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WHAT TO DO WHEN DOL AUDITS

James V. Cole IIGroom Law Group, Chartered(202) 861-0175JCole@groom.comNECA Labor Relations ConferenceOctober 14, 2009

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Overview

Overview Investigation Process Common Enforcement Issues

– What does DOL look for? Correction Programs DOL in Court

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OverviewStructure of the EBSA

The Employee Benefits Security Administration (“EBSA”) is the agency within DOL that administers and enforces ERISA Title I.- Phyllis Borzi is the Assistant Secretary of EBSA- Office of Enforcement is headed by Virginia Smith

Office of Enforcement has four divisions:- Enforcement Support, Field Operations, Field Offices, and

Criminal Coordinator Most enforcement activities take place through regional offices. EBSA has more than 300 investigators.

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OverviewCivil Authority, ERISA § 504

Secretary of Labor (acting through the EBSA Office of Enforcement) may investigate whether any person has violated or is about to violate any provision of Title I, and may —- Require submission or inspection of reports, books and records;- Question persons as the Secretary may deem necessary;- Administer oaths, compel attendance of witnesses, and access

and copy documentary evidence. Solicitor of Labor has litigation responsibility.

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OverviewCivil Penalties

ERISA § 502(i) - Authorizes Secretary to assess penalty (5% of “amount involved”) against a party in interest who engaged in prohibited transaction (if plan is not subject to Code § 4975).

ERISA § 502(l) - Requires Secretary to assess civil penalty against a fiduciary who breaches fiduciary responsibility, or against any person who knowingly participates in such breach.- Penalty is 20% of “applicable recovery amount” recovered from the

fiduciary under a settlement agreement with the Secretary or ordered by court in proceeding instituted by Secretary.

ERISA § 502(c)(2) - Authorizes Secretary to assess civil penalty against plan administrator who fails to file annual reports (Form 5500).

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OverviewCriminal Authority, ERISA § 506(b)

ERISA § 506(b) - Authorizes Secretary of Labor to investigate and refer criminal violations involving employee benefit plans. - 18 U.S.C. § 664 - embezzlement from plan - 18 U.S.C. § 1027 - false statements in documents required by

ERISA, such as Form 5500 filing - 18 U.S.C. § 1954 -solicitation to influence operations of a plan- ERISA § 411 - prohibits certain persons from holding plan positions- ERISA § 501 - willful violation of Title I- ERISA § 511 - coercive interference with participants’ rights

Prosecuted by DOL/U.S. Attorney’s office.

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OverviewWhy DOL Investigates

Participant complaints/inquiries Referrals from other regulators Other information,e.g., news reports National and field office projects Form 5500 desk and edit checks

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•OverviewWhy DOL Investigates

National Enforcement Projects– Multiple Employer Welfare

Arrangements– Consultant/Adviser Project– Employee Contributions – Sponsors in Bankruptcy

(REACT) – ESOPs

– Health Disclosure and Claims– Participant and Beneficiary

Complaints– Non-Filer Enforcement

Program– Late Filer Enforcement

Program– On-Site Reviews of Audit

Work Papers– Desk Reviews of Form 5500s

•See www.dol.gov/ebsa/erisa_enforcement

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Investigation Process

Initial document request or subpoena On-site document review

– DOL may take copies of documents Key person interviews Closing

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Sample Document Request (Plan Sponsor)

Plan documents in effect Summary plan description Trustee or fiduciary committee minutes Form 5500/Summary Annual Report All correspondence with plan service providers, or relating to

any plan matter Sponsor annual reports, contracts with plans Detailed documentation of plan administrative expenses

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Sample Document Request (Plan Sponsor) Cont’d

Fidelity bond and fiduciary liability policies List of sponsor’s officers, board of directors Trust participation agreements Plan merger documents Participant contribution records Investment policy Plan receipt and disbursement journals

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FINANCIAL INSTITUTIONSAreas Examined__ Scope of Fid. Respon.__ Proxy Voting__ Cash Management__ Equity Investments__ Fixed Income Investments

__ Pool Investments__ Real Estate__ Insurance__ Commercial Side

Transactions

__ Annuities__ Fees/Commissions__ Rebates__ Bonding__ Rptg. & Disclosure

Records ReviewedA. Financial Institution Agreements__ ERISA Client List__ Organizational Chart__ Officers/Directors List__ Internal Audits__ Investment Performance__ Marketing Materials__ Trust/Inv. Committee Minutes__ Asset Valuations

__ Regulatory Filings__ Fee Schedules__ Financial__ Client Complaints/Litigation__ Written Procedures & Guidelines__ Approved Securities List__ Master Securities List__ Investment Contracts

B. Plan/Client Records__ Financial Institution Agreements__ Correspondence Files__ Financial__ Insurance

__ Billing Invoices__ Participant Records__ Plan/Trust Documents__ Asset Holding__ Investment Contracts

•Investigation Process: What Does DOL Look For?

