Marketing Hedge Funds – Why “Fiduciary” Matters

–  by  Thomas M. White

The Department of Labor (“DOL”) recently adopted a rule expanding the definition of who may be a fiduciary under ERISA.  Significant because ERISA-covered plans control enormous pools of capital and ERISA fiduciaries are prohibited from engaging in self-dealing transactions.  The new rule, which went into effect on June 9, 2017, affects how investments in hedge funds will be marketed to ERISA-covered plans and IRAs.

If a person makes a “recommendation” regarding an investment or investment management and receives a fee from a plan, a plan participant, a fiduciary, an IRA or an owner of an IRA that person will be considered a fiduciary and that definition applies even if the underlying assets are not “plan assets” within the meaning of the DOL’s Plan Asset Regulation.  If this sounds confusing, appreciate there is litigation currently pending regarding whether the DOL’s rule applies to IRAs or their owners.

Probably the most critical determination will be whether a “recommendation” has been made for purposes of this new rule.  A “recommendation” involves the purchase, holding, managing or sale of securities and is “a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.”  In fact, a series of communications may result in a “recommendation,” even if each individual communications may not rise to that level.  Although general communications are not, advice based on individual characteristics of a potential investor are likely “recommendations.”

There are a number of regulatory exemptions, such as recommendations made to a “sophisticated” adviser or investor or if an adviser offers advice to an independent plan or IRA fiduciary in an arm’s-length transaction and the adviser reasonably believes the independent fiduciary is a qualified financial institution (e.g., a bank, insurance company or a broker-dealer) or if the recipient of the information manages at least $50 million in assets regardless of whether those assets are plan assets.

Why does all this matter.  Make a presentation covering the general features of a specific hedge fund to a meeting room packed with potential investors and investment advisers.  After the formal presentation concludes, an audience member comes over to the presenter, describes himself as an IRA owner and his particular circumstances – a discussion ensues.  If the speaker isn’t careful about what is said, and a fee may be earned by the hedge fund it may be a problem.  There are other examples too numerous to describe here.

To minimize the likelihood they will be considered fiduciaries under the new rule, hedge funds should determine if they want to market to IRAs, small plans and individuals who have investment discretion over the investments in their profit sharing and 401(k) accounts.  Marketing materials should be reviewed to determine if they need to be modified to avoid a problem.  Even subscription agreements should make it clear the potential investor is not a small plan or an IRA unless it is being advised by an investment professional who fits under the exemption. Marketing professionals should be trained as to what they may and may not say and written reports describing conversations and communications with potential investors should be retained.

If you want to read more about the potential application of this new rule you can read the entire Rimon Client Alert or contact Tom White directly.  Mr. White specializes in the full scope of human resources management, such as Employee Benefits and Executive Compensation, Healthcare, and Employment Law.

Net Neutrality: Is the Cease Fire Over?

