Compliance December 16, 2021

Plan Fiduciary Sentenced for 401(k) Plan Embezzlement

He pleaded guilty after the DOL found he fraudulently collected between $15,000 and $40,000 from plan participants’ accounts.

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It wasn’t a cyber breach that affected participants’ assets in the R&R Steel LLC 401(k) Plan, but rather embezzlement from a plan fiduciary.

The Department of Labor (DOL) announced that the company’s owner and the retirement plan’s only named trustee and administrator pleaded guilty to one count of theft or embezzlement from an employee benefit plan and one count of mail fraud. A federal judge sentenced him to 18 months in prison.

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Under terms of a plea agreement, Judge Timothy S. Black of the U.S. District Court for the Southern District of Ohio ordered the plan fiduciary to forfeit $25,000 to the government and to pay an amount of restitution to affected participants that will be determined at a later hearing. The fiduciary must also pay an assessment of $200 and serve three years of supervised release following his prison term.

The DOL says an investigation by its Employee Benefits Security Administration (EBSA) found the fiduciary fraudulently collected between $15,000 and $40,000 from the company’s 401(k) plan by forging participant signatures and using funds for his personal benefit. Investigators found he forged multiple participants’ signatures on distribution forms for the R&R Steel LLC 401(k) Plan and changed the participants’ addresses to that of his own or his company’s address. As the plan’s sole fiduciary, he then signed the distribution forms and authorized the cash distribution.

The checks arrived at the company or at the plan fiduciary’s personal address, and he then forged checks with participants’ signatures and converted the funds for his personal use by cashing the checks at local banks and markets. In some cases, the victims were non-English speaking or had limited English proficiency.

The count of mail fraud relates to the fiduciary fraudulently receiving Occupational Safety and Health Administration (OSHA) training certificates that he used to meet the requirements necessary to obtain a $450,000 subcontract to perform work on a Cincinnati commercial development in October 2015.

The case is U.S. v. Ron Craig Estes, Case No: 1:19-cr-00139-TSB.

Compliance December 16, 2021

SEC Proposes New Money Market Fund Rules

The proposed amendments are designed to address potential runs on money market funds during times of market stress.

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The Securities and Exchange Commission (SEC) has voted to propose amendments to certain rules that govern money market funds under the Investment Company Act of 1940.

The agency notes that in March 2020, growing economic concerns about the impact of the COVID-19 pandemic led investors to reallocate their assets into cash and short-term government securities. The market fall sparked by fears of the pandemic started on March 9, 2020, with a record-setting 7.79% drop in the Dow Jones Industrial Average. Two more record-setting days followed—a 9.99% dive on March 12 and a 12.93% plunge on March 16 for the Dow.

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As a result of the market drops, prime and tax-exempt money market funds, particularly institutional funds, experienced large outflows, which contributed to stress on short-term funding markets. The SEC says its proposed amendments are designed, in part, to address concerns about prime and tax-exempt money market funds highlighted by these events.

The SEC says the proposed amendments would increase liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions. The proposed amendments also would remove provisions in the current rule permitting or requiring a money market fund to impose liquidity fees or to suspend redemptions through a gate when a fund’s liquidity drops below an identified threshold. These provisions appeared to contribute to investors’ incentives to redeem in March 2020, as some funds’ reported liquidity levels declined, the SEC says.

To address concerns about redemption costs and liquidity, the proposal would require institutional prime and institutional tax-exempt money market funds to implement swing pricing policies and procedures that would require redeeming investors, under certain circumstances, to bear the liquidity costs of their redemptions. In addition, the proposal would amend certain reporting requirements to improve the availability of information about money market funds and enhance the SEC’s monitoring and analysis of these funds.

“Together, these amendments are designed to reduce the likelihood of runs on money market funds during periods of stress,” says SEC Chair Gary Gensler. “They also would equip funds to better meet large redemptions, addressing concerns about redemption costs and liquidity. Given the broad reach of short-term funding markets, these proposals speak to our remit to maintain fair, orderly and efficient markets.”

The SEC began evaluating the need for further money market fund reforms following the events in March 2020. Its proposal follows the agency issuing a request for comment to gather public feedback on potential reforms, including options discussed in a December 2020 report from the President’s Working Group on Financial Markets.

A fact sheet about the proposal is here, and the text of the proposed rule is here. A 60-day comment period will start after the proposed rule is published in the Federal Register.

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