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SERVICE PROVIDERS

Areas Examined

__ Scope of Fid. Respon.__ Claim/Benefits Processing__ Claim/Benefit Payments__ Unnec'y/Duplicate Svcs.

__Contributions__ Commissions__ Ins. Arrngmnt.__ Fees

__ COBRA Administration__ Investments__ Actuarial Services__ Rebates

Records Reviewed

A. General Service Provider Records__ Client List__ State License__ Organizational Chart

__ Marketing Materials__ Receipts/Disbursements

__ Financial__ Band/Investment__ SP Contracts

B. Plan/Client Records__ Administration Agreement__ Billing/Invoices__ Contributions/Premiums__ Participant Records__ Pended Claims

__ Plan/Trust Doc__ Form 5500__ Benefits/Claims__ Correspondence

__ Trustee/Corp. Minutes__ Financial Statements__ Bank/Invt Statements__ Insurance Contracts__ Other Contracts

Investigation Process: What Does DOL Look For?

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Sample Document Request(Financial Institution)

List of all current and former plan clients (name, sponsor name and address, identity of trustee, investment managers, and custodian)

Asset list/portfolio statement for all current and former plan clients Organization chart, list of affiliates, subsidiaries, officers and

directors Standard contracts and agreements for relevant period Schedule of fees charged for relevant period Documentation of “affiliated” mutual funds and collective funds

invested in by plan clients Internal audit reports related to plan services

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Sample Document Request (Financial Institution) Cont’d

Third party reports on services, including audited financial statements, commentary by external auditors, internal control letters, other performance or peer review reports prepared by third parties

All reports filed with regulatory agencies (FDIC, FFIEC, etc.) Fiduciary insurance policy Financial accounting records Detailed documentation related to 12b-1 fees received in connection

with investments by plan clients, including name of paying entity, amount, relevant contracts and agreements

Documents that identify income earned on funds held in excess of Federal Reserve Requirements

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Sample Document Request (Financial Institution) Cont’d

Documentation of handling of client funds, including —– statements of accounts holding assets pending distribution or

investment and contracts for such accounts– contracts with third parties used in connection with client

distributions– disclosures to clients

For selected plans,– all fee schedules, notices or disclosures– all billings or invoices for services fees– investment authorization forms

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Investigation ProcessCoordinating with DOL

After DOL inquiries, negotiate:– Scope of issue or subject matter– Time period under review (or risk requests covering the entire statute of

limitations period)– Document list and priority of production– Specific entities, lines of business, and geographic areas covered

Why negotiate?– Minimize disruption and burden– Facilitate getting closure on investigation– In a large company, focus on specific divisions with awareness that other

divisions may have different practices and systems

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Investigation ProcessInformation Release under ERISA § 504

Secretary may release information to any person actually affected by a matter that is subject to investigation.

Secretary may release information to another federal agency. Release may be restricted by various statutes, such as FOIA, Privacy

Act, IRC. (For example, FOIA has exceptions for personnel files, commercial and financial information, inter-agency and intra-agency communications, law enforcement records, and financial regulatory information.)

Investigative information for active cases generally will only be released within DOL and, in limited cases, to other government agencies.

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Investigation ProcessPrivilege Considerations

Fiduciary exception to attorney-client privilege.– Generally, fiduciaries may not assert attorney-client privilege to withhold information

about their fiduciary activities from plan participants or DOL. Exception does not apply to advice received when engaged in “settlor” functions

or other activities not in scope of fiduciary duty. Fiduciary exception for work product doctrine?

– Work product doctrine covers material prepared in anticipation of litigation, including analyses commissioned by corporation (e.g., memo on prospect of IRS litigation).

Privilege for self-critical evaluations (e.g., internal audit) generally not recognized by federal courts. See generally Dept. of Education v. NCAA, (7th Cir. March 21, 2007).

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Investigation Process

Is there a duty to organize or analyze information? What if requested information is personal

information or sensitive for other reasons? What if requested information is covered by third

party confidentiality agreements? When should counsel be involved? How long should an investigation take?

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Enforcement IssuesWhat Does DOL Look

For?

Typical plan sponsor Issues– failure to forward participant contributions– failure to make employer contributions– use of plan assets to pay non-plan expenses– improper valuation of assets (e.g., real estate, LLCs)– failure to keep assets in trust– abandoned (“orphan”) plans– no process for service provider selection

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•Enforcement IssuesWhat Does DOL Look For?

