Tag: DOL

Act Now: The Department of Labor may experience a shutdown on 10/1/2015

DOLAlthough Congress continues to discuss the Fiscal Year 2016 budget, if an agreement is not reached or continuing resolution passed, the Department of Labor (DOL) will experience a shut down as of October 1, 2015. Should this happen, both the iCERT and PERM online filing systems will not accept applications and users will no longer have access to the system.  This shutdown will impact immigration cases including: E-3, H-1B, H-2A, H-2B, and PERM applications. In addition, the DOL will not be able to receive or review any filings received by mail. Employers are urged to review their upcoming expiration dates and deadlines to ensure they submit all necessary applications and responses on or before September 30, 2015.

Article By Jennifer Blloshmi of Greenberg Traurig, LLP

©2015 Greenberg Traurig, LLP. All rights reserved.

Department of Labor Glitch Prevents PERM Filings re: Immigration

A programming glitch, which occurred during a software update implemented by the Department of Labor (DOL) on September 1, 2015, prevented some employers from being able to file their PERM applications, the DOL announced today on its website. The DOL explained that the malfunction precluded employers from completing some of the ETA Form 9089 online.

The problem with the Permanent Labor Certification Case Management System (CMS) continues and the DOL has directed employers who are unable to complete and file an ETA Form 9089 online to mail in their PERM applications to the Atlanta National Processing Center. The DOL is authorizing those employers who tried and could not file a PERM application online between September 1, 2015 and September 11, 2015, only, to include documentation demonstrating that information in their ETA Form 9089 was affected by the programming glitch.

If your PERM application was affected last week, you must submit your ETA Form 9089 and supporting documentation before September 30, 2015. Please see the DOL’s Employment & Training Administration’s web page for filing instructions here.

Article By Rebecca B. Schechter of Greenberg Traurig, LLP

©2015 Greenberg Traurig, LLP. All rights reserved.

Workers Should Properly be Classified as Employees Under the FLSA

U.S. Department of Labor (“DOL”) yesterday issued an Administrator Interpretation Memorandum announcing its position that most American workers are employees (as opposed to independent contractors), and thus are covered by the Fair Labor Standards Act (FLSA). The announcement comes exactly two weeks after the DOL issued a Notice of Proposed Rulemaking that would significantly change the legal requirements for an employee to qualify as exempt from the overtime requirements of the FLSA.

Department of LaborAccording to the Memo, employers are intentionally misclassifying workers as independent contractors to cut costs and avoid compliance with various laws, which deprives workers of certain benefits of employment. Taken together, the two recent DOL actions make the DOL’s true intentions abundantly clear: to sweep more American workers under the umbrella of the FLSA, and in turn, have more of those covered employees earning overtime compensation (or significantly higher salaries).

In the Memorandum, the DOL sets forth its interpretation of the FLSA’s definition of “employ” and the multi-factored “economic realities test” utilized by the courts to guide the analysis of whether a worker is properly classified as an independent contractor under the law. According to the DOL, applying the economic realities test in view of the FLSA’s expansive definition of “employ” will result in most workers being employees, and not independent contractors. In other words, a worker is an employee unless a convincing argument can be made that the worker is properly classified as an independent contractor.

While the “economic realities test” might vary somewhat depending on the court applying the test, the traditional questions considered are:

  • Is the work done by the worker an integral part of the employer’s business?;
  • Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?;
  • How does the worker’s relative investment compare to the employer’s investment?;
  • Does the work performed require special skill and initiative?;
  • Is the relationship between the worker and the employer permanent or indefinite?; and
  • What is the nature and degree of the employer’s control over the worker?

These questions should be considered under the guiding principle that workers who are economically dependent on the employer are employees, and only workers who are really in business for themselves are independent contractors. All factors must be considered in each case, no one factor is determinative, and the ultimate determination must be the degree of the worker’s economic independence from the employer.

ARTICLE BY Jeremy M. Brenner, John P. Hasman, Robert A. Kaiser, Daniel K. O’Toole, Jovita M. Foster & Dione C. Greene of Armstrong Teasdale

© Copyright 2015 Armstrong Teasdale LLP. All rights reserved

New Overtime Rules: $970 Per Week Salary Proposed For White Collar Exemptions in 2016

The minimum weekly salary for exempt employees will be raised from the current $455 to a likely $970 in 2016, if the Department of Labor’s (DOL’s) overtime pay revisions go into effect as proposed. In its long-awaited proposed revisions to overtime rules, the DOL estimates that 4.6 million U.S. workers who are currently exempt will be entitled to minimum wage and overtime compensation under the new salary level requirements.