By Stephen Díaz Gavin  *

The way the U.S. Government regulates the Internet is back in play again. The outcome of the long running battle over “net neutrality” and regulation of the Internet – now more than 15 years old — is still uncertain. However, it is clear that the Federal Communications Commission (FCC) is stepping back from the stronger supervision of Internet Service Providers (ISPs) adopted in March 2015 under former FCC Chairman Tom Wheeler at the insistence of former President Obama.
On May 18, 2017, the FCC voted to release a Notice of Proposed Rulemaking (NPRM) to step back from the agency’s controversial March 2015 decision to treat ISPs as “common carriers” under Title II of the Communications Act. Instead, the “proposed rule,” will revert to classifying ISPs as providers of an “information service” and return jurisdiction over ISPs privacy practices to the Federal Trade Commission (FTC) – a clear indication of the direction the FCC will take under the current administration.
Law professor Tim Wu coined the term “net neutrality” in 2003.  As the FCC’s current Chairman Pai recently noted in an interview in the Wall Street Journal, the term “[i]s one of the more seductive marketing slogans that’s ever been attached to a public policy issue”.  Who can be against “leaving the Internet alone?” (“Why ‘Net Neutrality’ Drives the Left Crazy,” Wall Street Journal).   Apparently, many believe that it should not be left alone: the FCC received nearly 1.25 million comments submitted via the Internet in the three weeks following FCC Chairman Pai’s announcement that he intended to reconsider the Title II rules; nearly all opposing the proposal.
At the core of the dispute is the tension between the ISPs on the one hand, and streaming content providers like Netflix and Amazon, as well as Internet giants like Google and Facebook on the other.
Consumers fear a slowdown in service. The ISPs maintain the March 2015 common carrier regulation decision will stifle investments and ultimately produce what consumers fear:  a slower Internet.  Indeed, in the NPRM the FCC cited a decline in investment since the March 2015 Order in support of changing the rules.  The clash of interests highlights how outdated the old ways of government oversight of telecommunications have become. The Communications Act of 1934, was originally enacted to monitor the monopoly telephone provider at the time (ATT), based on the model of regulating railroad service and freight rates under the Interstate Commerce Act of 1887 – hardly a relevant basis for overseeing the backbone of 21st century technology.
The common carrier regulatory model prohibits additional charges for streaming content providers, which could be viewed as discriminatory. However, such a regulatory structure does not account for how ISPs pay for upgrades to maintain service quality as consumer demand increases for such content streaming.  Video content producers that stream large volumes of data, slow up Internet connections. Although the largest ISPs have agreed voluntarily not to charge the Netflix and Amazons of the world for doing so, where must the money come from in order to continue to upgrade capacity to maintain high speed download?  Retail consumers are concerned about higher rates, surcharges or deliberate “slowing” of service, yet these same consumers are customers of over-the-top online video gaming and streaming services that consume huge amounts of capacity.  Consumers always want more and faster service and they want it at the lowest price.
Given the current Republican majority, the FCC will likely eliminate Title II regulation of ISPs as it has proposed.  However, the decision can and will again be challenged in the courts (as has every prior rule on net neutrality).  Even if upheld by the courts, only Congress can define ‘net neutrality’ once and for all and give some degree of regulatory certainty to the regulations (which can be changed by a Democratic majority just as easily as the current Republican controlled FCC has done to the Obama era rules).
Net neutrality is now a hot political issue and despite current Republican majorities in both the House and Senate, it is uncertain whether a working majority in both exists that can adopt legislation to guide the FCC.  No matter who you are, in the debate over net neutrality, clearly nobody is neutral. Until Congress acts to give some greater definition to the term, successive FCC Chairmen will be able to reinterpret net neutrality as they see fit.

* This post was derived and adapted from a Rimon Law Client Alert “No Peace in Sight for Net Neutrality” by Stephen Díaz Gavin, who you can contact directly for more information.  

Forensic DNA and Missing Children: The Legal & Ethical Issues

Since 1983, when the day was designated by U.S. President Ronald Reagan as National Missing Children’s Day in the United States and spreading internationally through the Global Missing Children’s Network (GMCN), May 25th has been celebrated as International Missing Children’s Day.  GMAC is a jointly sponsored venture of the U.S. National Center for Missing & Exploited Children (NCMEC) and the International Centre for Missing & Exploited Children (ICMEC),  that focuses on educating parents on steps they can take in protecting their children, as well sharing best practices and information in investigating cases of child abduction, trafficking and illegal adoptions.

This year, I have the distinct privilege and great honor of speaking at the conference for Missing Children and Genetic Identity, organized by the Portuguese Association for Missing and Exploited Children [Associaçāo Portuguesa de Crianças Desaparecidas] and sponsored by Genomed, to be held at Lusófona University in Lisbon on the 25th of May 2017 – International Missing Children’s Day.