Service Provider Focus on Fee Arrangements “When investigating plan service providers, PWBA [now EBSA]

generally focuses on the abusive practices committed by the specific service providers rather than the plans. For example, where a third party administrator has systematically retained an undisclosed fee…”

• Strategic Enforcement Plan, 65 Fed. Reg. at 18210 (April 6, 2000).

Undisclosed commissions or other fees from mutual funds.– See DOL Adv. Ops. 97-15A and 16A (May 22, 1997).

“Float” – Earnings on funds held pending investment or distribution should be

disclosed and approved. FAB 2002-3 (November 5, 2002) Soft Dollars

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Enforcement IssuesWhat Does DOL Look For?

DOL Statement on Mutual Fund Abuses

– review of practices of mutual funds, collective trust funds and other pooled funds, AND their service providers and “intermediaries,” to determine whether there have been violations of ERISA

• whether activities such as market timing or late trading harmed retirement plan beneficiaries

• improper payments for directed investments

• whether retirement accounts were used to facilitate market timing

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Correction - VFCP

The Voluntary Fiduciary Correction Program’s (VFCP) purpose is to encourage self-correction of possible ERISA Title I violations.

Program updated in April 2006, 71 Fed. Reg. 2026 (April 19, 2006). In order to be eligible for the VFCP, neither the plan or the applicant can

be under investigation, and the VFCP application must not contain evidence of potential criminal violations.

The VFCP covers 19 transaction types. Examples —– Delinquent participant contributions to a plan– Improper transactions with parties in interest– Benefit payments based on improper valuations of plan assets– Plan payment of excess compensation

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CorrectionVFCP Application

An application must describe the transaction and its correction, and provide supporting documentation, including copy of plan and other retirement documents, proof of correction, restoration of losses, signed checklist, and penalty of perjury statement.

– Correction procedures are specified by VFCP Program The application is filed with the EBSA regional office. PTE 2002-51 provides relief from excise taxes for some types of

transactions covered by VFCP - participant contribution violations, certain transactions with parties in interest.

(Notice to participants required).

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CorrectionVFCP Result

If the VFCP application is accepted, DOL issues a “no-action” letter stating that it will not conduct a civil investigation and that it will not assess any § 502(I) or 502(i)penalties.

Other government agencies, or any individual, may still enforce their rights.

If the application indicates that a violation has not been adequately corrected, applicants could be subject to DOL enforcement, including § 502(I) penalties.

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CorrectionInformal Self-Correction

Upon identifying an issue: advise DOL that entity will do its own investigation; take steps to remedy; advise DOL on findings; and propose correction.

May result in DOL deferring its own investigation. If DOL investigates and settles, it is statutorily required to charge a

penalty in some cases (e.g., ERISA § 501(I)). Considerations

– May avoid DOL enforcement and penalties– DOL may still investigate; DOL may require more burdensome

correction than anticipated

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CorrectionForm 5500 Filing

Modifications to Delinquent Filer Voluntary Compliance Program (DFVC Program) in March 2002 further reduced penalties.

– $10/day, maximum $2000/year for large plans or $750/year for small plans, and no more than $4000 for large plans or $1500 for small plans, even if for multiple years. 67 Fed. Reg. 15052 (March 28, 2002).

DOL/IRS announcements promise more aggressive efforts to identify delinquent filers.

– After DOL issues a written notice of failure to file, the DFVC Program is not available. Penalties of $50 per day may apply.

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DOL In Court

ERISA §§ 502(a)(2) and (5) authorize Secretary to commence certain kinds of civil actions to enforce Title I of ERISA.

– Where plan sponsor is in bankruptcy, DOL may file contingent and unliquidated proofs of claim on behalf of plans and their participants.

ERISA § 502(h) gives Secretary authority to intervene in private ERISA litigation (other than benefit claim disputes). See Campbell v. Hall-Mark Electronics Corp., 808 F.2d 775 (11th Cir. 1987) (affirming denial of Secretary’s motion to intervene).

Secretary of Labor participates as amicus curiae in significant cases or on significant issues (e.g., WorldCom, Enron).

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DOL In Court

Courts have held that DOL may sue for relief, even where DOL’s target had previously settled with class of affected plan participants. Martin v. South Carolina National Bank 140 F.3d 1413 (11th Cir. 1998); Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986) (en banc).

How to address risk of ERISA “double jeopardy.”

– condition private parties' settlement on defendants' obtaining adequate comfort that DOL will take no action

– statute of limitations