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Archive for June, 2019

You Have the Right to Vote – in a Gerrymandered Districtby Andrew Whiteman

The Supreme Court today reversed lower court decisions from North Carolina and Maryland that held partisan gerrymandering of congressional election districts is unconstitutional. The New York Times report is here. Better yet, read the Court’s opinion here.

This decision is thoroughly depressing. The message is that the political hacks in control of state legislatures may arrange the voting districts to ensure that they remain in power. This is a sad day for democracy. The Supreme Court completely abdicated its constitutional oversight responsibility. What are we left with? The right to vote in a rigged election. Why bother?

This decision affects only challenges to politically-gerrymandered voting districts brought under the United States Constitution. The Court stated that the federal courts may continue to consider challenges based on inequality of population among voting districts – on equal protection grounds – and based on claims of racial gerrymandering – also on equal protection grounds. Chief Justice Roberts’ explanation as to why the federal courts are fully capable of remedying racial gerrymandering but not partisan gerrymandering is unconvincing:

Unlike partisan gerrymandering claims, a racial gerrymandering claim does not ask for a fair share of political power and influence, with all the justiciability conundrums that entails. It asks instead for the elimination of a racial classification. A partisan gerrymandering claim cannot ask for the elimination of partisanship.

With all due respect, the plaintiffs did not ask for the elimination of partisanship but rather sought the elimination of partisanship in the drawing of Congressional districts. If the courts are able to redraw districts to remedy racial gerrymandering, they should be able to remedy partisan gerrymandering. Justice Kagan’s dissent is compelling.

The Court’s decision does not affect challenges to the drawing of state legislative voting district on state statutory and constitutional grounds. Justice Roberts wrote that “Provisions in state statutes and state constitutions can provide standards and guidance for state courts to apply.”

In North Carolina, the non-profit Common Cause filed suit on November 13, 2018 in Wake County Superior Court to challenge the voting districts for the North Carolina legislature on state constitutional grounds. The pleadings in Common Cause v. Lewis may be found here. The case is scheduled to go to trial on July 15, 2019.








The SEC Interprets Investment Advisers’ Fiduciary Duty to Customersby Andrew Whiteman

The SEC Interprets Investment Advisers’ Fiduciary Duty to Customers

On June 5, 2019, the United States Securities and Exchange Commission issued Release No. IA-5248, titled Commission Interpretation Regarding Standard of Conduct for Investment Advisers (herein, “SEC Interpretation”).[1]  The same day, the SEC issued Release No. 34-86031, titled Regulation Best Interest: The Broker-Dealer Standard of Conduct (herein, “Regulation BI”). The SEC Interpretation applies to investment advisers registered under the Investment Advisers Act of 1940 (“Advisers Act”). Regulation BI applies to broker-dealers registered under the rules of the Financial Industry Regulatory Authority (“FINRA”). The SEC Interpretation and Regulation BI provide similar “best interest” standards to govern dealings between financial professionals and their customers. To allow sufficient time for financial professionals to implement the new requirements, the new rules become effective on June 30, 2020. This blog discusses the SEC Interpretation. A prior blog covered Regulation BI.

The SEC Interpretation is not a rule, like Regulation BI. As such, the SEC Interpretation merely provides the SEC’s views on the nature and extent of the fiduciary duty owed by investment Advisers under the Advisers Act. The Advisers Act itself does state that investment advisers are fiduciaries to their customers. Courts have held that section 206 of the Act (29 U.S.C. § 80b-6) establishes federal fiduciary standards to govern the conduct of investment advisers. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (“Courts have imposed on a fiduciary an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading’ his clients.”).

The fiduciary duty owed by investment advisers encompasses both a duty of care and a duty of loyalty. In Capital Gains, the U.S. Supreme Court wrote that section 206 of the Advisers Act reflects a Congressional recognition “of the delicate fiduciary nature of an investment advisory relationship” as well as a Congressional intent to “eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which was not disinterested.” 375 U.S. at 191-92.

Best Interest = Duty of Care and Duty of Loyalty

The SEC used the term “best interest” to encompass both the duty of care and the duty of loyalty. SEC Interpretation, p. 8. The duty of care requires the investment adviser to provide advice in the best interest of its client, based on the client’s financial situation and goals. Id. Importantly, the SEC does not require that an adviser avoid all conflicts of interest in its dealings with its clients. Instead, the SEC Interpretation states that an adviser satisfies its duty of loyalty if it “makes full and fair disclosure of all conflicts of interest which might incline an investment advisor – consciously or unconsciously – to render advice which is not disinterested such that a client can provide informed consent to the conflict.” Id.

