Financial Services Employment Law

News, Updates, and Insights for Financial Services Employers

Compensation Based on Assets Under Management May Raise Conflict of Interest Concerns Requiring a Prohibited Transaction Exemption

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Advisers and financial institutions that are compensated based on a fixed percentage of the value of assets under management may want to reconsider that compensation methodology as it could require compliance with a prohibited transaction exemption, such as the Best Interests Contract Exemption (the “BIC Exemption”), which is a component of the fiduciary rule issued by the Department of Labor (the “DOL”) in April 2016 (the “Final Rule”).  While stating in the recently published “Conflict of Interest FAQs” (the “FAQs”) that the ongoing receipt of a fixed percentage of the value of a customer’s assets under management, where such values are determined by readily available independent sources, typically does not require compliance with a prohibited transaction exemption, the DOL cautions that such compensation may still raise conflict of interest concerns and require that the adviser comply with a prohibited transaction exemption.  The FAQs, like the Final Rule, are generally limited to advice concerning investments in employee benefit plans covered by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), individual retirement accounts (“IRAs”) and certain other plans.

By way of example, the DOL reiterates the view set forth in the Final Rule that there is a conflict of interest when an adviser recommends that a retirement investor roll retirement savings out of a plan into a fee-based account that will generate on-going fees for the adviser that he would not otherwise receive, even if the fees do not vary based on assets recommended or invested.  The DOL guidance also states that investment advice to switch from a commission-based account to an account that charges a fixed percentage of assets under management on an on-going basis could be a prohibited transaction.  For purposes of the BIC Exemption, a retirement investor is generally a participant in a plan subject to ERISA or the owner of an IRA.   Under  the BIC Exemption:

  • an “adviser” is an individual who:
    •  is a fiduciary of a plan or an IRA by providing investment advice for a fee and an employee, independent contractor, agent, or registered representative of a financial institution; and
    • satisfies applicable federal and state regulatory and licensing requirements with respect to the covered transaction.
  • a “financial institution” is an entity that employs the adviser or retains him in another capacity and that is:
    •  registered as an investment adviser under the Investment Advisers Act of 1940, as amended;
    •  a bank or similar financial institution;
    • an insurance company that satisfies certain criteria;
    • a broker or dealer registered under the Securities Exchange Act of 1934, as amended; or
    • an entity that the DOL, in a prohibited transaction exemption granted after April 6, 2016, determines is a financial institution.

Because the types of prohibited transactions described above are relatively discrete and the adviser’s provision of subsequent advice generally does not involve a prohibited transaction, the DOL states in the FAQs that advisers and financial institutions need only comply with the streamlined conditions in the BIC Exemption to cover the discrete advice that requires the exemption.  Per question 13 of the FAQs, the streamlined conditions applicable to level-fee fiduciaries include:

  • a requirement that the financial institution provide a written acknowledgement of its and its advisers’ fiduciary status to the retirement investor; and
  • satisfaction by the financial institution and its advisers of the impartial conduct standards with documentation showing the reasons why the advice was considered to be in the best interest of the retirement investor.  The impartial conduct standards require fiduciaries to act in the best interest of their clients, charge no more than reasonable compensation and make no misleading statements.

These streamlined conditions apply to “level-fee fiduciaries” who will receive only a “level fee” in connection with advisory or investment management services provided to a plan or an IRA.  As discussed in the FAQs, a level fee is a fee or compensation that is provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary with the particular investment.

The DOL also states that, after an adviser recommends a rollover to a plan participant, the receipt of level-fee compensation does not violate ERISA’s prohibited transaction rules or require compliance with an exemption.

However, the DOL warns that certain abusive practices could result in a self-dealing prohibited transaction, for which no exemption is available.  The DOL supports this position by citing the October 2013 “Report on Conflicts of Interest” of the Financial Industry Regulatory Authority, which describes various circumstances in which advisers may make inappropriate recommendations intended to promote the advisers’ compensation at the expense of the investors.  For example, recommending a fee-based account to a retirement investor with low trading activity and little need for on-going monitoring or advice would be considered abusive conduct, as such advice would be designed to enhance the adviser’s compensation at the expenses of the investor.

In summary, to mitigate the risk of having to comply with certain provisions of the BIC Exemption or of engaging in a non-exempt self-dealing prohibited transaction, advisers and financial institutions should consider designing compensation programs that are not based on the value of plan assets under management.  Alternatively, if assets under management is key component of an adviser’s compensation plan, then the adviser and financial institution should be certain that they comply with the streamlined conditions of the BIC Exemption.