Salary Level Would Automatically Adjust on an Annual Basis

Under its proposed rules, the DOL sets the salary threshold for the white collar exemptions at the 40th percentile of weekly earnings for full-time salaried workers nationwide. For 2013, using data from the Bureau of Labor Statistics, that figure was $921 per week, or $47,892 per year. The DOL anticipates that when its Final Rule goes into effect in 2016, the salary level will be $970 per week, or $50,440 per year.

In order to maintain the salary levels at a fixed percentile of earnings, the DOL proposes that the salary threshold automatically update annually. The automatic adjustment is intended to prevent the salary level from diminishing through inflation and to potentially make additional rulemaking adjusting the salary basis unnecessary. The DOL believes that this will provide more certainty to employers with a meaningful, bright-line test while improving government efficiency.

Highly Compensated Employee Exemption: $122,148 Salary

The current exemption for highly compensated employees requires an annual salary of $100,000. The DOL proposes to raise that salary threshold also based on an annualized value of a percentile of weekly earnings for full-time salaried workers. This proposal sets the salary level of highly-compensated employees at the 90th percentile, which was $122,148 per year for 2013. That number will likely be higher by the time the Final Rule is implemented. This salary requirement would also adjust automatically to the level equal to the 90th percentile of earnings for full-time salaried workers.

No Proposed Changes to Duties Requirements

Since 2004, the duties tests for the white collar exemptions have not included a limit on the amount of time that an employee can spend on nonexempt duties before the exemption is lost. Believing that a rise in the salary level will provide an initial bright-line test for the exemptions, the DOL refrained from proposing changes to the duties tests but will consider requests for changes during the comment period.

In its proposal, the DOL noted that employer stakeholders opposed any changes to the duties requirements as percentage limits on the amount of time spent on nonexempt duties are sometimes difficult to apply and hinder flexibility for work duties. Employee groups, on the other hand, expressed concern that certain businesses treat workers as exempt even though the employees perform mostly nonexempt duties, especially (they claim) in the retail industry. Without proposing its own duties requirements, the DOL seeks input from interested parties on whether changes to the duties tests are necessary in light of the salary level increases proposed.

Nondiscretionary Bonuses May Be Included in Salary Level Requirement

In the past, the DOL has not included nondiscretionary bonus payments when determining whether an employee’s salary meets the white collar exemption threshold; it looked only at actual salary or fee payments made to employees. In its proposed rules, the DOL seeks input on whether it should permit some amount of nondiscretionary bonuses and incentive payments to count toward a portion of the salary level requirement for the executive, administrative and professional exemptions. The DOL states that for these bonuses or incentive payments to count toward the weekly salary requirement, the bonuses and incentive payments would need to be paid monthly or more frequently, not as a yearly “catch-up” payment.

Next Steps

If you want to submit any comments on the DOL’s proposed changes to the overtime rules, you have 60 days in which to submit your input either electronically or by mail. Instructions are at the beginning of the Notice of Proposed Rulemaking.

After considering comments from interested parties, the DOL will decide whether to make any revisions to its proposed overtime rules and will issue its Final Rule sometime thereafter. Although the final version of the rules may change slightly, you should begin preparing for the changes now.

Examine your payroll records to determine which employees are currently treated as exempt under the various white collar exemptions. Determine which, if any, would or would not meet the new salary thresholds: $50,440 per year for executive, administrative and professional exemptions and $122,148 for highly compensated employees. Review the duties tests to make sure your exempt employees are performing exempt tasks.

After this review, consider how your organization is going to handle those employees who may not qualify as exempt under the new rules. Do you want to increase their salary to meet the new threshold? Change their status to nonexempt and pay them minimum wage and overtime? Do you need to change their duties to make sure they meet the duties tests? Have these internal conversations now so that you are not caught off guard when the Final Rule goes into effect in the coming months.

ARTICLE BY R. Calder Huntington of Holland & Hart LLP
Copyright Holland & Hart LLP 1995-2015.

