Compliance March 21, 2023

Church ERISA Charges Dismissed, but Fiduciaries Newport, Symetra Still on the Hook

A federal judge in Tennessee dismissed most of the fiduciary breach claims under federal benefits law in multidistrict litigation.

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The African Methodist Episcopal Church retirement plan and third-party administrators had federal ERISA charges from a class action retirement complaint dismissed by a Tennessee federal judge’s ruling, but they still face state charges.

The court order on the defendants’ motions to dismiss the consolidated amended complaint were granted, in part, and denied in part, by U.S. District Judge S. Thomas Anderson, of the Western District of Tennessee’s Eastern Division.

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The plaintiffs’ amended complaint alleged fiduciary breach charges against the AME Church’s Ministerial Retirement Annuity Plan; plan administrators Newport Group Inc. and Symetra Life Insurance Co.; and Reverend Jerome Harris, the former executive director of the AME Church’s department of retirement services from 2000 until June 2021.

“The court holds that Symetra has not discharged its burden to show that plaintiffs lack capacity to sue as representatives of the plan as a matter of Tennessee law and that the AMEC has not carried its burden to show why the Council of Bishops and the General Board lack the capacity to be sued as matter of the law of corporations,” Anderson’s decision stated.

The lawsuit, brought by AME Church plan participants, alleged Harris mismanaged the plan and engaged in negligent conduct, to the detriment of the plan participants’ retirement assets, according to an amended complaint.

“Defendant Harris made a series of self-dealing, illegal, and/or risky investments without any oversight from the African Methodist Episcopal Church and its ministers,” the amended complaint stated.

The parties were briefed on the legal issues in a February meeting when the court held a motion hearing with the parties’ counsel, according to the order.

The plaintiffs are current or retired clergy of the church. The lawsuit alleged claims under Tennessee law and “in the alternative,” claims under the Employee Retirement Income Security Act, against the denomination, church officials, the third-party service providers to the plan and others, according to the order.  

ERISA Claims Dismissed

Anderson dismissed the alleged fiduciary breach claims in the amended complaint brought under the Employee Retirement Income Security Act.

“The amended complaint fails to state any plausible ERISA claim (counts 11 through 17); its claim for breach of trust and misappropriation of trust assets in violation of the Tennessee Uniform Trust Code (count 2) against the AMEC Defendants, Newport and Symetra; its fraudulent concealment (count 5) and fraudulent misrepresentation (count 6) claims against the AMEC Defendants and Newport; its breach of contract (count 7) and promissory estoppel (count 8) claims against the AMEC; and its claim for the intentional infliction of emotional distress (count 9) against the AMEC. Defendants’ Motions [to Dismiss] are GRANTED as to each of these claims,” wrote Anderson in the order.

Defendants Newport and Symetra argued for the lawsuit to be dismissed for failure to state a claim upon which relief can be granted and lack of jurisdiction, but Anderson disagreed.

The amended complaint alleged a proper basis for the court to exercise original jurisdiction over the class action under the federal Class Action Fairness Act of 2005, because the amount “in controversy” exceeds $5 million, named plaintiffs are residents of several states and “the AMEC is a Pennsylvania corporation with its principal place of business in Tennessee,” states the order.

The amended complaint alleged claims under ERISA, making it a civil action arising under the laws of the United States and establishing the court’s jurisdiction under 28 United States Code, Section 1332, Anderson adds.

“‘The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States,’” the regulation states.

Anderson ruled that the District Court has proper subject matter jurisdiction over the case presented in the plaintiffs’ amended complaint and that the plaintiffs have alleged sufficient facts to demonstrate their Article III standing to bring this lawsuit.

“Therefore, Symetra’s motion to dismiss due to plaintiffs’ lack of capacity to sue is DENIED,” he wrote.

The amended complaint alleged three claims under Tennessee law against Symetra: breach of fiduciary duty (count 1), breach of trust in violation of the Tennessee Uniform Trust Code (count 2), and negligence (count 3) and the court concluded the amended complaint makes plausible allegations to satisfy plaintiffs’ burden of pleading their Article III standing to bring these claims, states the order.

The judge also affirmed breach of fiduciary duty on Count I, against Newport and Symetra, under Tennessee law. The court held that the amended complaint plausibly alleged Newport and Symetra were fiduciaries to the plan and the claim can proceed in state court, Anderson ruled.  

“On the merits of the claims alleged in the amended complaint, plaintiffs have stated plausible claims for breach of fiduciary duty (count 1) and negligence (count 3) against Newport and Symetra,” the order stated.

The violations alleged by plaintiffs against defendants AMEC, Newport and Symetra were of the Tennessee Uniform Trust Code for breach of trust and misappropriation of Trust Funds, according to the order. The defendants argued for the court to dismiss all of the amended complaint’s claims for breach of trust and misappropriation of trust funds, the order shows. “The court finds plaintiffs’ argument unpersuasive,” states the order and the defendants motion to dismiss is granted for Count 2.

The plaintiffs seek to represent a class defined as all U.S. participants in the African Methodist Episcopal Church Ministerial Retirement Annuity Plan and beneficiaries entitled to benefits as of January 1, 2021, under the African Methodist Episcopal Church Ministerial Retirement Annuity Plan, and all U.S. residents who are qualified employees of the AME Church who were not, but should have been, made participants or beneficiaries in the African Methodist Episcopal Church Ministerial Retirement Annuity Plan, according to the order.

The class consists of more than 5,000 members, though the precise figure is unknown.

