roles/ responsibilities of esop fiduciaries
DESCRIPTION
ROLES/ Responsibilities of esoP fIDUCIARIES. Las Vegas Conference November 8-9, 2012 Las Vegas, NV. Michael R. Holzman Dickinson Wright PLLC. Daniel M. Reser Fiduciary Services, Inc. Patrick De Craene GreatBanc Trust Company. Session Introduction. The objectives of this session are: - PowerPoint PPT PresentationTRANSCRIPT
LAS VEGAS CONFERENCENovember 8-9, 2012
Las Vegas, NV
Daniel M. ReserFiduciary Services, Inc.
Patrick De CraeneGreatBanc Trust Company
Michael R. HolzmanDickinson Wright PLLC
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The objectives of this session are:
Overview of the duties and responsibilities as an
ESOP Fiduciary/Trustee
Discuss practical situations and “best practices”
Share experiences
Anyone who has discretion or control over Plan Assets:
Plan Sponsor/Board of Directors: appoint/remove other fiduciaries;
oversight
Trustee (directed or discretionary): Record owner of shares held by
ESOP; must act for the “exclusive benefit” of participants; votes shares
(but may be directed as to voting)
ESOP Committee (if any): interprets plan; reviews claim appeals; may
direct trustee as to how to vote shares; may be Plan Administrator also
Plan Administrator/Plan Committee
Valuation Firm: annually appraises ESOP shares; may perform
valuation of, or financial advisory service for, specific transactions? (Are
they a “fiduciary” and are they “independent”)3
Individual Internal Trustees Frequently officers/employees of the Company Pros and Cons
Independent Trustees Could be an independent individual, however, Institutions usually fill
this role (banks, trust companies, etc.) Limited transactional vs. ongoing Pros and Cons
Directed Trustees Receives direction from insider fiduciaries or independent fiduciaries
Similarities and Differences Responsibilities Risks Judicial deference
Duties and responsibilities of the “Fiduciary” are defined in Plan and Trust documents
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A Fiduciary must: Discharge duties solely in the interests of the Plan
Participants Discharge duties with care, skill, prudence and diligence
Under the circumstances then prevailing That a prudent person acting in a like capacity and familiar with such
matters would use In the conduct of an enterprise of a like character and with like aims
Act in accordance with plan documents Insofar as such documents are consistent with ERISA and other
applicable law
Steer clear of prohibited transactions Related-party sales Loans
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Plan Sponsor/Administrator Trustee
Purchases and Sales of Company Stock
Invest trust assets
Determine value of company stock
Repurchase liability
Executive Compensation
Actions of Prior Fiduciary
Vote Shares held within ESOP
Process Distributions
Non-routine Events
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Prudence and the exclusive benefit rule Is the purchase a prohibited transaction? Conduct Due-Diligence Investigation
Financial matters (Adequate Consideration) Legal matters
Consider impact on existing shares held by the ESOP
Negotiate Price – Adequate Consideration Fairness Documentation Role of Conflicts Highly Scrutinized Plaintiffs’ Bar DOL
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Prudence and the exclusive benefit rule
Investment Policy Statement
Review of risk and return Characteristics
Duty of Diversification
Trustee
Plan Administrator (if the Trustee is Directed)
Investment Advisor
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Determining Value/Stock Price – The Trustee is responsible.
What should the Trustee do with the valuation report?
Process for accepting the report from valuation firm
Is appraiser independent?
Review the report
Ask questions
Review the approaches
Unique circumstances
Have questions been answered and documented?
Need to understand the valuation
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Overall solvency of the Company
Necessity of the Trustee to discuss issues with
management
Repurchase Liability
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Plan Sponsor must meet the obligation
Internal versus External studies
Sustainability
Effect on Valuation
Cash Flow
Balance Sheet
What happens when you fail to plan?