The conference will explore the connection between modern genetics and forensic science and on national and international efforts to aide investigations of missing and abused children.  The legal and ethical issues surrounding DNA collection and use, the pros and cons of storing DNA samples and maintaining a database of digital DNA ‘fingerprints’ as well as other bio metric information from individuals – convicted criminals, arrested individuals, victims, family members and even the general public – continues to be hotly debated on the national and international level throughout the world.  In addition to issues of privacy and security, the use and potential abuse of genetic and other bio metric evidence, whether to exonerate individuals or convict guilty individuals, is not just complicated, it is inconsistent across jurisdictional borders.  Sharing of critical information that may help identify a child or investigate a missing person, whether or not a crime may have been committed, is neither assured nor routine – despite the obvious benefits a regulated and carefully constructed information sharing system might be to family members, law enforcement and the forensic scientific community.

The conference, one of many throughout  the world on May 25th, will attract distinguished guests and provide a forum for discussion and shine a much needed spotlight on the legal and ethical challenges and opportunities at the intersection of science, law and law enforcement. I will publish a copy of my presentation and remarks after the conference concludes, but if you would like to know more about the conference, feel free to contact me, Joe Rosenbaum, or the organizers directly.

 

US-EU Data Transfer Privacy Shield

Being referred to by the European Union as the most important change in data privacy regulation in 20 years, the new EU General Data Protection Regulation (GDPR) comes into effect on May 25, 2018.  There is even a ‘countdown’ clock on the website and under the GDPR, “Personal Data” means information relating to an identified or identifiable natural person (including email addresses, telephone numbers, addresses and IP addresses).   While the European Commission has determined a number of countries already meet the ‘adequate protection’ test, the United States is not one of them!

As most readers of Legal Bytes already know, personal data cannot be transferred to from the EU to a non-European Union/European Economic Area country, unless that country can ensure “adequate levels of protection” for such personal data.

As background, in July of 2016, a new framework for the movement of personal data between the EU and the US was finalized – EU-U.S. and Swiss-U.S. Privacy Shield Frameworks – which was put into place in an effort to meet the requirements of the EU Data Directive.   However, critics noting the holes in that framework, have generated increasing concern as the 2018 effective date of the new EU GDPR approaches.   A few months ago, immediately following the inauguration ceremony, President Trump issued United States’ Executive Order 13768 (January 25, 2017) that has created even greater concern.  While it is possible a new or refined agreement and framework may be put into place in the months leading up to 2018, there is no certainty.

What do you need to know? What should you consider doing now?   My colleague Jill Williamson has written an article which has been published in Risk & Compliance Magazine, entitled “The Fragile Framework of the Privacy Shield“.   If you want to know more about the privacy and data protection implications of the new framework, its potential risks to your business and what you should be considering as you look to the future, feel free to contact Jill Williamson directly.  Of course, you can always contact me, Joe Rosenbaum, or any of the Rimon lawyers with whom you regularly work.

Taking Wagers on Sports Betting & Online Gambling

– Joe Rosenbaum

The Professional and Amateur Sports Protection Act of 1992 prohibits most states from authorizing sports betting (the law grandfathered a few states, such as Nevada) and New Jersey has been fighting to convince the Federal government to allow the State to legalize and license sports betting.  The latest attempt to circumvent the Act was the repeal of New Jersey’s own sports betting prohibitions at racetracks and casinos.  That effort was derailed by a series of court decisions, culminating in a 9-3 en banc decision of the Third Circuit Court of Appeals, which then led to the State of New Jersey petitioning the Supreme Court of the United States.

