Compliance November 5, 2015

Bill Calls for More Hedge Fund Transparency

A New York Congresswoman's bill would require more disclosure about hedge fund holdings.

 

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Legislation authored by Representative Nydia M. Velazquez (D-New York) would significantly strengthen reporting requirements for hedge funds.

Velazquez, who describes hedge funds as large privately organized, pooled investment vehicles not available to the public whose primary investors are wealthy individuals or institutions, says the “Hedge Fund Sunshine Act” (H.R. 3921) comes as media reports repeatedly link hedge funds to the ongoing financial crisis in Puerto Rico.

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The bill is the latest move attempting to bring more clarity to the alternative investment industry, which is coming under increasing scrutiny. In 2010, the SEC approved a rule mandating hedge fund and private equity managers to register with the agency and be subject to surprise examinations. The Government Accountability Office (GAO) in 2011 stated that hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments. More recently, a participant in retirement plans sponsored by Intel Corporation filed a lawsuit claiming its custom target-date funds were too heavily invested in private equity and hedge fund investments, making the funds too risky.

Using Puerto Rico and auto manufacturers as examples of financial opportunism, Velazquez called hedge funds predators that profit from financially distressed entities. “By giving the public and regulators a better sense of hedge funds’ activities, we can finally begin holding this secretive industry accountable for its actions,” Velazquez said in a statement.

Hedge funds are now required to file with the Securities and Exchange Commission (SEC) when they acquire ownership of more than 5% of a class of equity securities. Velazquez’s bill would lower that threshold to 1%, giving the public and the SEC with a better sense of funds’ holdings and financial positions.

H.R. 3921 would also institute a new quarterly reporting requirement for all securities—fixed income as well as equity—in which funds hold a 1% or greater ownership stake. This would mean that, for the first time, these funds would publicly report on their larger debt holdings, such as the significant stake many funds are suspected of holding in Puerto Rico’s debt. These requirements would also take into account derivatives like options and swaps, financial instruments Velazquez says are often used to skirt reporting requirements.

NEXT: A $3 trillion industry that operates with minimal oversight.

“Hedge funds constitute a $3 trillion industry with enormous impact on capital markets, corporations, local governments and, ultimately, working families’ lives,” Velazquez stated. “Yet, due to loopholes in existing law, they operate largely in the shadows, avoiding scrutiny.”

Estimates range widely as to how much of Puerto Rico’s debt is currently held by hedge funds, but some media outlets have suggested hedge funds could control as much as 50% of the island’s financial obligations. Through this outsized role, many funds have been pushing for greater austerity managers and against extending bankruptcy protections to the island.

“Rather than working to help resolve Puerto Rico’s financial crisis in a fair, orderly fashion, these funds are lobbying to cut basic services that 3.5 million American citizens in Puerto Rico rely upon,” Velazquez noted. “It is time we take a clear-eyed look at the effect these funds are having on Puerto Rico and on other parts of our nation’s economy.”

Velazquez’s bill received wide support from a range of advocacy and labor groups including: Americans for Financial Reform; AFL-CIO; AFSCME; Make the Road New York; Strong Economy for All Coalition; Center for Popular Democracy; and Hedge Clippers. The bill, which is being introduced this week, is expected to be referred to the House Committee on Financial Services, of which Velazquez is a senior member.

“This bill will allow regulators and the public to see exactly what role these funds are playing in Puerto Rico’s financial crisis and in our broader economy,” Velazquez said.

Compliance November 5, 2015

Settlement Terms and Price Tag Revealed in Boeing Fee Case

The retirement planning industry already knew Boeing would settle the nearly decade-old 401(k) litigation, but a trove of new details emerged this week as both parties agreed to final settlement terms.
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Plaintiffs’ attorneys announced months ago that Boeing would settle the long-running 401(k) excessive fee lawsuit, Boeing v. Spano, but at the time few concrete details emerged as to what Boeing’s liability might be, financial or otherwise.

Today the price tag emerged as a cool $57 million for Boeing, as laid out in a tentative settlement agreement provided by Jerry Schlichter, managing partner at Schlichter, Bogard & Denton and lead attorney for plaintiffs. He adds this is the “second highest in excessive 401(k) fee litigation after the $62 million settlement achieved on behalf of Lockheed Martin” in February 2015.  

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The approximately 190,000 plaintiffs in this particular case alleged that Boeing violated the Employee Retirement Income Security Act (ERISA) by permitting a variety of excessive fees to be charged to 401(k) plan participants. They also claimed that Boeing engaged in self-serving conflicts of interest, and permitted imprudent funds to be included in the company retirement plan Earlier this year the U.S. District Court for the Southern District of Illinois said it would hear new arguments from both sides, but on the eve of trial Boeing instead announced it would settle the accusations that it violated ERISA. 

Terms of the settlement were submitted to the court, but were not immediately available online or from the parties. Now they have emerged as submitted to the district court for approval.