Policies Prohibiting “Insubordination or Other Disrespectful Conduct” and “Boisterous or Disruptive Activity in the Workplace” Struck Down by NLRB Majority

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Once again seemingly appropriate work rules have been under attack by the National Labor Relations Board (“NLRB”). In a recent decision (Component Bar Products, Inc. and James R. Stout, Case 14-CA-145064), two members of a three-member NLRB panel upheld an August 7, 2015 decision by an Administrative Law Judge (“ALJ”) finding that an employer violated the National Labor Relations Act (“NLRA” or the “Act”) by maintaining overly broad handbook rules and terminating an employee who was engaged in “protected, concerted activity” when he called another employee and warned him that his job was in jeopardy.  Member Miscimarra concurred in part and dissented in part, arguing that the Board should overrule applicable precedent interpreting the Act.

Factual background

The respondent company is engaged in the manufacture and sale of precision machined products for the automotive and other industries from a facility in Missouri. Respondent maintained a personal conduct and disciplinary action policy in its associate handbook that prohibits “insubordination or other disrespectful conduct,” “unauthorized disclosure of business ‘secrets’ or confidential information,” and “boisterous or disruptive activity in the workplace.”  On January 20, 2015, a quality technician called his co-worker from his cell phone during business hours after his Plant Manager made a remark suggesting that the co-worker may not have a job with the company anymore.  The Plant Manager found out about the technician’s phone call when the co-worker called the Respondent to complain that it was management’s job, not an employee’s job, to tell him that he was being fired.  Respondent decided to terminate the technician for “misconduct” for involving himself in another employee’s personal affairs and otherwise engaging in conduct in violation of the handbook.

The ALJ’s Decision

The ALJ first considered whether the Respondent’s maintenance of rules prohibiting “insubordination and other disrespectful conduct” and “boisterous or disruptive activity in the workplace” violates Section 8(a)(1) of the Act because employees reasonably could construe those bans to include protected Section 7 activity. Citing NLRB precedent (Lutheran Heritage Village-Livonia, 343 NLRB 646 (2004)), the ALJ noted that an employer violates Section 8(a)(1) when it maintains a work rule that employees could “reasonably construe” to block or “chill” them from exercising their Section 7 rights.  In this case, the ALJ determined that both rules in the handbook violate Section 8(a)(1) because of their likelihood to chill Section 7 activity.

The ALJ next considered whether the discharge of the technician was proper or whether it violated Section 7 of the Act, which protects employee conduct that is both “concerted” and engaged in “for mutual aid and protection.” Because the Board repeatedly has held that an employee’s warning to another employee that the latter’s job is at risk constitutes protected, concerted activity, the ALJ found that the technician’s conversation with the co-worker constituted protected, concerted activity.  Accordingly, the ALJ found that the technician’s discharge violated Section 8(a)(1) because he was terminated for engaging in such conduct.

Among other things, the ALJ ordered the Respondent to offer the technician full reinstatement to his former position or, if that position no longer exists, to a substantially equivalent position, without prejudice to his seniority or any other rights or privileges previously enjoyed, and to make him whole for any loss of earnings and other benefits suffered as a result of the discrimination against him. The ALJ also said that the employer should compensate him for adverse tax consequences, if any, of receiving a lump-sum backpay award and to file a report with the Social Security Administration allocating the backpay award to appropriate calendar quarters.

The Panel’s Decision

The Board majority agreed with the ALJ’s application of Lutheran Village to find that the Respondent violated Section 8(a)(1) by maintaining overly broad handbook rules and that the technician engaged in protected concerted activity when he called another employee to warn the employee that his job was in jeopardy and the Respondent violated Section 8(a)(1) by discharging the technician for that activity.  The majority said, “We agree with the judge’s application of Lutheran Heritage … to find that the respondent violated Section 8(a)(1) by maintaining overly broad handbook rules. . . . We also agree with the judge that [the technician] engaged in protected concerted activity.” The panel also agreed with the ALJ that the technician should be awarded backpay in the form of a lump sum, but disagreed with the ALJ as to how the Respondent must report and allocate that payment.

