401(k): New Proposed Securities Legislation Could Affect 401(k) Participants’ Rights

Most pension rights advocates would agree that the recent stream of trending events has not been especially favorable to participants and beneficiaries in 401(k) plans.  Earlier this year, there was the demise of the DOL’s Fiduciary Rule, which many observers saw as a severe setback to the fortunes of individual investors in participant directed 401(k) plans.   Seen along with the current administration’s general deemphasis on regulation, many fear that the political climate is growing increasingly unfavorable to individual 401(k) plan participant rights and protections.

Last week, the U.S. House of Representatives Subcommittee on Capital Markets, Securities, and Investment took what many perceive could be another step in diminishing individual participant rights. On February 15, 2018, the full House had introduced  H.R. 5037, the Securities Fraud Act of 2018, which among other things would block private enforcement of state protections against securities fraud.  The proposed legislation’s goal is to federalize securities fraud actions by preempting any and all state laws that even indirectly touch on securities fraud.  The result would be that all securities fraud litigation and enforcement would need to take place at the federal level.  By considering the proposal, the House Subcommittee has now pushed the possible measure closer to becoming an eventual reality.

Critics, such as the North American Securities Association (NASSA), decry the proposal as an attempt to “tie the hands of the regulators who are the cops on the beat,” pointing out that state securities regulators are often in a better position to monitor securities fraud, due in part to the federal Security Exchange Commission (SEC)’s limited resources.  State-level enforcement is said to often be the most effective means by which securities fraud and similar criminal misdeeds can be identified and held in check. The lack of adequate enforcement activity in this regard is perceived as having a potentially large impact on retirement savings in general, coming at a time when retirement savings are already in increasing jeopardy.

SEC Chairman Jim Clayton has previously hinted that the SEC is considering allowing companies to adopt mandatory arbitration clauses for shareholders – an idea which is opposed by most 401(k) participant advocates on the grounds that it would effectively kill recovery chances for most 401(k) plan participants alleging securities fraud violations.  Although too early to predict outcomes, should both of these proposals see the light of day, it would present a classic “one-two punch” that could adversely affect the retirement savings of many thousands of Americans.

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