Schlichter tells PLANSPONSOR that, in addition to the terms emerging today, administrative improvements and fee reductions obtained after filing the case “are already benefiting Boeing employees and retirees, and will continue to do so for many years to come.” The final settlement still requires approval of a joint motion for settlement filed by the parties in the Court of Chief Judge Nancy J. Rosenstengel of the U.S. District Court for the Southern District of Illinois. This seems likely, given both party’s clear support for the terms and the similarity of the approach to other 401(k) litigation settlements that have been approved.

While Boeing still denies all of the allegations and contends it complied in all respects with the law, it already moved soon after the initial case was filed to obtain new and competitive bids for its retirement plan service providers, “already resulting in significant savings for employees and retirees,” Schlichter says.

NEXT: Settlement long on details and intent

Boeing also has already replaced mutual funds with lower priced separate accounts and has agreed to retain an independent investment consultant “to review or not to offer a technology sector fund in the plan,” and has also agreed to the district court retaining jurisdiction to enforce the settlement for three years.

Many more details are contained in the settlement agreement as to what else Boeing will now have to do to make whole its participants. Both the class representatives and class counsel say they consider it “desirable and in the class members’ best interests that the claims against defendants be settled on behalf of the class representatives and the class upon the terms set forth [by the agreement],” and they have concluded that such terms are “fair, reasonable, and adequate.”

Programmed into the settlement language is everything from how and on what timeline Boeing will be required to create and disseminate a qualified settlement fund—to how attorneys’ and court fees will be assessed and distributed. One detail advisers will surely be wondering about: “Class Counsel will seek to recover their attorneys’ fees, not to exceed nineteen million dollars ($19,000,000), and litigation costs and expenses advanced and carried by Class Counsel for the duration of this litigation, not to exceed one million, eight hundred forty-five thousand dollars ($1,845,000), which shall be recovered from the Gross Settlement Amount.”

Also contained in the settlement documentation are draft notices for class members, which define the settlement terms in a concise way: “After nine years of litigation, the Settlement has been reached. As part of the Settlement, a Qualified Settlement Fund of $57,000,000 will be established to resolve the Class Action. The Net Settlement Amount is $57,000,000 minus: (a) all Attorneys’ Fees and Costs paid to Class Counsel; (b) all Administrative Expenses; (c) any and all Class Representatives’ Compensation; and (d) a contingency reserve not to exceed an amount to be mutually agreed upon by the Settling Parties that is set aside by the Settlement Administrator for: (1) Administrative Expenses incurred before the Settlement Effective Date but not yet paid, (2) Administrative Expenses estimated to be incurred after the Settlement Effective Date but before the end of the Settlement Period, and (3) an amount estimated to account for adjustments of data or calculation errors.”

The final net settlement amount for a given class member is set according to a “plan of allocation to be approved by the Court.” Under the settlement agreement’s terms, class members fall into two categories, Current Participants and Former Participants, which may collect settlement assets on differing schedules.

NEXT: Plan of allocation

The plan of allocation outlined in settlement documents is necessarily complex, but the key details are explained as follows:

“The Settlement Administrator shall obtain, in writing, an agreement between Class Counsel and the Settlement Administrator on the Net Settlement Amount, and the amount apportioned to each sub-class. The Net Settlement Amount shall be allocated to the sub-classes as follows: (a) 50% to the Recordkeeping Class (the “Recordkeeping Allocation”); (b) 20% to the Mutual Fund Sub-Class (the “Mutual Fund Allocation”); (c) 15% to the Technology Fund Sub-Class (the “Tech Fund Allocation”); (d) 10% to the Company Stock Fund Sub-Class (the “CSF Allocation”); and (e) 5% to the Small Cap Fund Sub-Class (the “SCF Allocation”).”

According to the settlement agreement, the Recordkeeping Allocation will be divided among class members on a pro rata basis in proportion to each member’s average quarter-ending plan account balance over the class period, starting with the fourth quarter of 2000 and ending with the fourth quarter of 2006.

The Mutual Fund Allocation will be divided among class members of the mutual fund sub-class also on a pro rata basis in proportion to each class member’s combined average quarter-ending balance in the plan’s mutual funds between September 30, 2000, and December 31, 2005. The SCF Allocation, in a similar way, will be divided among the class members of the small cap fund sub-class on a pro rata basis in proportion to each class member’s average quarter-ending balance in the plan’s actively-managed small cap fund during the same time period. Monies will be routed to the company stock fund sub-class in the same way, but calculated according to a members’ holdings in that asset class, and so on for the remaining member classes. 

The Settlement Administrator will then “utilize the calculations required to be performed herein for (a) making the required distributions to Authorized Former Participants; and (b) instructing Defendants as to the amounts to be distributed to Current Participants and calculating the total amount to deposit in the Plan to fulfill this instruction.” Unless the settling parties agree in writing, the total amount of all checks to be written by the Settlement Administrator plus the total amount of all credits that defendants are instructed to make to current participants may not exceed the net settlement amount.

See "How to Treat Lawsuit Awards and Settlements."

The full text of the settlement agreement is here.

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