Duty of Care

According to the SEC, the duty of care is primarily satisfied by providing investment recommendations that are “suitable” for the client. Interpretation. p. 12. “Suitability” is a concept borrowed from the regulation of broker-dealers by FINRA. See FINRA Rule 2111. Investment adviser recommendations must be “suitable” for the customer in light of information disclosed by the customer concerning the customer’s investment profile, ie. the client’s financial situation, level of financial sophistication, investment experience, and financial goals. Interpretation, p. 9.

Duty of Loyalty

The SEC Interpretation states that the duty of loyalty requires that “an advisor not subordinate its clients’ interests to its own” and “not place its own interest ahead of its client’s interests.” However, this duty of loyalty is met, not by requiring that the adviser “put its client’s interests first,” which was the language of the 2018 Proposed Interpretation, but by making “full and fair disclosure to its clients of all material facts relating to the advisory relationship.”


The SEC Interpretation gives several examples of matters that require full and fair disclosure. Dual-registered broker-dealers and investment advisors must disclose “the circumstances in which they intend to act in their brokerage capacity and the circumstances in which they intend to act in their advisory capacity.” Disclosure of the capacity in which the adviser is acting may be made at the commencement of the relationship. A dual registrant acting in its advisory capacity should disclose any circumstances in which its advice will be limited to a menu of certain products offered through an affiliated broker-dealer or an affiliated investment adviser. SEC Interpretation, p. 22. In addition, an adviser must eliminate or “expose through full and fair disclosure all conflicts of interest which might incline the investment adviser – consciously or unconsciously – to render advice which was not disinterested.” While such disclosure and the client’s informed consent prevent the presence of the conflicts from violating the adviser’s fiduciary duty, such disclosure and consent do not themselves satisfy the adviser’s duty to act in the client’s best interest. SEC Interpretation, p. 23. The SEC sees the advisers’ delivery to their clients of the “brochure,” under Part 2A of Form ADV, as the primary means for advisers to satisfy their duty of disclosure.

Best Interest? What’s That?

Strangely, given the importance of the term “best interest,” nowhere in the Interpretation does the SEC define. it. All the SEC Interpretation tells us is that “an investment advisor’s obligation to act in the best interest of its client is an overarching principle that encompasses both the duty of care and the duty of loyalty.” SEC Interpretation, p. 23, at n.58. The SEC’s failure to be more definite about when “best interest” is and is not satisfied is unfortunate and unhelpful.

To say that full and fair disclosure of material facts and conflicts of interest satisfies the adviser’s fiduciary duty but not necessarily the duty to act in the customer’s best interest begs the question – what exactly is the adviser’s duty to its clients? The SEC’s formulation resembles a dog that chases its tail but never catches it. An adviser’s fiduciary duty, we are told, consists of a duty of care and a duty of loyalty. Care and loyalty require the adviser to “act in the ‘best interest’ of the client at all times.” SEC Interpretation, p. 8. To meet its duties, the adviser’s recommendation must be “suitable.” While never mentioning the FINRA suitability standard applicable to broker-dealers under FINRA Rule 2111, the SEC Interpretation for the first time adopts it as the standard applicable to investment advisers. SEC Interpretation, pp. 12-18.

The duty of loyalty requires that an adviser may not place its own interest ahead of those of its client. Disclosures made in a “brochure” provided at the outset of the adviser-client relationship may satisfy the adviser’s fiduciary duty, but disclosure and consent “do not themselves satisfy the adviser’s duty to act in the client’s best interest.”


The SEC Interpretation has been widely criticized on many grounds. For one thing, the Proposed Interpretation stated explicitly that “the duty of loyalty requires an investment adviser to put its client’s interests first.” Proposed Interpretation, p. 15. The version adopted by the Commission replaced that sentence with the statement that the duty of loyalty “requires that an adviser not subordinate its clients’ interests to its own,” which the SEC explained means that an advisor cannot favor its own interests over those of a client. SEC Interpretation, p. 21. In an accompanying footnote, the SEC stated that it had made a mistake by referring to “placing clients’ interests first” in the Proposed Interpretation. According to the SEC, it had previously adopted the formulation that the best interest duty “includes the obligation not to subrogate clients’ interests to its own.” The SEC conceded that advisers commonly used “a plain English formulation” – putting the client’s interests first – as a means of explaining their duty of loyalty in a way “that may be more understandable to retail clients,” but argued that this was not the legal standard. SEC Interpretation, pp. 21-22, at n.54.

The failure to require advisers to place their clients’ interests first is the main point stressed by Commissioner Robert L. Jackson, the lone dissenter to both the SEC Interpretation and Regulation Best Interest. In a statement released on the day the Commission voted, Commissioner Jackson pointed to empirical evidence. According to Commissioner Jackson, the vast majority of firms that describe their fiduciary duty to their clients tell the public that they place their clients’ interests first. The Commission’s Interpretation retreats from that standard. In Commissioner Jackson’s words, “the Commission is wrapping a policy choice in legalese” and the Commission’s refusal to require advisers to place client interests first is contrary to the prevailing standard of care.