DOL’s Upcoming Proposed Revisions to the FLSA’s White Collar Exemption Regulations

This month the Department of Labor is expected to propose, for the first time since 2004, revised regulations concerning the executive, administrative, professional, outside sales, and computer exemptions under the Fair Labor Standards Act. These revisions were prompted by President Obama’s March 13, 2014 memorandum to the Secretary of Labor, which stated that the exemptions “have not kept up with our modern economy” and which “direct[ed] [the DOL] to propose revisions to modernize and streamline the existing overtime regulations.” After the memorandum was issued, the agency began writing proposed regulations and announced on May 5, 2015, that it had completed drafting them and had submitted them (as required by Executive Order 12866) to the Office of Management and Budget for review.

Procedurally, the “proposed rules” will be published in the Federal Register (an action known as a “Notice of Public Rulemaking” or “NPRM”) for public comment following the OMB’s review, and the DOL has stated that it expects to take this step this month. After the public comment period closes, the DOL will consider the public comments in drafting “final rules;” submit them for a final review by the OMB; and then publish them in the Federal Register with an effective date on which they become law. Although implementation of the final rules may not occur until well into 2016, traditionally the final rules do not differ substantially from the proposed rules. Accordingly, employers should get a sense this month of what the future regulatory landscape will look like.

So what can we expect from these revisions? As an initial matter, it’s almost certain that the DOL will raise the $455 minimum salary requirement, which hasn’t changed since 2004. With regard to the other revisions, however, the DOL’s drafting process has been opaque, and official pronouncements have been largely limited to the Presidential Memorandum and the DOL’s description of the regulatory action on its Spring 2015 agenda, neither of which provide any specific detail. Nonetheless, unofficial pronouncements (including the Secretary of Labor’s remarks before the International Association of Firefighters on March 18, 2014) have repeatedly stressed the DOL’s position that the current regulations result in too many employees falling under the exemptions, particularly retail managers who spend a large portion of their time performing non-exempt duties. Accordingly, there is speculation that the DOL may eliminate the “concurrent duties” provision of 29 CFR 541.106, which provides that simultaneously performing both exempt and nonexempt duties will not automatically disqualify an otherwise exempt employee from the executive exemption. There is also speculation that the regulations may impose a set percentage cap on the amount of time an exempt employee may spend on non-exempt duties, similar to exemption provisions under some state laws (such as California and Connecticut) and to some provisions of the pre-2004 FLSA regulations.

In any event, one thing is certain – some employees who are properly classified as exempt under the current regulations will no longer be exempt under the new rules. Employers will shortly have a preview of just how drastic these changes will be, and should begin evaluating their compliance with the regulations well in advance of the implementation of the final rules.

ARTICLE BY Dennis M. Mulgrew, Jr. of Drinker Biddle & Reath LLP
©2015 Drinker Biddle & Reath LLP. All Rights Reserved

Uncertainty Follows Judicial Decision Enjoining DOL’s Same Sex Spouse Rule Change

Dinsmore Shohl LLP

Following Indiana Governor Mike Pence’s decision to sign the Religious Freedom Restoration Act (RFRA), a decision by Texas District Court Judge Reed O’Connor adds to the controversy and conversation surrounding the lesbian, gay, bisexual, transgender (LGBT) rights movement.

Opponents to the Indiana law say it will allow businesses to deny services to customers based on customers’ sexual orientation or gender identity and justify this denial based on religious beliefs. A day after Governor Pence signed Indiana’s RFRA into law, on March 27, 2015, the Arkansas legislature voted to enact its own religious freedom legislation known as the “Conscience Protection Act”, and the bill is currently before Governor Asa Hutchinson.

While the Arkansas Governor is set to consider religious freedoms and LGBT discrimination, Arkansas’s Attorney General has been battling the Department of Labor (DOL) in another issue impacting LGBT employees. On March 26, 2015, in Texas v. United States, N.D. Texas No. 7:15-cv-00056-O, Judge O’Connor granted an injunction to Texas, Arkansas, Louisiana, and Nebraska to temporarily halt the DOL’s Final Rule revising the definition of “spouse” under the Family and Medical Leave Act (FMLA).

