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● USA Today
2023 Best Financial Advisory Firms
usa today best financial advisory firms 2023 logo for wellspring financial

Award based on independent survey carried out by USA TODAY and Statista. Firms need to be nominated by a participant in the survey. No prior registration is required, and no costs are involved for the nomination. The recommendations for each firm are summarized and evaluated anonymously. 
In addition to the survey results, additional metrics (e.g., data in relation to assets under management (AUM)) will be included in the final analysis.

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Fiduciary Hot Topics • April 2022

Department of Labor Issues Cautionary Warning Regarding Cryptocurrencies

  • Recently, the Department of Labor has become more aggressive about issuing guidance to plan fiduciaries regarding their investment decisions that goes beyond the general fiduciary standards in ERISA. On March 10th, the Department issued a Compliance Assistance Release cautioning fiduciaries of defined contribution plans about Cryptocurrencies. This follows on the recently issued regulations regarding ESG investing and a cautionary letter stating the Department does not view private equity as an appropriate investment in most defined contribution plans.

  • The release is clear that the Department is highly skeptical about cryptocurrencies. While the release does not explicitly prohibit investing in cryptocurrencies, it would seem wise for fiduciaries to hold off on any decision to add cryptocurrencies for the foreseeable future.

  • The Release is largely devoted to describing the well understood fiduciary standards in ERISA. The release “cautions plan fiduciaries to exercise extreme care before considering adding a cryptocurrency option to a 401K plan’s investment menu…” The Department’s concerns about the prudence of allowing participants to invest in cryptocurrencies rests on a number of factors including the price volatility of cryptocurrencies, the reliability of valuations, and the fact that cryptocurrencies trade outside of established regulatory frameworks.

  • The language in the release implies that in future Department audits, plan fiduciaries will be asked about cryptocurrencies.

Facts About Cryptocurrencies

  • Cryptocurrencies are digital assets in a decentralized system that allow for secure online payments. Traditional currencies are backed by a government agency – usually a central bank. Cryptocurrencies have no backing from either a private or public entity. There are now many cryptocurrencies with a total value estimated at $2 trillion. The most popular are Bitcoin and Ethereum. Bitcoin represents about 40% of the outstanding value of all cryptocurrencies.

  • The investing public has become increasingly interested in cryptocurrencies due, in large part, to the meteoric rise in the value of Bitcoin. At the beginning of 2011, Bitcoin had a value in US dollars of $0.31. As of the beginning of 2020, the value had soared to $8,023. During March of this year, Bitcoin was trading in the range of $47,000.

Plan Participants Have Little Exposure to the Russian Stock and Bond Markets

  • Apart from plans that offer a fund focused on the Russian markets, the exposure of most participants to the Russian Federation, even before the invasion of the Ukraine, was small. For most probably less than one percent.

  • Russian securities are no longer considered investable as they cannot be effectively traded. The Russian stock market was closed for a month and trading in the depositary receipts of Russian firms has been suspended in New York and London.

  • Because Russia has a relatively small economy, exposure of US investors to that country has always been low. As of December 31, 2021, there were 150 index tracking mutual funds and ETFs with more than 0.5 percent of their portfolios invested in Russia. Those funds comprised less than two percent of total assets in mutual funds and ETFs. Even funds focused on emerging markets have had small weightings to Russia. Russia represented only 3.4 percent of the MSCI Emerging Markets Index before the Ukrainian invasion.

  • Exposure to Russian markets is now at or close to zero as index providers and asset managers around the world are writing off Russia. In March, MSCI and FTSE Russell eliminated Russian equities from their indices by effectively writing the value down to zero. At that time, the Russian weighting was 1.5 percent in the MSCI Emerging Markets Index and 1.3 percent in the comparable FTSE Russell index.

  • Funds tracking global and international indices had little exposure to Russia prior to the Ukrainian invasion. As of December 31st of last year, Russia had a weighting of 0.78 percent in the Vanguard Total International Stock Index Fund and 0.89 percent in the Fidelity Total International Index Fund.