Last month, the Supreme Court refused to deny New Jersey’s challenge to the Federal ban (see, Christopher J. Christie, Governor of New Jersey, et al, Petitioners v. National Collegiate Athletic Association, et al; and New Jersey Thoroughbred Horsemen’s Association, Inc., Petitioner v. National Collegiate Athletic Association, et al) and left the door open to grant certiorari in the case if the Office of the Solicitor General (which is part of the U.S. Department of Justice) argues the case raises serious issues and questions of Federal law. They could, if they so choose, seek to revisit the long-standing position of the DOJ holding sports betting illegal.  To some extent, with the new administration of President Trump in place, many see this as an opportunity to do just that, since many of you may remember that as owner of casinos in Atlantic City, New Jersey, then businessman Donald Trump was a proponent of the legalization of sports betting.

Clearly, as States look to generate other sources of tax revenue, many view this as an opportunity to increase revenues and regulate an activity that has long been associated with organized crime. Indeed, the American Gaming Association estimated well over $4 billion in bets were placed on the Super Bowl last Sunday, virtually all of it, illegally. President Trump has consistently said he is in favor of eliminating or reducing legislation and regulation that restricts what States may or may not do and that encumber businesses needlessly beyond necessary Federal oversight. This may well fit right into that category, although there have been no comments as yet from the Administration.

Former Alabama Senator Jeff Sessions, just confirmed last night as Attorney General of the United States, has voiced opposition to any expansion of online gambling in the past, although when questioned during Senate hearings, did indicate he was willing to take another look at how and to what extent online gaming is being enforced by the Federal government.  There is also the possibility that in deciding to allow sports betting and an expansion of online gaming generally, the Federal government may choose to adopt some form of federally regulated or licensed betting and gambling scheme. While the path ahead is far from certain and opposition remains, some things do seem clear: attitudes are changing, the present administration is not averse to controversial new ideas, is favorably disposed to the elimination of any unnecessary Federal regulation that stands in the way of creating jobs and stimulating the economy and, notably, is likely to welcome finding an opportunity to enable States to find ways to increase tax revenue – and taxing so-called ‘sin’ industries may not be such an objectionable idea.

Stay tuned and, of course, if you have any questions, want further information or need help, don’t hesitate to contact me, Joe Rosenbaum, or any of the attorneys you regularly work with at Rimon.

FCC Drops ‘App’ Plan to Open Set-Top Boxes

–  Joe Rosenbaum

The Federal Communications Commission (FCC), under its new Chairman Ajit Pai, removed from its list of items for consideration, a proposal originally put forth by prior Chairman Tom Wheeler that would have allowed consumers to access pay-TV content on third-party devices.  Previous Chairman Wheeler’s original proposal took an “apps” based approach, but also included a licensing scheme that would require implementation of a standardized license for placing apps on such platforms or devices.

Critics, however, noted this particular proposal would actually have the opposite effect and more restrictively limit the choices available to consumers.  The original proposal also put the FCC in the position of acting as supervisory authority in order to ensure, in each case, that such a license wouldn’t harm competition.  Critics immediately raised concerns over the need for such intrusion by the FCC at all (some raised questions regarding the authority of the FCC to require or supervise such a licensing scheme), with many preferring to simply get rid of restrictions and limitations on access devices altogether.

While the FCC has removed the proposal from its list of items being considered for a vote, it remains on the Commission’s circulation list. Thus, the FCC’s action removes the proposal from immediate consideration, but doesn’t close the file officially – something over which industry groups remain concerned.   Their concerns continue to relate to the uncertainty of having a proposal still open for consideration, which, if resurrected, could pose problems for many in the industry, including distributors and content creators whose existing contracts might be in violation of such a new FCC requirement or policy.  Stay tuned.

California Employment Agreements – Choice of Law? Venue: Think Again!

by Thomas M. White

California’s Labor Code was amended effective January 1, 2017, to require that employment disputes regarding California resident employees be subject to the substantive law of California and that the arbitration or litigation of such matters be held in California.  These requirements will have a significant effect on how out-of-state employers negotiate and draft employment, separation and confidentiality agreements. Moreover, some of the statutory language is subject to interpretation and may result in violations of law by unsuspecting employers.

