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Feb 1, 2017 | 0 comments

Article 1: “This Is the Real Reason Wall Street Should Fear the ‘Fiduciary Rule’”

According to the article, big banks and brokerages have been publicly fretting about how a new rule on retirement accounts might reduce their income. But at least one observer thinks they should be more worried about how it might jack up their legal fees.

The threat in question is the so-called fiduciary rule, a regulation approved by the Department of Labor last year and scheduled to go into effect this April. The rule applies to retirement accounts, and it states that when working with investors, “The Financial Institution and the Adviser(s) [must] provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor.”

That concept may sound astoundingly obvious, but it is meant to address a significant problem in the retirement-savings world. Currently, many relationships between investment pros and retirement clients are required only to meet a “suitability” standard. In practice, under that rule brokers can and do park clients in investments that are either absurdly expensive—often because they generate chunky commissions for the broker—or highly risky, or both.

The fiduciary rule basically puts pressure on financial-services companies to justify the costs of the retirement accounts they offer. And as Fortune contributor Joshua Brown pointed out when the rule was passed, many big firms are already moving in that direction. They have seen the writing on the wall, as more investors have moved their nest eggs into low-priced index funds. They have also seen courts side with workers who sued their employers for offering overpriced mutual funds in their 401(k)s. They do not want to be the mustache-twirling villains charging 6% commissions and 2% annual fees on IRAs when index giants like Vanguard and BlackRock have proven you can get similar returns for fractions of a penny on the dollar.

But Michael Kitces, a financial planner who writes extensively about retirement investing, thinks financial services firms are focusing on one problem when it really faces two. In a recent post on his Nerd’s Eye View blog, Kitces argues that the idea of fiduciary duty implicitly holds financial advisors to a minimum standard of competency—and that, disturbingly, many firms would not be able to prove that their staff met that standard. There are various designations that advisers can earn that require them to prove that they are competent at helping clients solve financial problems. (Kitces holds many of those designations, as it happens.) But many “client-facing” advisers are not required to earn those credentials.

The fiduciary rule would essentially enable a group of disgruntled retirement-savings clients to use this flaw as a key argument in a class-action lawsuit. As Kitces puts it (emphasis his):

“Financial institutions face the risk that they will be sued in a class action lawsuit for failing to put their financial advisors through the training and education (e.g., professional designations) necessary to ensure that the advisor would even know what the ‘best’ advice for the client was in the first place!”

If courts were sympathetic to that argument, he concludes, things could get uncomfortable, and expensive, very quickly.

Granted, Kitces’s point could quickly become moot under a Donald Trump administration. Trump’s advisers and cabinet picks, including Secretary of Labor nominee Andy Puzder, have generally been outspoken about their desire to roll back financial regulations. Earlier this month, Representative Joe Wilson (R, S.C.) introduced a bill to delay the implementation of the fiduciary rule, one that would likely get a sympathetic hearing from laissez faire GOP congressional leaders. But whether or not the rule survives, Kitces’s take highlights an important point: Just because an advisor is not trying to fleece you does not mean he or she is qualified to help you.

Discussion Questions

1. In general, what does it mean to be a “fiduciary?”

A fiduciary is a type of agent in a principal-agent relationship. It is an arrangement involving pronounced trust and requiring extreme care. In a fiduciary relationship, the principal puts the fiduciary in a position of utmost trust and confidence to manage and protect property or money.

2. What is the specific “fiduciary rule” referenced in the article?

As the article indicates, the “fiduciary rule” is a regulation approved by the United States Department of Labor in 2016 and scheduled to go into effect in April 2017. The rule applies to retirement accounts, and it states that when working with investors, “The Financial Institution and the Adviser(s) [must] provide investment advice that is, at the time of the recommendation, in the Best Interest of the Retirement Investor.”

3. What is the best argument for the “fiduciary rule” referenced in the article? What is the best argument against it?

The best argument for the fiduciary rule is that it better ensures that an investment advisor will advise and act in the best interest of the retirement investor.

The best argument against the fiduciary rule is that it represents over-regulation by the government and exposes investment advisors to liability for not acting in the best interest of the retirement investor (as determined by a court).

Article 2: “Rolls-Royce Reaches $809 Million Settlement over Bribery Probes”

According to the article, British engineering group Rolls -Royce Plc said recently that it had reached settlements with authorities in Britain, the U.S. and Brazil relating to bribery and corruption involving intermediaries, which would result in a series of payments totaling about $809 million.

Rolls also said in a statement that it would report its financial results for 2016 on February 14 when “an appropriate update on the implications of these agreements will be provided at that time.”
It said there were early indications that its full-year profits and cash for 2016 would be ahead of expectations.

The settlement and the profit outlook come about a month after the maker of aero engines said it would cut 800 jobs in its marine business, responding to weak demand from shipping and energy customers.

The settlement with British authorities, for $599 million, was the biggest ever for Britain’s Serious Fraud Office.

Rolls said the deals with the three authorities would see the group pay about $353 million in the first year.