Dismissed ‘Without Prejudice’

The dismissed claims were ruled out by Anderson without prejudice, should the plaintiffs request a leave to amend, he wrote.

“The claims are hereby dismissed without prejudice to plaintiffs’ right to raise the same claims in a subsequent motion to amend their pleadings filed in accordance with Rule 7(b) and the [August 25, 2022] case management order previously set by the Court,” Anderson stated. The initial complaints filed in several jurisdictions were consolidated in the U.S. District Court for the Western District of Tennessee in June 2022, and the plaintiffs filed an amended consolidated complaint in August 2022.

The primary suit is Reverend Charles R. Jackson et al. v. Newport Group, Inc; Symetra Financial Corporation; Reverend Dr. Jerome V. Harris; and African Methodist Episcopal Church et al. 

The AME Church and Symetra did not return a request for comment on the litigation. An Ascensus spokesperson for Newport says the firm does not comment on litigation.

The plaintiffs are represented by Branstetter, Stranch & Jennings PLLC, of Nashville, Tennessee; attorneys from Wright & Schulte LLC, based in Vandalia, Ohio; and attorneys from Osborne & Francis Law Firm PLLC, based in Orlando, court documents show.

Newport is represented by attorneys from the Groom Law Group, based in Washington, D.C., and Burch, Porter & Johnson PLLC, based in Memphis, Tennessee. Symetra is represented by attorneys from Carlton Fields PA, based in Washington, D.C. The AME Church is represented by attorneys from the Memphis, Tennessee office of Baker Donelson.  

Compliance March 21, 2023

SEC Balances Competing Interests in Finalizing Cybersecurity Rule

The SEC reopened the comment period on a cybersecurity rule which would require updated policies and prompt SEC notification of cyber events.

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The Securities and Exchange Commission last week decided to reopen the comment period for a proposed cybersecurity rule that would apply to the policies of registered investment advisers and fund companies. The initial proposal was introduced on February 9, 2022, and its original comment period expired on April 11, 2022.

The reopening decision was based in part on the requirement that covered actors confidentially inform the SEC within 48 hours of detecting a significant cyber incident. Additionally, according to Dan Bresler, a partner at Seward & Kissel, the reopening is also due to two new proposals, on Reg SCI and Reg S-P, which cover related topics and could “impact the industry’s comments on the cybersecurity rule.” He adds that, “It also likely signals that a final rule will be coming in the near term.”

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If approved as written, the cybersecurity rule would require broker/dealers, clearing agencies, national securities associations, national securities exchanges and transfer agents to maintain policies which identify and address their cybersecurity risks. They must also review these policies annually in light of possible changes to those risks. They must also inform the SEC of a significant cyber incident within 48 hours of becoming aware of it and make updates to that disclosure if the disclosed facts become materially inaccurate. This disclosure would be completed on a proposed new form, Form SCIR.

The new comment period opened on Tuesday, with the reopening release’s publication in the Federal Register, and continues through May 22.

The Investment Adviser Association said in an emailed statement that it supports reopening the comment period because it needs more time to study the rule’s interactions with others, such as the outsourcing rule.

The day before the SEC’s open hearing, the IAA also hosted a panel at its 2023 Investment Adviser Compliance Conference in which representatives of the SEC discussed the cybersecurity rule with representatives of the investment adviser industry.

Maria Chambers, the chief compliance officer at Klingenstein Fields Advisors, said that the 48-hour reporting and update requirements are misguided. She noted that many of the cybersecurity employees at her firm who are responsible for fixing and mitigating the breach will also be responsible for reporting. This means the reporting requirement essentially becomes a burden and a distraction while an incident is ongoing. It also is not clear what “significant” means in terms of precise events that would require a disclosure to the SEC.

David Joire, a senior special counsel with the SEC’s division of investment management who helped draft the proposal, said the SEC has received many comments which say that the 48-hour requirement is not enough time. He added, however, that many other comments, especially those from investors, said that it is too much, because those investors might be damaged severely in the 48 hours before a significant cyber event was reported.

He also explained that the 48-hour clock starts when a covered actor becomes aware of the cyber event, rather than the moment it takes place.

Joire also elaborated on what “significant” means: In the SEC’s definition, a cyber event is significant if critical operations, such as processing trades, are disrupted. A significant monetary loss or the theft of intellectual property would also qualify.

William Birdthistle, the director for the SEC’s division of investment management, who also spoke at the conference, commented briefly on the proposed rule. He said the importance of the 48-hour element of the proposal lies in the ability of the SEC to prevent “contagion:” If one critical actor is compromised, then that can impede other actors working in the same market segment. Other actors who had critical information compromised by the breach could be vulnerable to attack themselves, so the SEC position is that knowing about such an event quickly could reduce the probability of a contagion effect taking place.

SEC Commissioner Mark Uyeda expressed skepticism of this proposal in his statement at the open hearing. He also questioned the SEC’s ability to prevent contagion, noting that the SEC does not have a “cyber response team” and that the agency could not do much to limit the damage of a major cyber event.

Commissioner Hester Peirce agreed with that sentiment in a statement from last week’s open hearing. She said that a 48-hour notice requirement is a distraction from a crisis.

“Unfortunately, with this proposal, the Commission has apparently decided its role is to be an enforcer demanding that a firm dealing with a cybersecurity attack first and repeatedly attend to the Commission’s voracious hunger for data,” she said. “The Commission stands ready, not with assistance but with a cudgel to wield if the firm fails to comply with a complicated reporting regime, even if the firm resolves the incident by avoiding significant harm to the firm or its customers.”

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