By way of background, in drafting employment agreements, employers typically identify one state whose substantive laws apply and require all disputes be litigated or arbitrated in a venue where the business operations are centered.  First, employers with employees spread across several states want the certainty and uniformity in their business arrangements. Second, the substantive law of a particular state may be more amenable to employer concerns. Third, employers may wish to inhibit litigation or arbitration by requiring employees to travel to another state to assert or defend contractual rights. These factors, already under assault in California, are expressly given no weight in the new statute.

The new statute, effective January 1, 2017, with respect to employees who primarily reside and work in California, will apply to all new employment agreements and also covers agreements that are extended or modified after that date.  Under the new law, injunctive relief is available and reasonable attorneys’ fees may be awarded.  However, the new law does not apply to contracts where the employee was represented by an attorney during the negotiation of the agreement.

Several of the above statutory features require additional consideration:

  • On its face, the new law does not apply to independent contractors. However, if such a contractor were to be deemed an ‘employee’ in the context of disputes involving other matters (e.g., tax, employee benefits, etc.), they may well also be held covered under the new law as well;
  • The law does not specify what is meant by an employee that lives and performs services “primarily” within California. You might want to keep records of employees in case a dispute arises. The answer may well mean the difference between the application of this new law and not;
  • It is not clear whether a contract is “extended” or “modified” if there is an automatic rollover or extension provision? What if there is a finite term and then the contract continues month to month, subject to termination at-will? Is that an ‘extension’ for purposes of the new statute?  Similarly, if the employee is entitled to a set of fringe benefits available to similarly situated employees and a new benefit is added January 1st –  is that a “modification”?

Although there is an exception for agreements negotiated by counsel, most employees don’t typically have the funds necessary to engage counsel. Consider this: it may be worthwhile for an employer to reimburse an employee for attorney’s fees in certain situations where the benefit of employment limitations outweighs the additional cost. Note, where this exception is intended to be relied upon, it is wise for the agreement to specify it has been negotiated by counsel, including the name of the attorney and the firm. Given the many choice of law considerations that arise in litigation, it should not be assumed non-California choice of law and venue provisions will be upheld simply because the employee retained counsel during negotiations.

What should you do now?  Any business that has current employment agreements with employees (and independent contractors) living and working in California, should carefully review those agreements in light of the need to comply with the new law. Where concerns may arise – in the language or the interpretation, counsel should be engaged to assure that relevant consideration is given to applicable factors.

For more information, contact Thomas M. White, a Partner specializing in the full scope of human resources management and employment law, including employee benefits, executive compensation and healthcare.  Of course, you can always contact me, Joe Rosenbaum, the Editor, or the attorney you normally work with at Rimon.

The Paradox of Illumination

I first heard about the paradox of illumination from Lee Loevinger, an extraordinary gentleman I was privileged to know professionally.  Lee was a multi-faceted, multi-talented, thought-provoking lawyer whose sage advice and stimulating ideas continue to resonate with those honored to have known him, and everyone else wise enough to read his work and the words he left behind.

In a nutshell, the paradox of illumination is extraordinarily complex, but simple to describe.  Much like Albert Einstein who, when asked about his theory of relativity and the notion that time is not constant, described it in personal terms: if a man is at dinner for 10 minutes with a beautiful woman, it seems like a fleeting instant; but sit on a burning hot stove for 10 minutes and it seems like an eternity :).

The paradox of illumination can similarly be described on a personal level.  Sit in completely dark room.  Really.  Completely dark.  What can you see?  Nothing.  You know little about your surroundings and can only sense your own body – in fact, you don’t even know how far your surroundings extend beyond your immediate sensations.

Now light a match.  The circle of illumination allows you to see a little of what is around you – but the perimeter and beyond are still dark.  Now light a candle.  The circle of what you can see illuminated by the light is larger than before, but the size of the perimeter beyond which you cannot see is also a lot larger than before.  The larger the light, the larger the area of illumination, but larger by far is the perimeter beyond which we know nothing.