Member Miscimarra’s Concurring and Dissenting Opinion

Member Miscimarra concurred with the majority’s finding that the technician engaged in protected concerted activity when he telephoned his coworker to warn him that his job was in jeopardy, and he agreed that the Respondent violated Section 8(a)(1) of the Act when it discharged the technician for doing so. However, regarding the majority’s finding that the Respondent violated Section 8(a)(1) by maintaining the two work rules, Miscimarra disagreed with those violation findings, and he also disagreed with the standard that the ALJ and the majority applied in reaching those findings:  he said, “Unlike my colleagues and the judge, I believe the Board should not apply the ‘reasonably construe’ standard [from Lutheran Village].”

Miscimarra said that he believes the Lutheran Heritage ‘reasonably construe’ standard should be overruled by the Board or repudiated by the courts.

Instead, Member Miscimarra endorsed the standard he articulated in the NLRB’s decision William Beaumont Hospital, 363 NLRB No. 162, slip op. at 7–24 (2016) (Member Miscimarra, concurring in part and dissenting in part).  In William Beaumont, he articulated his view that the Board is required to evaluate an employer’s workplace rules, policies and handbook provisions by striking a “proper balance” that takes into account (i) the legitimate justifications associated with the disputed rules and (ii) any potential adverse impact on NLRA protected activity, and a “facially neutral” policy, rule or handbook provision (defined as a rule that does not expressly restrict Section 7 activity, was not adopted in response to NLRA-protected activity, and has not been applied to restrict NLRA-protected activity) should be declared unlawful only if the legitimate justifications an employer may have for maintaining the rule are outweighed by its potential adverse impact on Section 7 activity.  Applying that standard, Member Miscimarra said that the Board should find that the two rules at issue are lawful.

Conclusion

Notwithstanding Member Miscimara’s dissenting opinion, Lutheran Village remains viable NLRB precedent, as evidenced by the majority’s application of that decision.  Accordingly, this case is yet another example of the NLRB’s broad view of what constitutes “concerted protected activity,” “work rules” and unlawful activity under the Act. Because what constitutes an overbroad work rule is not always clear-cut, any employer subject to the Act (one whose company affects commerce) should carefully review its various agreements, policies and handbooks to ensure that they do not contain rules that would not be reasonably construed to chill union-related activities. While there are swirling questions on how aggressive the future NLRB will be under a new administration, in the meantime, taking a proactive approach of revising potentially problematic work rules will put employers in the best possible position if they find themselves facing scrutiny from the NLRB.

Texas Federal Court Enjoins New FLSA Overtime Rules: Employer Impact

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Our colleague Michael S. Kun, national Chairperson of the Wage and Hour practice group at Epstein Becker Green, has a post on the Wage & Hour Defense Blog that will be of interest to many of our readers in the financial services industry: “Stop! Texas Federal Court Enjoins New FLSA Overtime Rules.”

Following is an excerpt:

The injunction could leave employers in a state of limbo for weeks, months and perhaps longer as injunctions often do not resolve cases and, instead, lead to lengthy appeals. Here, though, the injunction could spell the quick death to the new rules should the Department choose not to appeal the decision in light of the impending Donald Trump presidency. We will continue to monitor this matter as it develops.

To the extent that employers have not already increased exempt employees’ salaries or converted them to non-exempt positions, the injunction will at the very least allow employers to postpone those changes. And, depending on the final resolution of this issue, it is possible they may never need to implement them.

The last-minute injunction puts some employers in a difficult position, though — those that already implemented changes in anticipation of the new rules or that informed employees that they will receive salary increases or will be converted to non-exempt status effective December 1, 2016. …

Read the full post here.

Proposed Increases Under New York State’s Overtime Laws: Not Blocked by Federal Overtime Rule Change Injunction

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Our colleague Jeffrey H. Ruzal, Senior Counsel at Epstein Becker Green, has a post on the Wage & Hour Defense Blog that will be of interest to many of our readers in the financial services industry: “Decision Enjoining Federal Overtime Rule Changes Will Not Affect Proposed Increases Under New York State’s Overtime Laws.”

Following is an excerpt:

As we recently reported on our Wage & Hour Defense Blog, on November 22, 2016, a federal judge in the Eastern District of Texas issued a nationwide preliminary injunction enjoining the U.S. Department of Labor from implementing its new overtime exemption rule that would have more than doubled the current salary threshold for the executive, administrative, and professional exemptions and was scheduled to take effect on December 1, 2016. To the extent employers have not already increased exempt employees’ salaries or converted them to non-exempt positions, the injunction will, at the very least, appear to allow many employers to postpone those changes—but likely not in the case of employees who work in New York State.

