Obama Administration Proposes Rules to Tighten Broker Standards for Retirement

One source notes that the Department of Labor is moving full steam ahead with a proposed fiduciary standard for anyone giving retirement investment advice. As the Wall Street Journal notes, at present, brokers’ recommendations only have to be “suitable.”

The proposed rule would require financial advisers dealing with retirement savings to do so in their clients' best interests and disclose any potential conflicts of interest. It also calls for several prohibited transaction exemptions that would allow retirement advisers and service providers to continue arrangements like revenue sharing and fees.

The rules come as individuals have become increasingly responsible for their own retirement security as traditional pensions have mostly disappeared in favor of IRAs and 401(k)s. Such products either didn’t exist or were brand new when the department wrote its rules for retirement advice 40 years ago but now contain about $11 trillion in assets.

Labor Secretary Tom Perez notes that the rule is “intended to provide guardrails but not straitjackets, so we know consumers are getting advice that is in their best interest.

The DOL sent its proposed rule to the Office of Management and Budget for regulatory review on Feb. 23, which typically can take up to 90 days. The proposed rule is now being released for a 75-day public comment period, followed by a public hearing and further public commentary.

 

 

Former Old Town, Maine Mill Owner Faces SEC Fraud Charges

As the Bangor Daily News and other media outlets reported recently, Lynn Tilton -- the force of nature behind a brief ray of hope for Maine's Old Town paper mill -- is now facing Securities Exchange Commission fraud charges.   Tilton's firm had tried but failed to breath new life into the Old Town mill and, ultimately, sold the facility as reported here.

The SEC's press release says, "The Securities and Exchange Commission today announced fraud charges against an investment adviser and her New York-based firms accused of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage." 

Tilton has responded, as Reuters reports, by suing the SEC over alleged constitutional defects in that agency's administrative justice system.

White House: "conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings."

In a report issued in February 2015 the White House concluded that conflicted investment advice harms investors to the tune of billions of dollars.  The White House estimates losses at between $8 billion and $17 billion or between 1 percent and 0.5 percent of the $1.7 trillion dollars of IRA assets under management.


The report suggests that mandated disclosures are not a solution. They may actually backfire by providing a false sense that advice is unbiased.  Disclosures are not read by investors.  They are often are not understood.  They are in fine print or in legalese and may not be understood.   


The report also suggests that the American public receives much less protection against conflicts of interest than our neighbors in Canada, Europe, and India.


This report supports a push by the White House, as widely reported, to have the Department of Labor move forward with rules that will impose a fiduciary standard on all stock brokers handling retirement accounts.  

Maine Securities Regulator Testifies Before U.S. Senate Committee on Aging; Touts Success of Maine Program to Combat Senior Financial Exploitation

As the North American Securities Administrators Association (NASAA) reports, on February 4, 2015 Maine Securities Administrator Judith Shaw testified before the U.S. Special Committee on Aging. Shaw emphasized the difficulty in addressing senior financial exploitation, noting that many elderly individuals are vulnerable, socially isolated and distant from family and other supportive networks. According to Shaw, financial exploitation is one of the most serious issues facing seniors.

Of note, Shaw discussed the approach Maine is taking to address this growing issue. In particular, Shaw noted the success of Maine’s “Senior$afe” program (a partnership between the Maine Department of Health and Human Services’ Office of Aging and Disability Services, the Maine Department of Professional and Financial Regulation, the Maine Bankers Association, the Maine Credit Union League, Maine’s Legal Services for the Elderly, and Maine’s five Area Agencies on Aging). The “Senior$afe” program is a training and outreach effort intended to increase identification and reporting of elder financial exploitation by financial institutions. It provides training for tellers, other front-line staff and managers on the red flags of elder abuse and financial exploitation.

According to Shaw, over 200 bank and credit union employees in Maine have received Senior$afe training. The program has been so successful that Senior$afe program materials have been shared with NASAA for revision and co-branding so that it can be made available to NASAA members in the United States, Canada and Mexico. According to one source, Shaw “strongly believe[s]” the program could be a model for other states.

According to U.S. Senator Susan Collins, “Maine is on the cutting edge of helping to combat financial abuse of seniors though programs like the innovative Senior$afe program, which is the first of its kind in the nation.”

Shaw’s testimony can be viewed by video by clicking here.