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Board of Directors
Fair and Reasonable
Trustee Duty to monitor Board actions
Dilutive effects of equity compensation
409(p)
Effect on valuation - Delta Star, Inc. vs. Patton 76 F. Supp.
2d 617 (W.D. Pa. 1999); Johnson vs. Couturier 2009 WL
2216805 (9th Cir. July 27, 2009)
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Duty to Investigate Barker v. American Mobile Power Corp. (9th Cir.)
Department of Labor view, DOL 1976 Advisory Opinion
In Fernandez v. K-M Indus. Holding Co. (9th Cir.), the Court relied upon a Department of Labor opinion and the common law of trusts and held that while the Successor Trustee could not be held vicariously liable for the breaches of fiduciary duty by Moore, it was potentially liable under §1005 for its failure to remedy the alleged breaches of fiduciary duty that took place before it was appointed trustee if it failed to act despite its knowledge of the breaches
Co-fiduciary liability Silverman v. Mutual Benefit Life Insurance Co. (2nd Cir.)
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Trustee Votes Is the Trustee directed? Investigation and documentation
Pass-Through Vote to Participants Merger, consolidation, liquidation, sale of substantially all
company assets, “organic changes” Voluntary Participant Voting for Board of Directors Adequacy of information provided to participants
Ensure Voting Safeguards, confidentiality Potential for Conflicts
Voting for yourself Should you abstain?
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Recordkeeping Trust/Accounting
Payment of the ESOP loan
Notify the Company of pending loan payments due
Collect the loan payments from the company and make
the necessary payments to the bank or back to the company
(DOL)
All loan payments need to be run through the trust even
if the loan is from the company (IRS and DOL)
Working with TPA, calculate the release of the shares as
per the loan documents and make sure that all
covenants have not been violated (DOL)
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Allocations/5500/Annual Audit:
Who should check the Allocation Reports to insure that they are
correct?
Verify the release of shares
Spot check the allocations
Verify the number of shares on the reports to the Trust
Statements for both the allocated and unallocated shares
Look at the results of the 409(p) test for Sub S ESOPS. Is there a
non-allocation year?
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Distributions:
The Trustee makes the distributions to the plan
participants as directed by the Plan Administrator.
The distributions should be verified to the allocation
reports before checks are issued.
Prepare the check or stock certificates (if shares are to
be paid out).
Compute income tax withholding. Prepare the
appropriate tax reporting forms and send withholding
timely to the IRS.
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If the Company purchases distributed ESOP shares, is it a
Fiduciary decision?
If the ESOP purchases distributed ESOP shares, is it a
Fiduciary decision?
What if Company offers to repurchase ESOP shares from
the ESOP so that the ESOP can distribute cash in lieu of
shares?
If stock is sold by the ESOP to the Company, the sale is a
party-in-interest transaction and must be done at or below fair
market value as determined at time of the sale, not as of last
annual valuation date.
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Sale of Company
Asset sale or merger
Stock sale
Acquisitions of other companies
Refinancing of ESOP loan balance(s)
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Liability for Breach of Duty
ERISA Section 409(b)
Penalties for Violation of Prohibited Transaction Rules
Indemnification
Liability for Breach of a Co-Fiduciary
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Review indemnification agreements
Review level of ERISA fiduciary liability coverage for
adequacy; take defense costs into account
Board of Directors – annual review of actions of ESOP
Trustee (including stock valuations); seek independent,
competent advice of executive compensation and board fees
Daniel M. ReserFIDUCIARY SERVICES, INC.369-B Third Street, #543San Rafael, CA 94901-3581Tel: 415-482-9513Fax: [email protected]
Patrick J. De CraeneGREATBANC TRUST COMPANY801 Warrenville Road Suite 500Lisle, Illinois 60532Tel: 630-810-4500Fax: [email protected]
Michael R. HolzmanDICKINSON WRIGHT PLLC1875 Eye Street NW,Washington, DC 20006Tel: [email protected]