The DOL’s Final Rule took effect on March 27, 2015 and changed the definition of “spouse” to include individuals in same-sex marriages if the marriage was valid in the place it was entered into regardless of where they live. The Final Rule reads as follows:

Spouse, as defined in the statute, means a husband or wife. For purposes of this definition, husband or wife refers to the other person with whom an individual entered into marriage as defined or recognized under state law for purposes of marriage in the State in which the marriage was entered into or, in the case of a marriage entered into outside of any State, if the marriage is valid in the place where entered into and could have been entered into in at least one State. This definition includes an individual in a same-sex or common law marriage that either:

(1) Was entered into in a State that recognizes such marriages; or

(2) If entered into outside of any State, is valid in the place where entered into and could have been entered into in at least one State.

29 C.F.R. § 825.102. This change enables eligible employees in legal same-sex marriages to take FMLA leave to care for a spouse with a serious medical condition. The Final Rule no longer looks to the laws of the state in which the employee resides but rather relies on the laws of the jurisdiction where the marriage was entered into–i.e. the place of celebration.

Texas law, similar to Ohio, does not recognize same sex marriage. Texas, joined by Arkansas, Nebraska, and Louisiana, argued that the DOL exceeded its jurisdiction by requiring them to violate the Full Faith and Credit Statute and/or state law prohibiting recognition of same-sex marriages from other jurisdictions. Texas argued that the Final Rule would require it to violate state law which prohibits it from giving any legal benefits asserted on the basis of a same-sex marriage. Judge O’Connor also relied on Section 2 of the Defense of Marriage Act (DOMA) to hold that Congress intended to preserve a state’s ability to define marriage differently than another state or jurisdiction. Finding that the Final Rule would require Texas agencies to recognize out-of-state same-sex marriages in violation of state law, Judge O’Connor temporarily halted the application of the Final Rule pending a full determination of this matter on the merits.

In these four states, Judge O’Connor’s decision prevents employees in same-sex marriages from receiving the benefits afforded heterosexual married couples until the issue is resolved through legal channels. However, employers are not prohibited from granting family leave benefits to qualifying employees to care for a loved one. Despite the decision—only applicable in four states—the Final Rule is currently in effect. For this reason, employers should proceed in accordance with the DOL’s regulation and fulfill its obligations to its LGBT employees by revising their family and medical leave policies and providing FMLA benefits to employees in legal same-sex marriages.

ARTICLE BY

Anjali Chavan
Sadhna G. True
Dinsmore & Shohl LLP

Supreme Court: DOL Can Flip-flop on its Interpretation of Its Own Regulations

Godfrey & Kahn S.C. Law firm

In 2010, the United States Department of Labor (DOL) issued an “Administrator’s Interpretation” stating that DOL would no longer consider employees who perform duties typical of mortgage loan officers to be exempt from the Fair Labor Standards Act’s overtime pay requirements.  This particular ruling revolved around the FLSA’s exemption for administrative employees.

Supreme court DOL FLSA

The DOL’s 2010 stance represented a change of course, as DOL had previously issued an “Opinion Letter” in 2006 stating that mortgage loan officers were generally exempt from the FLSA’s overtime pay requirements under the administrative exemption.  Litigation ensued following the 2010 Administrator’s Interpretation.  The focus of that litigation was a rather technical issue:  Should DOL have followed the formal rulemaking process before it could flip-flop on its interpretation of its own regulations?  You can read more about the details of the litigation here.

On Monday, March 9, 2015, the United States Supreme Court ruled that DOL was not required to follow the formal rulemaking process whenever it took a position that was contrary to previous guidance issued by DOL.

Why does this ruling matter to employers of mortgage loan officers?  Those businesses should classify those employees as non-exempt and evaluate their compensation structures immediately to comply with DOL’s interpretation of the administrative exemption.  Otherwise, these employers run the risk of DOL enforcement actions and private litigation.  Of course, these employers can disregard the DOL’s interpretation and rely on individual merits of their classifications, but they would do so at their peril.

Why does this ruling matter to employers generally?  Based on the Court’s ruling, DOL can arguably change its tune about any interpretation of its own interpretive regulations without any warning to employers.  An emboldened DOL could revisit regulatory interpretations that currently favor employers and flip those interpretations on their head, without warning.  More importantly, the Court’s ruling was not limited to the DOL, which means that other federal administrative agencies (e.g., OSHA) could follow suit, leaving employers with little recourse to challenge such changes of heart.

