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August 8, 2017

On June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act (the “Act”), which if enacted as passed, would bring sweeping changes to our regulatory landscape, essentially gutting the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Although the Act mostly impacts the banking industry, it also contains a number of provisions that would impact executive compensation for public companies across all industries.

The Act repeals the U.S. Securities and Exchange Commission’s (“SEC”) final rule implementing the CEO pay ratio disclosure mandated by Dodd-Frank.  The Act would also repeal the SEC’s proposed rules requiring companies to disclose their hedging policies for officers, directors, and employees. Additionally, the Act would repeal the requirement that the SEC issue rules requiring annual disclosure of why the company has elected to retain or change its CEO and chairman structure (i.e., combined Chairman and CEO role, separate independent chairman/lead director and CEO positions, etc.).

The Act would also amend Dodd-Frank’s clawback provisions and Say-on-Pay rules.  Specifically, the Act would: (a) limit the applicability of the SEC compensation clawback rules to current or former executives who had control over company financial reporting (current legislation applies the clawback rules to any current or former executive regardless of their financial reporting responsibilities); and (b) ends the requirement for advisory Say-on-Pay votes at least every three years, instead requiring the advisory vote only in years following material changes to the executive compensation programs.

While the Act passed the House along party lines in early June, the likelihood of it passing the U.S. Senate in its current form is bleak. Republicans in the Senate do not have the numbers to pass the Act without bipartisan support, which is unlikely given Washington’s current climate.  Accordingly, we advise all of our clients to proceed with business as usual as we do not foresee any imminent changes to Dodd-Frank.

Calculating Maximum Loan Amounts

On July 26, 2017, the IRS issued an internal memorandum (TE/GE-04-0717-0020) (the “IRS Memorandum”) to address ambiguity in the permitted means of calculating the maximum loan available to qualified plan participants. The IRS issued interim guidance on this topic on April 20, 2017; however, the new IRS Memorandum supersedes the prior guidance.  The IRS concluded that where a participant has multiple loans during a plan year and none of the loans is taken for an amount greater than or equal to the $50,000 maximum, the IRS will recognize two permissible methods for calculating the highest outstanding balance within the past 12 months.  Plan sponsors may either use the highest balance of the largest loan, or they may aggregate all plan loans. The IRS Memorandum indicates that this guidance is applicable to examinations open on and after the date of issuance.

Loans to participants in a qualified plan are governed by Internal Revenue Code (“IRC”) § 72(p). With respect to the loan amount, IRC § 72(p)(2)(A) requires that a loan not exceed the lesser of:

(i)      $50,000, reduced by any excess of

(I) the highest outstanding balance of loans during the 1-year period ending on the day before the date on which such loan was made, over

(II)     the outstanding balance of loans on the date on which such loan was made; or

(ii)     the greater of

(I)      half of the present value of the vested accrued benefit, or

(II)     $10,000.

The adjustment to the $50,000 limit in (i) above is intended to prevent an employee from continuously maintaining a $50,000 loan balance.

The general rule creates ambiguity where a participant takes and repays multiple loans in a one-year period. According to the IRS Memorandum, plans may calculate maximum loans in these situations by using one of two approaches, either aggregating the highest outstanding loan balance for each loan taken during the one-year period, or determining the highest outstanding balance based on each loan separately.

The IRS demonstrated these approaches using the following example[1]:

A participant borrowed $30,000 in February which was fully repaid in April, and $20,000 in May which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, since $30,000 + $20,000 = $50,000.  Under the second approach, using the IRS’s example, the participant would be permitted to take another $20,000 plan loan since the highest outstanding balance was $30,000.

While the IRS Memorandum is not legally binding, it does provide reassurance to plan sponsors that the law does not preclude the use of either approach to calculate the highest outstanding balance and additional flexibility in calculating maximum loan amounts. Accordingly, how the plan document is written and the approach the plan sponsor has chosen to take will control the maximum loan amount.

[1] The example assumes that all other IRC § 72(p)(2) requirements are met, so the participant has a vested accrued benefit of more than $100,000, and the loan is repayable in 5 years and requires substantially level amortization.