The more we can see and the more we know and understand about the world around us, the larger the amount becomes that we don’t know.  In other words, as the circle of our knowledge grows, so does the amount of knowledge we cannot see and don’t know.  The paradox of illumination is the paradox of knowledge.  Perhaps that is why Michelangelo, when he was more than 87 years old, still said, “Ancora Imparo” (I am still learning).

FTC Finally Defines ‘Unfair’

According to the FTC: “The basic consumer protection statute enforced by the Commission is Section 5(a) of the FTC Act, which provides that “unfair or deceptive acts or practices in or affecting commerce … are … declared unlawful.” (15 U.S.C. Sec. 45(a)(1)). Safe Web amended Sec. 5(a) “unfair or deceptive acts or practices” to include such acts or practices involving foreign commerce that cause or are likely to cause reasonably foreseeable injury within the United States or involve material conduct occurring within the United States.”

Given that view and the FTC’s traditionally robust enforcement activities in areas of false, deceptive or misleading advertising, it is not surprising that most advertising, marketing and promotional professionals are familiar with section 5.

However, of lesser fame are pronouncements by the FTC in what is “unfair” competition – another segment of the authority vested in the Federal Trade Commission by section 5 of the FTC Act. This is the lesser-known part of section 5 that gives the FTC the authority to take action when it determines that “unfair methods of competition in or affecting commerce” may be deemed illegal – essentially an antitrust concept.

For the first time, the FTC, this past Thursday (August 13, 2015) released a single page “Statement of Enforcement Principles Regarding ‘Unfair Methods of Competition’ Under Section 5 of the FTC Act“. Perhaps indicative of the challenges and internal discussions among the regulators themselves, the principles are short and, to many, appear to be a re-statement of what has already been the enforcement practices of the FTC in recent years concerning this provision of the Act.

The Commission announced it will follow three basic principles. In short, enforcement will be considered: (1) Using the same underlying principles that guide antitrust law – protection of consumer welfare; (2) if the practice causes, or is likely to cause, harm to competition or the competitive process, without any counter-balancing justification; and (3) if enforcement under the Sherman or Clayton Act is insufficient and independent action is considered necessary.

If you want to know more or have questions, please contact me or any Rimon attorney with whom you work.

FTC Updates Its FAQs for Endorsement Guides

The Federal Trade Commission has just updated its version of Frequently Asked Questions, or FAQs, that relate to the “Guides Concerning the Use of Endorsements and Testimonials in Advertising” that went into effect December 1, 2009. You can find the updated FTC website page right here “What People Are Asking.”

If you are a loyal Legal Bytes’ reader, you know we have been following this since as early as November 2008, when we posted Endorsements & Testimonials – FTC Broom Proposes Some Sweeping Changes, and numerous updates and informational pieces have graced these pages since then (now when we say “pages,” we mean web pages). You can refer back to any or all of them, or you can check out any you may have missed right here: FTC Testimonial and Endorsement Guides Stimulate Industry Comment (March 2009); a presentation given at the University of Limerick on the subject entitled “Trust Me, I’m a Satisfied Customer: Testimonials & Endorsements in the United States,” which you can download; Ghostwriters: Medical Research or Paid Endorsers (and are they mutually exclusive?) and Rights of Publicity – Wake Up and Smell the Coffee! (both in August 2009); and FTC Releases Updated Endorsement & Testimonial Guidelines and Rimon Analysis of the New FTC Endorsement and Testimonial Guidelines (both in October 2009).

In December 2009, Legal Bytes posted another thoughtful and practical analysis FTC (Revised) Endorsement Guides Go Into Effect, written by John P. Feldman, so you know Rimon is following and keeping up with developments as they occur.

So, if you want to know more or have questions, please do not hesitate to contact me, or any Rimon attorney with whom you regularly work.