Arbitration versus Litigation: Factors to Consider

 ARBITRATION v. LITIGATION: Pros & Cons
How do they compare?   What factors might you consider if you have a choice whether to go to U.S. state or federal court or pursue arbitration? 

	Litigation	Arbitration
Cost	High.  Litigation is the most expensive dispute resolution process as a result of extensive pre-trial discovery, motion practice, and formal process.	Moderate.  Arbitration is generally less expensive than litigation, although unlike litigation, the arbitrator’s fees are paid by the parties (Judges are paid by taxpayers).
Discovery	Expansive. Ability to uncover vast amounts of information.	Limited.  Most arbitration rules favor limited discovery, so opportunities for depositions and subpoenas to third-parties are limited.
Dispositive Motions	Allowed.  Courts often dismiss claims prior to trial.	Limited.  Many arbitration rules limit or disfavor dispositive motions.
Speed	Slow.  Timing of resolution based on court’s schedule, cases may be set for hearing on short notice.	Faster.  Arbitration is usually faster, and a date certain for hearing is standard; greater  scheduling flexibility.
Predictability	Unpredictable.  Juries can be unpredictable.   The parties cannot select the judge and have limited ability to select the jury.	More predictable. Arbitrator is agreed upon by both parties and can be an expert in the subject matter.
Appeal Rights	Yes.  Full rights of appeal. Decisions by judges are explained.	Very limited.  Arbitration awards are subject to appeal only on very narrow grounds.  Decisions may not be explained, making it even more difficult to appeal.
Evidence	Formal.  Rules of evidence apply.	Informal.  Rules of evidence do not apply.  Evidence can be introduced in arbitration that would be prohibited by a court.
Privacy	Public.  The Courts are public; information obtained through litigation is often public too.	Private.  Information disclosed and outcome can be confidential if agreed upon by both parties.
Forum Selection	Limited.  Limited by the events giving rise to the dispute and where the parties are located.	Flexible.  Parties can select where to hold the arbitration regardless of where they live or where the events giving rise to the action took place.

Largest One-Time Settlement in Maine History Involving Alleged Unfair Credit Rating Practices

The Maine Attorney General announced earlier this week that its $21.5 million share of the multi-state settlement with Standard & Poor's over credit rating practices is the "largest ever one-time settlement in Maine history."  The settlement received substantial press attention nationwide following Attorney General Eric Holder's press conference and in Maine following the Attorney General Janet Mills' February 4 press conference at the Kennebec County Courthouse.

According to the Maine Attorney General's press release, "Attorney General Mills said her office has aggressively litigated and negotiated the case for two years. Initially S&P removed the case from Kennebec County to federal court in Maine. The case was then consolidated with cases in other states and transferred to the United States District Court for the Southern District of New York. The Attorneys General then litigated the case in New York for eight months until the federal court remanded Maine’s lawsuit back to Kennebec County, where S&P then tried unsuccessfully to have the case dismissed on jurisdictional grounds."

Attorney General Mills singled out Assistant Attorney General Linda Conti, head of the Consumer Protection Division, for praise.  AAG Conti "traveled to New York City a number of times and . . . spent hundreds of hours litigating the case in state and federal courts on behalf of the State of Maine."

Crowdfunding -- Less Useful and More Risky?

It's great that Maine and about fifteen other States are making it easier for startups to raise money by authorizing crowdfunding -- a money-raising strategy that may be a way of assisting small businesses and start-ups looking for investment capital to get their ventures off the ground. 

Crowdfunding is an option for some entrepreneurs .  But there are plenty of ifs, ands, and buts that go along with crowdfunding.  What about complying with federal law?  Required.  Complying with the law of any other state in which investors reside?  Required.  Substantial legal oversight and advice and financial reporting capabilities?  Required. 

What about investors?  Investors should be extremely cautious about crowdfunding.  The companies involved may be new and inexperienced, information about the investment may be limited, regulatory oversight may be limited, the investments may not be liquid (it may be impossible or very difficult to cash-out), and the risk of loosing money may be off the charts.

Information from the Maine Office of Securities can be found here.

As reported in recent press, entrepreneurs can now lawfully raise capital by crowdfunding in several states.  But the utility of this tool for most entrepreneurs is limited and, as is the case with many other forms of private offerings,  the risk to investors can be substantial.