[1] On April 18, 2018, the Commission published for comment a proposed interpretation regarding the standard of conduct for investment advisers. See Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. 4889 (Apr. 18, 2018) (“Proposed Interpretation). The SEC Interpretation was adopted after the SEC considered comments made in response to the Proposed Interpretation.

© Andrew Whiteman 2019


The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Click here for more information about our securities litigation and arbitration practice. Please contact us for more information.

The SEC Adopts Regulation Best Interestby Andrew Whiteman

The SEC Adopts Regulation Best Interest

On June 5, 2019, the United States Securities and Exchange Commission issued Release No. 34-86031, titled Regulation Best Interest: The Broker-Dealer Standard of Conduct. This much-anticipated rule takes effect on June 30, 2020.

The stated purpose of Regulation BI is to establish a standard of conduct for broker-dealers and their associated persons when they make recommendations to retail customers for any securities transaction or investment strategy involving securities. According to the SEC’s 771-page release, the Regulation BI enhances the broker-dealer standard of conduct by requiring broker-dealers “to act in the best interest of the retail customer at the time the recommendation is made,” to refrain from “placing the financial interest of the broker-dealer ahead of the interests of the retail customer,” to “address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest,” and, in certain instances, to mitigate or eliminate conflicts.

The actual regulation takes up less than six pages, while the remainder of the 771 pages consists of the SEC’s attempt to explain why this new regulation, rather than the much broader fiduciary rule that it replaces, is in the best interest of retail investors. In fact, Regulation BI is in many ways a step backward. The new was universally opposed by investor advocates, including the Public Investors Arbitration Bar Association, and falls far short of the protections investors deserve. The rule purports to require that brokers adhere to a “best interest” standard but does not actually require that they act in their customers’ best interests. The standard does not prevent brokers from placing their own interests first. It provides that brokers are not required to monitor customer accounts unless they agree “to provide the retail customer with specified account monitoring services.” Regulation BI permits broker-dealers to place their interests ahead of customers if they disclose the conflict.

The history of efforts to reform the standards applicable to broker-dealers has its origin in financial crisis that began in September 2018. In July 2010, President Obama signed the Dodd-Frank financial reform law, which gave the SEC the authority to develop a uniform fiduciary standard for retail investment advice that was no less stringent than the standard applicable to investment advisers under the Investment Advisers Act of 1940. The same year, the United States Department of Labor released a rule designed to limit conflicts of interest for financial advisers who worked with customer retirement accounts. In January 2011, the SEC staff issued a report that recommended the SEC propose a uniform fiduciary rule. On April 14, 2016, the Department of Labor issued its final version of the fiduciary rule. Full compliance with the rule was to occur by January 1, 2018. In August 2017, the Labor Department proposed that compliance with the fiduciary rule be delayed for 18 months, until July 1, 2019. By that time, President Trump had been elected. The new administration stated its opposition to imposing a fiduciary standard on broker-dealers, and Department of Labor’s rule was shelved. Regulation BI is its replacement.

The SEC commissioners adopted Regulation BI by a vote of three to one, with Commissioner Robert L. Jackson, Jr. casting the sole dissenting vote. Commissioner Jackson issued a statement in which he wrote “today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice.” The Dodd-Frank law gave the SEC full authority to adopt a strong, pro-investor fiduciary standard that covered broker-dealers. Unfortunately, the SEC failed to do so.

© Andrew Whiteman 2019


The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Click here for more information about our securities litigation and arbitration practice. Please contact us for more information.



COBRA – Know your Rights and Avoid Being Bitten by the Snakeby Andrew Whiteman

COBRA – Know your Rights and Avoid Being Bitten by the Snake

Terminated employees generally lose their COBRA health care continuation coverage for one of two reasons: they fail to timely elect COBRA coverage within 60 days, or they fail to timely make required premium payments. The rights and obligations of COBRA qualified beneficiaries are described below.

COBRA is a federal statute that is codified at 29 U.S.C. §§ 1161-1169. The acronym stands for The Consolidated Omnibus Budget Reconciliation Act. The health benefit provisions of the law amend the Employee Retirement Income Security Act, the Internal Revenue Code, and the Public Health Service Act to require employer-sponsored group health plans to provide temporary continuation of group health coverage that would otherwise be terminated due to a “qualifying event.”

COBRA requires continuation coverage to be offered to “qualified beneficiaries” – covered employees, their spouses, their former spouses, and dependent children. COBRA continuation coverage is often more expensive than the amount that active employees are required to pay for group health coverage. That is because employers usually pay all or part of the cost of health coverage for active employees. The entire cost may be charged to individuals who receive continuation coverage.

