an investment must be focused only on pecuniary factors that have a material effect on the return and risk of an investment.
- Fiduciaries are prohibited from subordinating the financial interests of plan participants and beneficiaries to some other, non-pecuniary goal, either by sacrificing investment return or taking on additional investment risk.
- Plan fiduciaries must consider alternative investments or investment courses of action.
- When alternative investments are determined to be economically indistinguishable after thorough evaluation, and one of the investments is selected on the basis of a non-pecuniary factor or factors such as ESG considerations, the fiduciary must fully document the analysis undertaken.
- Fiduciary standards also apply to a fiduciary’s selection of investments in 401(k) and other defined contribution individual plans which allow a plan participant to direct their investments into an array of options in the plan. The proposal explicitly sets forth the criteria that a fiduciary must consider in selecting investment options for such plans when the investment option includes ESG goals in their investment mandates, or in the fund name.
The full text of the rule proposal can be found here.
To speak with a CSS regulatory expert, email us at info@cssregtech.com.
[i] Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, RIN 1210-AB95, Financial Factors in Selecting Plan Investments
FINRA Enhanced Security Features for Super Account Administrators (SAAs) and Account Administrators (AAs)
FINRA recently deployed a new security feature for users of the Web CRD and IARD systems which is being rolled out to firms in phases over the next several months. FINRA is implementing Multi-Factor Authentication (MFA) which will add an additional layer of security for Super Account Administrators (SAAs) and Account Administrators (AAs) verifying their identity. In addition to your existing user name and password, you will now be required to provide a second method of authentication using one of the following methods:
- Mobile application;
- Test message; or
- Phone call
Your SAA will receive an email notification from FINRA prior to the rollout phase in which your firm is included. To assist you in preparing for this change, SAAs and AAs should install the Duo Mobile app on their mobile device to allow for MFA.
For more information, check out the following link or email our regulatory compliance experts at info@cssregtech.com.
CCPA Enforcement Begins July 1, 2020 – Violators Already Being Pursued
Financial institutions are down to one week left to update their privacy notices and privacy practices in order to comply with the California Consumer Privacy Act. The CCPA will be enforced by California’s Attorney General starting July 1, 2020 following six months of breathing room since the law took effect January 1, 2020. In addition to the enforcement by California’s AG, private actions for CCPA violations have already been filed against a number of companies – signifying that the law has teeth and noncompliance is being pursued aggressively.
In a previous blog post, we identified the various requirements imposed by the CCPA, many of which are similar to data protections for individuals under the GDPR. Noncompliance can result in a penalty of up to $2,500 per violation ($7,500 per violation if deemed intentional), which can quickly rack up given the number of California clients a financial institution may have.
Final regulations implementing the CCPA were published June 1, 2020 and are available here.
At CSS, we are receiving inquiries from financial firms looking to update their privacy notices ahead of the enforcement date. If you would like assistance in reviewing your privacy practices for CCPA or conducting a data classification assessment, or to inquire about any of our cybersecurity service offerings, please contact our experts at: cybersecurity@cssregtech.com.
Global Short Selling Restrictions in a COVID-19 Economy
Since the outbreak of the COVID-19 pandemic and the resulting lockdown of Wuhan, China on 23 January 2020, world markets have seen unprecedented swings, developed and developing countries alike have experienced severe economic damage, and regulators around the world have taken swift and significant actions in attempts to stave off further financial turmoil.
For investment managers and other market participants, the most frequent and severe regulatory measures have been directed at their short positions. And yet, as trading suspensions and complete market closures have also made clear, no type of investor is immune from this new global wave of regulations.
Hover over a jurisdiction below, for a sampling of where your short position may be banned outright, or otherwise subject to these emergency measures. And keep in mind that, while some of these temporary rules have expired and given some hope for normalcy, many others do remain in force, and moreover regulators are now well-equipped to quickly introduce a second wave should the need arise.
Other maps: Shareholder Disclosure: Long Holdings in Europe | Regulatory Changes to Sensitive Industries | Shareholder Disclosure: Low Notification Thresholds in Europe
*This map includes content derived from Rulefinder Shareholding Disclosure, the online legal service from aosphere LLP. We work with aosphere to source legal content for our rules engine.
Shareholder Disclosure: Low Notification Thresholds in Europe
Among the hundreds of threshold reporting rules throughout Europe that affect investment managers, a significant number apply to long or short positions of 1% or lower. And because the applicable rules are the local laws of wherever the issuer is based or listed, a market participant with exposure in various European issuers could be subject to multiple filing obligations at once. This map illustrates low thresholds of which position holders should be aware:
Other maps: Shareholder Disclosure: Long Holdings in Europe | Regulatory Changes to Sensitive Industries | Global Short Selling Restrictions in a COVID-19 Economy
* This includes the UK, which remains subject to EEA requirements during the Brexit transition period.
0.1% – short (EU Short Selling Regulation, issuer of shares: private notification)**
** The 0.1% initial threshold is a temporary measure introduced by ESMA (lowered from 0.2%).
0.5% – short (EU Short Selling Regulation, issuer of shares: public notification)
0.1% – short (EU Short Selling Regulation, sovereign debt issuer of ≤ €500 billion)
0.5% – short (EU Short Selling Regulation, sovereign debt issuer of > €500 billion)
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BelgiumBelgium imposes an obligation to submit a filing to the FSMA if holding at least 1% of the outstanding shares of a target company or relevant issuer involved in a takeover bid. In addition, many Belgium issuers privately impose upon their shareholders a separate disclosure obligation, at levels starting at 1%.