ARTICLE BY

M. Scott LeBlanc
Rufino Gaytán
OF
Godfrey & Kahn S.C.

DOL Issues Final Rule Amending FMLA Definition of “Spouse” to Include Same-Sex Marriages

The U.S. Department of Labor has issued a final rule amending the regulatory definition of “spouse” under the Family and Medical Leave Act (“FMLA”).  We earlier reported on the DOL’s proposed rule to this effect, which is now final and will become effective on March 27, 2015.

The amendment changes the definition of “spouse” to include individuals in same-sex marriages if the marriage was valid in the place it was entered into regardless of where they live.  Before the new rule was issued, the FMLA and its accompanying regulations defined “spouse” as a husband or wife as recognized under the laws of the state in which the employee resides.  The new definition of spouse instead looks to the law of the jurisdiction in which the marriage was entered into and expressly encompasses same-sex married couples.  The final rule thus adopts a “place of celebration” rule rather than a “state of residence” rule for the definition of “spouse” under the FMLA.

According to the DOL, the amended regulatory definition of spouse permits “eligible employees in legal same-sex marriages [to] be able to take FMLA leave to care for their spouse or family member, regardless of where they live.”  The DOL has also suggested that the new rule will reduce the administrative burden on multi-state employers, who no longer have to consider an employee’s state of residence and the laws of that state in determining the employee’s eligibility for FMLA leave.

The new rule was prompted by the United States Supreme Court decision in United States v. Windsor, which found unconstitutional those provisions of the Defense of Marriage Act that prohibited federal recognition of same-sex marriages.

Some of the other features of the new rule include:

  • The new rule encompasses an employee in a same-sex marriage entered into abroad as long as the marriage is valid in the place it was entered into and could have been entered into in at least one state in the United States.

  • The new rule encompasses employees in a common law marriage as long as the common law marriage became valid in a state that recognizes such common law marriage.

  • An employee in a legal same-sex marriage can now take FMLA leave to care for his or her stepchild whereas before, an employee in a legal same-sex marriage could only take FMLA leave to care for his or her stepchild for whom the employee stood in loco parentis.

  • Similarly, an employee can now take FMLA to care for his stepparent who is the employee’s parent’s same-sex spouse, even if the stepparent never stood in loco parentisto the employee.

ARTICLE BY

Shira Forman
Sheppard, Mullin, Richter & Hampton LLP

President Obama’s Executive Orders on Immigration – Interagency Cooperation and DOL Initiatives

Godfrey Kahn Law Firm

On November 20, 2014, President Obama announced a series of executive actions designed to reduce the strain on the country’s immigration system.  Many of these policies will have a direct effect on employers and the business community and demonstrate that the increased interagency cooperation and enforcement we have seen in recent years will continue.

Visa Application, Passport

The President has ordered the creation of an interagency working group consisting of U.S. Department of Labor (DOL), U.S. Department of Homeland Security (DHS), U.S. Department of Justice (DOJ), U.S. Equal Employment Opportunity Commission (EEOC) and the National Labor Relations Board (NLRB) to identify policies and procedures to promote the consistent enforcement of labor, employment and immigration laws.  Two of the topics the working group will review include 1) promoting worker cooperation with enforcement authorities without fear of retaliation based on immigration status, and 2) ensuring that employers do not use federal agencies to undermine worker protection laws by introducing immigration authorities into labor disputes.  DOL’s interagency working group fact sheet is available here.  This interagency group appears to be ready to continue the DOL-DHS discussions that began with the signing in March 2011 of a Memorandum of Understanding (which has since been revised) between those two agencies governing their coordination with respect to their various civil enforcement activities and avoidance of conflicts.

DOL has also proposed to review the permanent labor certification program (PERM), which is used to certify a shortage of U.S. workers who are able, willing and qualified to fill certain positions.  This certification is a necessary prerequisite for many employment-based legal permanent residence processes.  For example, DOL has reported that employers filed more than 70,000 PERM applications seeking to certify shortages of U.S. workers for specific positions in fiscal year 2014.  Among other key changes, DOL will attempt to modernize the PERM program so that it can identify worker shortages more effectively.  This part of the President’s directives will hopefully have a positive impact on employers trying to fill positions for which the pool of qualified applicants is limited.  DOL’s PERM fact sheet is available here.

Other initiatives flowing from the President’s announcement but whose details are not yet known include improved allocation of immigrant (legal permanent resident) visas; increased portability of work authorization without jeopardizing a pending legal permanent resident process; expanded work authorization for students, recent graduates and the spouses of certain professional-level workers; and efforts to increase the number of investors eligible to enter the country.

