The DOL has issued some important guidance on the subject of “Fiduciary Responsibilities of Directed Trustees” in Field Assistance Bulletin 2004-03 (“FAB”). This article from PlanSponsor.com–“EBSA Issues Directed Trustee Responsibility Guidance“–gives some history behind the FAB:
The FAB was a response to Groom Law Group Chartered’s advisory opinion request filed by Stephen M. Saxon and Jon W. Breyfogle, on behalf of a dozen banks and other financial institutions early in 2004. The request was endorsed by the American Bankers Association.
The FAB retains the DOL’s controversial “knows or should know” standard:
Under section 403(a)(1), a directed trustee is subject to proper directions of a named fiduciary. For purposes of section 403(a)(1), a direction is proper only if the direction is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee may not, consistent with its fiduciary responsibilities, follow the direction.
Regarding the subject of following a direction that is “made in accordance with the terms of the plan”, the FAB makes it clear that directed trustees must read and follow the plan documents as well as the investment policy statement and if ambiguities exist, seek clarification from the “plan’s named fiduciary.”
Regarding following a direction that is “not contrary to ERISA”, the FAB provides that the “directed trustee cannot follow a direction that the directed trustee knows or should know would require the trustee to engage in a transaction prohibited under section 406 or violate the prudence requirement of section 404(a)(1)”:
The FAB provides guidance on how directed trustees can satisfy their fiduciary responsibility in avoiding prohibited transactions. The DOL states that the directed trustee “must follow processes that are designed to avoid prohibited transaction” and can “satisfy its obligation by obtaining appropriate written representations from the directing fiduciary that the plan maintains and follows procedures for identifying prohibited transactions and, if prohibited, identifying the individual or class exemption applicable to the transaction.”
With respect to “prudence determinations”, the FAB makes it clear that:
- The directed trustee’s role is “significantly limited.”
- The directed trustee does not have a “direct” or “independent” obligation to determine the prudence of every transaction.”
- The directed trustee “does not have an obligation to duplicate or second-guess the work of the plan fiduciaries that have discretionary authority over the management of plan assets.”
The FAB then divides its remarks into two parts: (1) Where directed trustees possess “material non-public information” and (2) where directed trustees merely possess “public information.”
The FAB provides that if “the directed trustee possesses material non-public information regarding a security” that is necessary for a prudent decision, the directed trustee, prior to following a direction that would be affected by such information, “has a duty to inquire about the named fiduciary’s knowledge and consideration of the information with respect to the direction.” The FAB provides this example:
For example, if a directed trustee has non-public information indicating that a company’s public financial statements contain material misrepresentations that significantly inflate the company’s earnings, the trustee could not simply follow a direction to purchase that company’s stock at an artificially inflated price.
If the directed trustee has no more than public information, the FAB makes it clear that the directed trustee “will rarely have an obligation under ERISA to question the prudence of a direction to purchase publicly traded securities at the market price solely on the basis of publicly available information.” The FAB goes on to say that where there are “clear and compelling public indicators, as evidenced by an 8-K filing with the Securities and Exchange Commission (SEC), a bankruptcy filing or similar public indicator, that call into serious question a company’s viability as a going concern, the directed trustee may have a duty not to follow the named fiduciary’s instruction without further inquiry.”
While there is a great deal more here that one could write about from the FAB, I found some of the following footnotes to the FAB to be most interesting:
From Footnote 2: “The Department expresses no view as to whether, or under what circumstances, other procedures established by an organization to limit the disclosure of information will serve to avoid the imputation of information to a directed trustee.”
From Footnote 4: “We note that section 409 of the Sarbanes-Oxley Act of 2002, 15 U.S.C. 78(m)(l), requires public companies to disclose “on a rapid and current basis” material information regarding changes in the company’s financial condition or operations as the SEC by rule determines to be necessary or useful for the protection of investors or in the public interest. The SEC has recently updated its disclosure requirements related to Form 8-K, expanding the number of reportable events and shortening the filing deadline for most items to four business days after the occurrence of the event triggering the disclosure requirements of the form. 69 FR. 15594 (Mar. 25, 2004). Not all 8-K filings regarding a company would trigger a duty on the part of a directed trustee to question a direction to purchase or hold securities of that company. Only those relatively few 8-Ks that call into serious question a company’s ongoing viability may trigger a duty on the part of the directed trustee to take some action.”
From Footnote 5: “A directed trustee’s actual knowledge of media or other public reports or analyses that merely speculate on the continued viability of a company does not, in and of itself, constitute knowledge of clear and compelling evidence concerning the company sufficient to give rise to a directed trustee’s duty to act.”
From Footnote 7: “Nothing in the text should be read to suggest that a directed trustee would have a heightened duty whenever a regulatory body opens an investigation of a company whose securities are the subject of a direction, merely based on the bare fact of the investigation.”
Also, this quote from the Plan Sponsor article noted above:
In response to the FAB, Groom’s Saxon said in a statement, “We appreciate the Department’s guidance and are still analyzing it. The guidance did not go as far as we would have liked, and certainly we would never concede that a directed trustee is a fiduciary. The case law here is not clear. Notwithstanding this, the FAB sends a message, loud and clear, to the plaintiffs’ bar that ordinary directed trustees are no longer fair game for class action lawsuits. The Department agrees with us that directed trustees who by contract have no investment responsibilities will not be liable for losses that arise simply because of a drop in stock prices. That game is over,” Saxon added.