  • The Russian Stock Exchange reopened to trading in 33 companies on March 24th. However, short selling is prohibited, and foreigners cannot sell out of their positions. After the reopening, the stock prices of some Russian companies moved up quickly suggesting that the Russian stock market is less a measure of value and more a testament to the alternate reality the Russian people are now in.

Long Awaited Proposed SEC Rule Will Require Climate Disclosures

  • On March 21st, the Securities and Exchange Commission published a proposed rule that will require public companies to produce disclosures regarding climate risks.

  • There is increasing investor demand for disclosures on climate related risks and the management of these risks. Many companies make such disclosures in their proxy statements and on their websites. But the SEC has expressed concern that these disclosures vary widely in completeness, granularity, and format. The proposed rule is intended to bring some consistency to these disclosures.

  • Some believe the proposed rule is a significant step forward in the battle against climate change. While it does not directly regulate climate change, the rule will improve transparency around climate risks and enhance accountability for climate related claims. Critics of the proposal argue that it is overly broad, requires disclosure of immaterial information and will obligate companies to rely on imprecise assumptions.

  • The rule will require disclosing the following
    • Climate-related risks likely to have a material impact on company operations;
    • Greenhouse gas (“GHG”) emissions associated with a company’s operations including in many cases, an attestation report by a GHG emissions attestation provider consistent with AICPA guidelines; and
    • Including climate-related financial metrics in audited financial statements. 

While The Supreme Court’s Decision in Hughes vs. Northwestern University Breaks no New Legal Ground, it May Make Trial Court Judges more reluctant to Dismiss Class Action Suits Against Plan Sponsors

  • Historically there was little litigation involving retirement plans. But in recent years, such litigation has exploded. These cases are class action suits that are not initiated by individuals, but by plaintiffs’ attorneys on behalf of a class that consists of the participants in the plan.

  • These cases consistently focus on fees and investments. The complaints are mostly cookie cutter and often lift allegations from complaints filed in other lawsuits. The allegations tend to second guess, with the benefit of hindsight, the decisions of plan fiduciaries, rather than explicitly alleging the use of facts of a flawed process in making decisions

  • Many judges are unfamiliar with ERISA and the factors present in retirement plans. This has allowed plaintiffs’ attorneys to utilize ERISA’s perceived complexity and avoid the dismissal of these suits regardless of the merits. This has left sponsors the choice of expensive and protracted litigation or entering a settlement.

  • The case against Northwestern never went to trial because the district court granted Northwestern’s motion to dismiss. A motion to dismiss is granted if the judge decides that regardless of what facts are proven at trial, the plaintiffs have failed to state a legal claim.

  • This decision was affirmed by the Seventh Circuit of the US Court of Appeals. In a strong rebuke of the plaintiffs, the Court of Appeals stated they failed to allege violations of ERISA, but rather stated opinions and preferences regarding how retirement plans should be administered.

  • One reason the Supreme Court agreed to hear this case is probably because the Solicitor General, who represents the federal government before the Court, argued for review. The Court’s decision was unanimous. This is not unusual in cases that do not involve political controversy.

  • The decision does not break new legal ground. The Court remanded this case to the Court of Appeals because it decided the lower court did not give sufficient weight to its decision in Tibble versus California Edison. There the Court stated fiduciaries have an ongoing duty to monitor plan investments. The Court did not delve into the merits.

  • The Court of Appeals could decide to remand this case back to the trial court or reaffirm its previous decision upholding the trial court’s granting of a motion to dismiss. Another possible outcome is that the parties reach a settlement.

  • While the decision in Hughes does not set any new legal precedent, there may be some significance because the decision may make trial judges more reluctant in future cases to grant motions to dismiss.

For any further questions, please do not hesitate to email Wellspring Financial Partners at info@wellspringfp.com or call 1 (844) 203-2402.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. ACR# 3860268 10/21. A proud member of RPAG.

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