COBRA applies to all health coverage plans maintained by employers with 20 or more employees or by state and local governments. Excluded are plans sponsored by the federal government or by churches and church-related organizations.

Electing COBRA continuation coverage is not mandatory. Persons may elect to forego COBRA continuation coverage and enroll in a spouse’s group health plan, purchase health coverage in the market (including the Health Insurance Marketplace established under the Affordable Care Act), enroll in Medicare or Medicaid if such programs are available, or forego health insurance.

Eligibility for continuation coverage is triggered by a “qualifying event.” Qualifying events for an employee include the loss of employer-sponsored group health coverage due to (1) termination of employment other than for gross misconduct, or (2) reduction in the hours of employment. Qualifying Events for the spouse or dependent child of a covered employee include the covered employee’s loss of employee’s employer-sponsored health coverage, the covered employee becoming entitled to Medicare, divorce or legal separation of the spouse from the covered employee, and the death of the covered employee. Qualified beneficiary status may also be available to retired employees and their spouses and dependent children in the case of the bankruptcy of the employer sponsoring the plan.

COBRA Notices

Group health plans must provide covered employees and their spouses a summary plan description and a general notice that describe their COBRA rights within 90 days after the employee first becomes a participant under the health plan. The employer must notify the health plan within 30 days of a qualifying event if the qualifying event is the employee’s termination, reduction of hours, death, entitlement to Medicare, or the bankruptcy of the employer. The covered employee or one of the other qualified beneficiaries must notify the plan if the qualifying event is divorce, legal separation or loss of a child’s dependent status under the plan. The plan can set a time limit on giving this notice, but it cannot be shorter than 60 days.

When the plan receives notice of a qualifying event, it must give the qualified beneficiaries notice of their rights to elect COBRA continuation coverage and instructions on how to make the election. This notice must be provided within 14 days after the plan receives notice of the qualifying event. Notices must be given separately to the former employee and the spouse. Each qualified beneficiary must be given at least 60 days from the later of the date the person was provided the election notice or the date the person would lose coverage to chose continuation coverage. Each beneficiary may separately whether to elect coverage. Parents may elect on behalf of dependent children.

What Coverage is Required by COBRA

Coverage must be identical to the coverage currently available under the plan to similarly situated active employees and their families. However, any change made to the plan’s terms that apply to active employees and their families may also apply to qualified beneficiaries covered under COBRA continuation coverage.

Duration of COBRA Coverage

Generally, an employer is required to provide continuation coverage for 18 months from the qualifying event. However, coverage may be required for 36 months in certain circumstances. If the qualifying event is the termination of employment or reduction in hours, and the employee becomes eligible for Medicare less than 18 months before the qualifying event, COBRA coverage for the employee’s spouse and dependents continues until 36 months after the date the employee becomes entitled to Medicare. In addition, if one qualified beneficiary in a family is found to be disabled by the Security Administration, coverage may be extended for all qualified beneficiaries for 11 months for a total of 29 months. In such cases, the plan may charge qualified beneficiaries an increased premium, up to 150% of the cost of coverage, during the 11-month extension period.

Termination of COBRA Coverage

COBRA coverage may be terminated early for the following reasons:

You Must Pay

A plan may charge qualified beneficiaries up to 102% of the cost of the plan coverage. Qualified beneficiaries who are receiving coverage under the 11-month disability extension may have their premium increased to 150% of the plan’s total cost for active employees. The plan election notice should contain all information the qualified beneficiary needs to understand the COBRA premiums the beneficiary will have to pay, when payments are due, and the consequences for non-payment.

A qualified beneficiary cannot be required to send any payment with the election form, but the beneficiary may be required to make an initial premium payment within 45 days of the date the election form is submitted. Failure to make the required premium payment with 45 days will result in the beneficiary losing all COBRA rights. The plan may set premium due dates for successive periods of coverage, after the initial payment, and must provide the option to make monthly payments and must provide a 30-day grace period for payment of any premium. With one exception, the plan is not required to send invoices or reminder notices for the subsequent payments, and the failure to make payment in full before the end of the grace period will result in the qualifying beneficiary losing all COBRA rights. However, if the amount of a payment to the plan is incorrect but is not significantly less than the amount due, the plan is required to notify the beneficiary of the deficiency and grant a reasonable period (30 days is considered reasonable) to pay the difference.

Additional information concerning COBRA coverage may be found in the U.S. Department of Labor’s Frequently Asked Questions.

© Andrew Whiteman 2019


Whiteman Law Firm specializes in cases involving claims for employee benefits. These cases typically involve application of a federal law, the Employee Retirement Income Security Act of 1974, known by the acronym ERISA, and are usually resolved through the benefit plan’s appeal process or federal court. We have helped hundreds of individuals with their claims for short-term and long-term disability insurance and other employee benefits.

Contact us for more information about our ERISA employee benefits practice.


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