Under the terms of the agreements with the U.S. Department of Justice (DOJ), Brazil’s Ministerio Publico Federal (MPF) Rolls said it has agreed to make payments to the DOJ totaling nearly $170 million and to the MPF totaling $25.58 million.

Under the terms of a deferred prosecution agreement with Britain’s Serious Fraud Office the company said it will pay $599 million plus interest under a schedule lasting up to five years, plus a payment in respect of the SFO’s costs.

The proposed agreement with SFO was still subject to court approval.

“These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets, concerns about which the company passed to the SFO from 2012 onwards,” the company said in its statement. “These are voluntary agreements which result in the suspension of a prosecution provided that the company fulfills certain requirements, including the payment of a financial penalty.”

Since the concerns were brought to light, Rolls -Royce has set up an audit committee at each of its units in a bid to curb bribery and corruption, according to the company’s latest annual report.
Its settlement with Britain’s SFO is not the first of its kind. Military contractor BAE Systems Plc agreed to pay 288 million in 2010 to settle long-running corruption investigations.

Rolls is in the midst of a program launched in 2015 to cut costs and simplify its operations after a slowdown in several markets hit profits.

Discussion Questions

1. Define bribery.

Bribery is defined as the offering, giving, receiving, or soliciting of something of value in order to influence the action of an official in the discharge of his or her legal duties.

2. Does the settlement referenced in the article constitute an admission of guilt by Rolls Royce? Why or why not?

Legally, the settlement referenced in the article does not constitute an admission of guilt by Rolls Royce. Typically, settlement agreements include language asserting that payment of the agreed-upon settlement amount does not constitute an admission of guilt; rather such payment is made for the purpose of resolving the dispute and avoiding further judicial proceedings.

3. What/Who is a “marketing intermediary?” In your reasoned opinion, should it constitute a crime to bribe a marketing intermediary? Why or why not?

A marketing intermediary is a party in the chain of product distribution between the manufacturer and the ultimate consumer of the product. Marketing intermediaries include wholesalers and retailers, as well as any government officials who must approve further movement of the product in the chain of distribution.

Article 3: “Beef-Jerky Plant Employee Fired After Call to 911 over Severed Thumb”

According to the article, the owner of a now-closed beef-jerky maker is being sued by the federal government for firing an employee who tried to call 911 to help a co-worker with a severed thumb.

John M. Bachman, who owned the Lone Star Western Beef plant in Fairmont, could be forced to pay back wages and punitive damages to the employee as a result of the lawsuit, which the U.S. Labor Department filed recently against him and his company in federal court in Clarksburg.

The lawsuit said that when a band saw severed part of a worker’s right thumb in July 2014, his co-worker applied pressure to the wound while using her cell phone to call 911. But before responders could answer, Bachman allegedly ordered her to hang up, and she was fired two days later.

Instead of calling an ambulance, Bachman collected the severed part of Chris Crane’s thumb and told a supervisor to take him to an urgent care clinic. Crane was ultimately transferred to a hospital, where efforts to reattach the thumb were unsuccessful, the lawsuit said.

The co-worker, Michele Butler-Savage, told a U.S. agriculture inspector later that day that Bachman did not fully clean or sanitize the area of the plant where the accident happened. She also mentioned a lack of personal protective equipment. After she was fired, she filed a complaint with the Occupational Safety and Health Administration, which found the company violated federal whistleblower protections for workers who report violations of the law.

OSHA regional administrator Richard Mendelson said Butler-Savage’s effort to show “basic human decency” was protected under federal safety and health laws.

“Lone Star Western Beef punished an employee for seeking emergency medical care for a seriously injured co-worker,” Mendelson said. “No worker should have to fear retaliation from their employer for calling 911 in an emergency, or taking other action to report a workplace safety or health incident.”

Bachman did not immediately return a message left at a telephone number listed on the company’s website. In January 2015, the plant closed and relocated to Reading, Pennsylvania, the Labor Department said.

Discussion Questions

1. Describe the regulatory responsibilities of the Occupational Safety and Health Administration (OSHA).

The Occupational Safety and Health Administration (OSHA) is a federal administrative agency charged with the responsibility of ensuring a safe work environment for workers. OSHA enforces the provisions of the Occupational Safety and Health Act, which mandates a general duty on the part of employers to provide a safe work environment, as well as industry-specific safety standards.

2. What is “whistleblower” protection?

Whistleblower protection seeks to protect workers (and others) who report company violations of law, including violations of the Occupational Safety and Health Act (OSHA). For example, according to the anti-retaliation provisions of whistleblower protection, an employer cannot make an adverse employment decision based on an employee’s decision to report the company for a violation of law. Such protection exists on both federal and state levels.

3. What are punitive damages?

Punitive damages are designed to punish a defendant for an intentional, extremely reckless or grossly negligent act that “shocks the conscience” of a reasonable person. Since they are punitive in nature, punitive damages are not tied to the amount of compensatory damages awarded to the plaintiff for “out of pocket” losses resulting from the defendant’s wrongful action(s). Punitive damages are often based on the size of the defendant corporation, the amount of profits generated by the defendant, the defendant’s asset base, etc.