On October 19, 2016, the New York State Department of Labor (“NYSDOL”) announced proposed amendments to the state’s minimum wage orders (“Proposed Amendments”) to increase the salary basis threshold for executive and administrative employees under the state’s wage and hour laws (New York does not impose a minimum salary threshold for exempt “professional” employees).  The current salary threshold for the administrative and executive exemptions under New York law is $675 per week ($35,100 annually) throughout the state.  The NYSDOL has proposed the following increases to New York’s salary threshold for the executive and administrative exemptions …

Read the full post here.

Seventh Circuit Vacates Panel Ruling on Sexual Orientation – Employment Law This Week

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Featured on Employment Law This Week: The U.S. Court of Appeals for the Seventh Circuit may consider ruling that Title VII of the Civil Rights Act of 1964 (Title VII) protects sexual orientation.

On its face, Title VII prohibits discrimination only on the basis of race, color, religion, sex, or national origin, and courts have been unwilling to go further. In this case, the Seventh Circuit has granted a college professor’s petition for an en banc rehearing and vacated a panel ruling that sexual orientation isn’t covered. Also, an advertising executive who is suing his former agency has asked the Second Circuit to reverse its own precedent holding that Title VII does not cover sexual orientation discrimination. We’re likely to see more precedent-shifting cases like these as courts grapple with changing attitudes towards sexual orientation discrimination.

Watch the segment below and read our recent post on this topic.

Seventh Circuit Vacates Panel Determination That Title VII Does Not Prohibit Sexual Orientation Discrimination and Grants Rehearing En Banc

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On October 11, 2016, the United States Court of Appeals for the Seventh Circuit vacated the July 28, 2016 decision of a Seventh Circuit panel holding that sexual orientation discrimination is not sex discrimination under Title VII (discussed in our August 2, 2016 article) and granted rehearing en banc.  En banc oral argument is scheduled for November 30, 2016.

Employer Blocked from Waiving Non-Compete to Avoid $1 Million Payment

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Our colleague Peter A. Steinmeyer, a Member of the Firm at Epstein Becker Green, has a post on the Trade Secrets & Noncompete Blog that will be of interest to many of our readers in the financial services industry: “Employer’s Waiver Of Non-Compete Period In Order To Avoid $1 Million Payment Held Ineffective.

Following is an excerpt:

In Reed v. Getco, LLC, the Illinois Court of Appeals was recently faced with an interesting situation: under a contractual non-compete agreement, the employer was obligated to pay the employee $1 million during a six month, post-employment non-competition period.  This was, in effect, a form of paid “garden leave” —  where the employee was to be paid $1 million to sit out for six months – perhaps to finally correct his golf slice or even learn the fine art of surfing.  It was a win-win situation that seemingly would be blessed by most courts; it was for a reasonable length of time, and the employee was set to be paid very handsomely for sitting out.  Accordingly, it is doubtful that most judges would have had an issue with it.

Yet here, the employer apparently had second thoughts – and just over a week after the employee resigned, the employer notified the employee that it was waiving the six month non-compete, allowing him to work anywhere, and therefore not paying him any portion of the promised $1 million. …

One option to control such costs is to make explicit in the agreement that the employer has the right to shorten any non-compete or garden leave period, and that the employer also has an accompanying right to proportionately reduce or eliminate any accompanying payment obligation. The absence of such an express contractual authorization was the death knell for Getco in this case.

Read the full post here.

Employers Under the Microscope: Is Change on the Horizon? – Attend Our Annual Briefing (NYC, Oct. 18)

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Employers Under the Microscope: Is Change on the Horizon?

When:  Tuesday, October 18, 2016    8:00 a.m. – 4:00 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Latest Developments from the NLRB
  • Attracting and Retaining a Diverse Workforce
  • ADA Website Compliance
  • Trade Secrets and Non-Competes
  • Managing and Administering Leave Policies
  • New Overtime Rules
  • Workplace Violence and Active-Shooter Situations
  • Recordings in the Workplace
  • Instilling Corporate Ethics

This year, we welcome Marc Freedman and Jim Plunkett from the U.S. Chamber of Commerce.  Marc and Jim will speak at the first plenary session on the latest developments in Washington, D.C., that impact employers nationwide.

We are also excited to have Dr. David Weil, Administrator of the U.S. Department of Labor’s Wage and Hour Division, serve as the guest speaker at the second plenary session. David will discuss the areas on which the Wage and Hour Division is focusing, including the new overtime rules.