ARTICLE BY

Gene T. Schaeffer, Jr.
Monica Santa Maria
OF
Godfrey & Kahn S.C.

What ERISA Plans Should Know about Money Market Reform

Drinker Biddle Law Firm

Most U.S. money market funds will begin restructuring their operations beginning in 2014 and throughout 2015 and 2016 as a result of the SEC’s adoption of wide ranging changes to the rules regulating these funds.  Since many plan participants invest in money market funds, ERISA plan sponsors, recordkeepers and investment consultants and other advisers will need to plan for operational, contractual, disclosure and other changes in connection with these new rules.

Floating and Stable NAV Funds

One of the biggest rule changes involves how money market funds will be allowed to value their shares.  Currently, money market funds generally offer shares at a stable net asset value (“NAV’) of $1.00.  Under the SEC’s new money market rules, only government and “retail” money market funds can offer their shares at a stable NAV.  Government money market funds are those funds that hold at least 99.5% of their investments in government securities, cash or repurchase agreements collateralized by government securities.  Money market funds that don’t qualify to offer shares at a stable NAV because of the nature of their shareholder base (i.e., institutional money market funds) will have to float their NAVs, meaning the share price will fluctuate from day to day.

Retail money market funds are funds that restrict investors only to beneficial owners that are natural persons.  A beneficial owner is any person who has direct or indirect, sole or shared voting and/or investment power.  Under the new rules, retail money market funds will be required to reasonably conclude that beneficial owners of intermediaries are natural persons.  The SEC stated that tax-advantaged savings accounts and trusts, such as (i) participant-directed defined contribution plans; (ii) individual retirement accounts; (iii) simplified employee pension arrangements, and other similar types of arrangements, would qualify for the natural person test.  On the other hand, defined benefit plans, endowments and small businesses are not considered “natural persons” and would not be eligible to invest in a retail money market fund.

It is widely expected that the SEC’s new money market rules will result in many changes in fund offerings.  For example:

  • Money market funds that currently have both institutional and natural persons as holders may spin off the institutional holders into separate floating NAV funds;

  • Some institutional funds may decide to liquidate or merge with other funds;

  • Some advisers may begin offering new money fund-“like” products that only hold short term securities (60 days or less maturity) and therefore value fund holdings at amortized cost; and

  • Some prime money market funds may change their investment strategies to operate as a government money market fund in order to steer clear of the floating NAV and liquidity fee and gate rules (discussed below).

Effect on ERISA Plans.  The SEC provided examples of how funds could satisfy the natural person definition with intermediaries, including through: contractual arrangements, periodic certifications and representations or other verification methods.  Accordingly, ERISA service providers who hold fund shares in omnibus accounts may expect to be contacted by retail money market funds to provide these certifications or representations and/or to enter into new agreements with funds for this purpose.

ERISA plan sponsors and investment consultants and advisers will also need to be alert to potential changes to existing money market funds currently offered in plans to which they provide services and/or new fund offerings that may be appealing to and/or better serve the best interests of participants.

Liquidity Fees and Redemption Gates

All money market funds, except government money market funds, will be subject to the SEC’s new rules with respect to the imposition of liquidity (or redemption) fees and redemption gates during periods when a money market fund’s weekly liquid assets dip below certain thresholds.  Under these new rules a fund board may impose up to a 2% liquidity fee and a gate on fund redemptions if weekly liquid assets fall below 30% of total assets.  The fund board must impose a 1% liquidity fee if weekly liquid assets fall below 10% of total assets, unless the board decides otherwise.  Of course, if 10% of a money market fund’s assets are below 10% of a fund’s total assets, it would be unlikely that a board would not impose liquidity fees and redemption gates.  The redemption gates can last no longer than 10 days and cannot be imposed more than once in a 90-day period.

Effect on ERISA Plans.  The liquidity fee and gate requirements will usually only be triggered in times of extreme market stress.  But they are features that many ERISA participants and ERISA service providers will not find appealing.  For that reason, there may be more demand from participants for government money market funds, which may, but are not required to, comply with the fee and gate rules.  It is not expected that government money market funds will opt to become subject to these fee and gate rules.