The Fiduciary Rule Is (Finally) In Effect

The Department of Labor’s (“DOL”) fiduciary rule has been the subject of much discussion, debate, and many delays over the past year. Originally proposed under the Obama administration, the rule expands the DOL’s definition of a fiduciary so that it includes many more financial professionals who provide investment advice for a fee to qualified plans, plan participants, or IRA holders. Under the rule, investment advice fiduciaries must act in the best interests of their clients, and disclose potential conflicts of interest and all fees and commissions in dollar form.

Proponents of the rule believe it will increase fee transparency, accountability, and protect clients who are seeking investment advice. Conversely, opponents have argued that it will hurt the retirement advice business by adversely impacting investment advisors whose income is commission-based and requiring advisors to pay large amounts to comply with the regulations.

The first phase of the fiduciary rule went into effect on June 9th. The next phase, which includes the enforcement and exemption provisions (i.e., the Best Interest Contract Exemption, the Class Exemption for Principal Transactions, and the amendments to Prohibited Transaction Exemption 84-24), was originally scheduled to become effective on January 1, 2018; however, the DOL has submitted an amendment to the Office of Management and Budget proposing to delay the effective date until July 1, 2019.

Additionally, there has been a flurry of activity aimed at passing legislation to repeal, replace, or delay the fiduciary rule, but it does not appear that any of that legislation will pass in the immediately near future. Among the proposed legislation, the House Education and the Workforce Committee approved a bill on July 19th that, if enacted, would replace the fiduciary rule with a more disclosure-focused advice standard. Another proposed bill, the Affordable Retirement Advice for Savers Act, would put the retirement advice industry back where it was before the fiduciary rule by bringing back a more relaxed definition of fiduciary. Finally, the House Financial Services Committee proposed a bill that would essentially eliminate the DOL rule and replace it with a best-interest standard that would be proposed by the Securities and Exchange Commission.

It remains to be seen how it will turn out for the DOL’s fiduciary rule, but it will likely continue to be in the news for some time.

The Trump DOL Will Not Support 2016 Salary Threshold Increase

The US Department of Labor (“DOL”) indicated that under President Trump, it will not defend or enforce the controversial Obama-era 2016 overtime regulations (the “2016 Regulations”) that would have increased the salary threshold for the white-collar exemptions to the Fair Labor Standards Act (“FLSA”) (however, the Trump administration is asking the court to affirm the DOL’s authority to establish its own salary threshold and not reinstate the specific salary threshold set by the DOL’s 2016 rule). Instead, the DOL plans to go through the rule making process to revise the salary threshold – likely downwards – to a level the current administration believes is more appropriate.

The DOL’s announcement came in response to a Texas District Court’s November 2016 order preventing the 2016 Regulations from going into effect. This had the effect of preventing an estimated 4.2 million people from becoming newly eligible for time-and-a-half overtime pay.  Absent the court order, the 2016 Regulations, which would have increased the while-collar exemption salary threshold from $23,660 per year to $47,476 per year, were set to go into effect on December 1, 2016.

Rather than advocating for the $47,476 threshold, the DOL plans to re-examine the salary threshold level through the rule making process.  To that end, the DOL has announced its intention to issue a Request for Information (“RFI”) to seek public comments, data, and information related to the FLSA overtime rules and the salary threshold. The purpose of the RFI is to provide the DOL with requisite background to consider as it potentially drafts new regulations setting a salary threshold with a more incremental increase from its current $23,660 level.  Although it is anyone’s guess where the DOL will set the new salary threshold, Secretary of Labor Alexander Acosta testified during his Senate confirmation hearing that he thought “somewhere around $33,000” would be more reasonable.

This news means three things for the overtime rules. First, the salary threshold for the white-collar exemption will remain at $23,660 until further notice.  Second, the proposed $47,476 salary threshold is, for all intents and purposes, dead – it will not go into effect.  Third, the DOL intends to revisit the salary threshold and has taken steps towards drafting new regulations that would set a more reasonable salary threshold. The rule making process can be slow, so employers should assume that the current  threshold will be in place for the foreseeable future.