In addition to workshop sessions led by attorneys at Epstein Becker Green – including some contributors to this blog! – we are also looking forward to hearing from our keynote speaker, Former New York City Police Commissioner William J. Bratton.

View the full briefing agenda here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions.  Seating is limited.

Non-Solicit Violation: $4.5 Million Punitive Damage Award Upheld

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Our colleague Peter L. Altieri, a Member of the Firm at Epstein Becker Green, has a post on the Trade Secrets & Noncompete Blog that will be of interest to many of our readers in the financial services industry: “Non-Solicit Violation: $4.5 Million Punitive Damage Award Upheld.”

Following is an excerpt:

Rarely do we see punitive damages being awarded in cases involving the movement of employees and information between firms. The Superior Court of Pennsylvania last week affirmed a punitive damage award granted by a Judge of the Court of Common Pleas in such a matter, albeit which also found tort liability against the new employer and the five former employees.

The decision in B.G. Balmer & Co., Inc. v. Frank Crystal & Co. Inc., et al. sets forth a classic example of “bad leavers” and a complicit new employer. Confidential information concerning clients was copied and given to the new employer.  The senior employees, on Company time and using Company facilities, conspired with the new employer to hire the junior employees and solicit existing clients, including the largest and best clients of the Company.  Complete indemnification was provided by the new employer to the employees.  Personnel files were purloined and not returned upon request.  Upon resignation they immediately solicited the company’s largest client and did so using trade secret and confidential information of the Company while disparaging the Company in the process. …

The conduct of the defendants in Balmer provides a roadmap on how not to recruit employees from a competitor and the resulting punitive damages award should be a further deterrent to all bad leavers and their new employers.

Read the full post here.

Agency Guidance Issued Regarding the Final Standards for Assessing Diversity Policies and Procedures of Regulatory Entities Pursuant to Dodd Frank Section 342

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Lauri F. RasnickWe previously reported that on June 9, 2015, six federal agencies (“Agencies”) subject to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Act”) issued much-anticipated joint final standards (“Final Standards”) in accordance with Section 342 of the Act for assessing the diversity policies and practices of the entities that they regulate (“Covered Entities”). See our earlier client advisory for an overview of the Final Standards which are divided into five general categories: (i) organizational commitment to diversity and inclusion, (ii) workforce profile and employment practices, (iii) procurement and business practices (or supplier diversity), (iv) practices to promote transparency of organizational diversity and inclusion, and (v) entities’ self-assessment.

The Final Standards were published in the Federal Register and became effective on June 10, 2015.  It has now been over a year since the issuance and publication of the joint final standards with little further guidance provided to employers.

Just last month, however, a Frequently Asked Questions (“FAQs”) on the Final Standards was issued by the Board of Governors Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency.  In the FAQs, the agencies set forth several key points:

  • Assessments of regulated entities should be self-assessments.
  • It is recommended that self-assessments cover the standards set forth in the Final Standards but can include additional issues as well.
  • Self-assessments should be conducted on an annual basis.
  • Information concerning a regulated entity’s self-assessment should be voluntarily provided to the Director of the Office of Women and Minority Inclusion of the entity’s primary federal regulator within 90 days of the close of the calendar year.
  • Information concerning a regulated entity’s diversity and inclusion efforts should be published on its website or otherwise communicated.
  • In terms of defining “diversity”, there is no preclusion in an entity defining it more broadly than including women and minorities.
  • Regulated entities’ self-assessments of their diversity policies and practices, and the provision of such assessments to their respective regulators, are voluntary.

The agencies further clarify that an entity’s diversity policies and practices will not be assessed by its primary federal regulator and examinations by regulators will not consider compliance with the Final Standards. Rather, the agencies are relying on the regulated entities to engage in self-assessment.  In addition, the agencies state that they will be using the information provided through self-assessments to monitor progress and trends, identify best practices and possibly highlight certain practices or successes anonymously.

While compliance with the Final Standards is not mandatory, many firms are interested in improving their diversity and inclusion efforts and can look to the Final Standards for ways to engage in self-analysis and development. In this vein, employers should consider in what ways they are currently implementing actions envisioned by the Final Standards and what other actions may be taken.  Even this exercise can be beneficial.  Many employers that go through this analysis identify shortcomings and develop goals and plans for improvement, all of which can go a long way to ultimately increasing diversity.