The liquidity fee and redemption gate rules will require recordkeepers to make technical changes in their operations.  These operational changes could be expensive and time consuming to implement especially for smaller plans.  In particular, it should be noted that liquidity fees may vary in amount depending on a fund board’s determination and redemption gates may vary in the amount of days and will need to be removed quickly upon notice by a fund board.  Additionally, there may be contractual impediments to implementation of liquidity fees and gates, which are discussed below.

Many commenters on the proposed money market rules raised questions with the SEC regarding possible conflicts caused by the application of the fee and gate rules to funds in ERISA and other tax-exempt plans.  Specifically, commenters mentioned the following issues with the fee and/or gate rules:

  • possible violations of certain minimum distribution rules that could be interfered with by the gate rule;

  • potential taxation as a result of the inability to process certain mandatory refunds on a timely basis;

  • delays in plan conversions or rollovers;

  • possible conflicts with the Department of Labor’s (“DOL”) qualified default investment (“QDIA”) rules; and

  • conflicts with plan fiduciaries’ duties regarding maintenance of adequate liquidity in their plans.

The SEC’s response generally was that these concerns either were unlikely to materialize or could be mitigated by ERISA plan sponsors or service providers.  For example, with respect to QDIAs, the SEC suggested that a plan sponsor or service provider could (i) loan funds to a plan for operating expenses to avoid the effects of a gate, or (ii) pay a liquidity fee on behalf of a redeeming participant.  In connection with rollovers or conversions, the SEC likewise pointed out that if the liquidity fee caused a hardship on a participant, then the ERISA fiduciary or its affiliate could simply pay the liquidity fee; failing that, the SEC suggested that the fiduciary consider a government money market fund for investment purposes, which is not required to comply with the fee and gate rules.

The SEC continues to work with the DOL on these and other ERISA-and tax exempt specific issues but thus far has not provided any relief from its fee and gate rules for these types of plans and accounts.  Thus, ERISA fiduciaries and plan sponsors may need to consider money market fund offerings in their plans in light of these issues.

Contractual Issues

As noted above, the “natural person” requirements for retail money market funds will require these funds to ascertain information regarding beneficial ownership of fund shares from ERISA intermediaries.  Retail money market funds may ask ERISA intermediaries to make representations about their customers through revised service agreements containing representations about the nature of the intermediaries’ customers.  These funds may also use periodic certifications or questionnaires to obtain this information.

In addition, many existing contracts between money market funds and intermediaries have restrictions in them regarding the imposition of redemption fees and may restrict a fund’s right to delay effecting redemptions thereby putting them in conflict with the new liquidity fee and redemption gate rules.  Recordkeepers who contract with retail or institutional money market funds may therefore be asked by these funds to amend or otherwise revise their servicing agreements with the funds to provide for liquidity fees and redemption gates.

Pricing Changes

The new money market rules will require all floating NAV money market funds to price their shares to four decimal places (e.g., $1.0000).  Recordkeepers will need to adjust their systems to accommodate the four-decimal place pricing system.

Disclosure and Education/Training

ERISA service providers will need to train and educate their personnel on the new money market rules and fund options so that they can answer participants’ questions.  ERISA service providers will need to develop disclosure for ERISA participants that clearly describes the risks and differences in money market funds and new fund options.

Compliance Dates

The new money market rules take effect in various stages over the next two years.  Importantly, the floating NAV, decimal pricing, and liquidity fee and gate rules become effective on October 14, 2016.  That said, the mutual fund industry appears to be moving quickly to prepare to comply, and it is probable that investment advisers to money market funds will begin to make some changes, for example, creating new funds and separating retail and institutional shareholders into different funds well ahead of the 2016 compliance date.  Therefore, ERISA service providers will need to be alert to the possibility that their operations may need to be adjusted as these changes occur.

The SEC’s new money market rules will usher in many changes to money market funds over the next 18-24 months that will affect ERISA and tax-exempt participants who invest in these vehicles and ERISA service providers.  ERISA service providers should begin preparing for these changes by assessing their systems, as applicable, to evaluate whether they can comply with the new rules and, if not, what other investment options might be available to address participants’ short-term investment needs.  ERISA service providers may also want to consider whether non-government money market funds or other short-term liquidity vehicles should be offered to ERISA participants in light of the new fee and gate rules.

ARTICLE BY

Diana E. McCarthy
OF
Drinker Biddle & Reath LLP