CyprusOnce reaching interests of at least 0.5% in an issuer involved in a takeover bid, each acquisition in such issuer must be disclosed to CySec.
Czech RepublicInvestments in certain issuers with a minimum level of registered capital trigger a disclosure obligation to the CNB for long holdings at a 1% threshold.
European Economic Area (31 jurisdictions)Under the EU Short Selling Regulation, a market participant must disclose to the relevant national competent authority any short position of at least 0.2% it holds in a company issuer listed on a qualified EEA exchange. As of 16 March 2020, ESMA temporarily reduced this initial threshold to 0.1%. At levels starting at 0.5%, the required disclosure becomes public. For short positions in sovereign debt, the filing thresholds start at 0.1% (of issued sovereign debt if that amount is at most €500 billion when duration-adjusted) or 0.5% (of issued sovereign debt if that amount is greater than €500 billion when duration adjusted, or if there exists a liquid futures market for the sovereign debt).
FranceIn France, a filing obligation can be triggered at long holdings of 0.5% under various scenarios. A negotiated transaction constituting at least 0.5% of issuer outstanding is disclosable to the AMF if it provides for “preferential terms and conditions”. A transaction of 0.5% can also trigger an AMF filing requirement if undertaken pursuant to a borrowing or similar arrangement. In addition, hundreds of issuers in France, including the vast majority of blue chip issuers listed on the CAC40, set forth their own disclosure thresholds beginning at 0.5%. Shareholders should also take note of a low threshold requirement in the context of an issuer involved in a takeover bid: increasing holdings by at least 1% would then trigger a filing requirement (made to the AMF) upon any subsequent transactions made in that issuer.
GreeceWhen the issuer is involved in a takeover bid, a requirement to file with the HCMC is triggered when increasing holdings by at least 0.5%. |
GuernseyGuernsey is a British Crown dependency that forms part of the Channel Islands. While not officially a part of the United Kingdom, Guernsey (as well as nearby Jersey) applies the rules of the UK Takeover Panel, including the filing requirement when reaching interests of at least 1% in a relevant (Guernsey) issuer involved in a takeover. The filing is made to the UK Takeover Panel.
IrelandReaching at least 1% interests in a relevant issuer involved in a public bid triggers a required disclosure to the Irish Takeover Panel.
Isle of ManLocated in the Irish Sea, the Isle of Man is a British Crown dependency (like Guernsey and Jersey), and imposes the rule that shareholders reaching interests of at least 1% in a relevant (Manx) issuer involved in a takeover must submit a disclosure to the UK Takeover Panel.
ItalyAs a result of the economic effects of the COVID-19 pandemic, effective 18 March 2020 Italian regulator CONSOB lowered its disclosure thresholds as follows, scheduled to be effective for a three-month period: 3% for investments in shares of Small and Medium Enterprises (SMEs) and 1% for investments in shares of non-SMEs.
JerseyLike Guernsey, Jersey is a British Crown dependency that forms part of the Channel Islands. It follows the requirement that shareholders must submit a filing to the UK Takeover Panel when reaching at least 1% interests in a relevant (Jersey) issuer involved in a takeover.
SpainShareholders considered to be based in a “tax or regulatory haven” must disclose their positions at every percentage point of holdings reached in a Spanish issuer, starting at 1%. (Spain’s changing list of tax havens has included jurisdictions such as Bermuda, the Cayman Islands, the Cook Islands, the British Virgin Islands, the US Virgin Islands, Saint Lucia, Gibraltar, Liechtenstein, Monaco, Isle of Man, and the Channel Islands.)
United KingdomWhen reaching interests of at least 1% in a relevant issuer involved in a takeover, the shareholder must submit a filing with the UK Takeover Panel. |
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Don’t Forget the Disclosure Obligation
Recently, the SEC announced the settlement of an enforcement case against Morgan Stanley Smith Barney (MSSB) involving charges that MSSB provided misleading information to its clients in connection with trading costs in its retail wrap fee programs. MSSB agreed to pay a $5 million penalty that will be distributed to harmed investors. The case is the latest in a series of cases against firms that sponsor wrap fee programs. Wrap fee program sponsors are generally dually registered as investment advisers and broker-dealers.
In a typical wrap fee program, a client pays a single asset-based management fee to the sponsor to cover investment advice and brokerage services, including trade execution. To the extent trades are executed at other brokers (“trading away”), clients generally incur additional trading fees, which generally are not visible to the client.
The practice of trading away is not illegal, and there are often good reasons why a manager may choose to trade away from the sponsor. However, in cases over the last several years the SEC has found that wrap fee program sponsors, such as MSSB, have not adequately disclosed the trading away practice or the costs of such trades to clients.
The SEC has prioritized cost transparency to investors as an important focus over the past few years and has brought many cases on the topic. This focus is highlighted in the SEC’s adoption of Regulation Best Interest (Reg BI), which imposes a new standard of care upon broker-dealers to act in a client’s best interest. This standard can only be satisfied by, among other things, exercising care in making a recommendation (or executing a trade) and disclosing all relevant information, including fees, costs and conflicts of interest. Reg BI is effective June 30, 2020.
CSS’s regulatory experts are former CCOs, and can help you with any compliance challenges you’re facing today. Email us at info@cssregtech.com.