The assault on investors’ rights to sue in court continues, with yet another attempt to compel mandatory arbitration of investor claims through a change in company bylaws.
The latest onslaught is being championed by Hal Scott, a Harvard Law professor and frequent critic of securities lawsuits. In November, Scott submitted a shareholder proposal on behalf of a trust he represents to Johnson & Johnson, Inc., a New Jersey corporation, seeking to amend the company’s corporate charter to require arbitration of all federal securities claims. Scott’s draconian proposal further seeks to prohibit class and joined claims, as well as eliminate appeals or challenges of awards, rulings and decisions.
The stakes for shareholders are high. Arbitration is neither cost effective nor practicable for investors who have lost money due to corporate misconduct, and lacks important safeguards guaranteed by the court system—the rights to a jury trial, discovery and a public hearing, to name just three.
At the urging of President Trump, the Securities and Exchange Commission is studying the impact of allowing publicly traded companies to file financial reports just twice a year instead of quarterly, a reduced standard that would turn back the regulatory clock a half century.
On December 18, four months after President Trump raised the idea in a Tweet, the SEC asked for public comment “on the nature, content, and timing of earnings releases and quarterly reports made by reporting companies.”
Proponents of eliminating quarterly reports, such as President Trump and the US Chamber of Commerce, argue it would reduce unnecessary expenses associated with preparing the reports and encourage executives to focus on longer-term investments rather than quarterly earnings.
While replies aren’t due until March 18, market heavyweights like Larry Fink of BlackRock, Warren Buffet of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase—all of whom decry “short-termism”— are already on the record in favor of quarterly financial reports.
So is the Council of Institutional Investors, which issued a statement the day of the Tweet. “Investors and other stakeholders benefit when regulations ensure that important information is promptly and transparently provided to the marketplace,” CII Deputy Director Amy Borrus said. “Investors need timely, accurate financial information to make informed investment decisions.”
That the SEC would consider such a measure is unsurprising, given the anti-regulatory posture of the Trump administration and Republican lawmakers. Over the last two years, the SEC appears to have focused chiefly on promoting capital formation, while pulling back on efforts to protect investors, police markets and ensure corporate accountability.
Enforcement, by most measures, is down since President Trump took office. Meanwhile, the Commission has floated ideas such as allowing companies to issue dual-class shares that permanently enhance insiders’ power over that of ordinary shareholders.
A basic premise of the federal securities laws is that investors are entitled to recover for harms caused by the revelation of a company’s false statements. But in First Solar Inc. v. Mineworks Pension Scheme, defendants argue that they cannot be held liable for losses caused by the revelation of the effects of their fraudulently concealed conduct until the fact of the fraud itself is also disclosed. After their arguments fell short at the trial and appeals court levels, they have petitioned the Supreme Court of the United States to consider their position. First Solar Inc., No. 18-164 (U.S.) (cert. petition pending).
During the class period alleged in the case, First Solar’s stock fell from nearly $300 per share to around $50. Plaintiffs allege that, during that period, defendants intentionally concealed the existence of serious defects in two of their products, and that, even after one of the defects was revealed, defendants continued to hide its full costs and impact. The market did not learn about the existence of the second defect during the class period. But defendants did incorporate the costs of the concealed defects into their earnings statements— albeit without explaining all the reasons for their poor performance to the public. Plaintiffs argue that their loss was caused, in part, by the market reaction to those statements. A trial court agreed that plaintiffs’ argument was sufficient to go to trial but permitted defendants to appeal that determination to the Ninth U.S. Circuit Court of Appeals.
The full article can be accessed here.
A number of vexing issues facing ERISA practitioners came to a head in 2018 and are primed to be resolved in the coming year. This article will examine the cases raising these issues, and the impact their resolution in the coming year will have on retirees and the retirement industry.
Who Is in Control? Plan Participants’ Role in Retirement Plan Management Put Into Question
2018 continued the trend of courts grappling with ERISA’s “functional fiduciary” definition. In the coming year, the Tenth Circuit will decide whether a plan participant’s ability to divest from an investment option short-circuits a service provider’s fiduciary duty to retirement plan participants who allocated retirement assets into that option.
This issue arises in Teets v. Great-West Life & Annuity Insurance Company. Great-West concerns a “stable value” product created by Great-West Life & Annuity Insurance Company that pays investing participants a rate of return set by Great-West each quarter.[1] Great-West earns a profit for itself if and when it generates returns greater than the preset rate of return.[2]
The question presented in Great-West was whether the service provider was an ERISA fiduciary because it had the contractual discretion to set a rate of return for participants and exercised that discretion every quarter year.[3] Under ERISA, an insurance company is a fiduciary with respect to a plan to the extent, among other things, that the insurance company exercises any authority or control respecting management or disposition of the plan’s assets.[4]
The court noted that the contract was a plan asset, and Great-West exercised control with respect to the management of that asset by setting the rate of return every quarter, but refused to treat Great-West as an ERISA fiduciary, because the participants invested in the stable value product could still “vote with their feet if they dislike the new rate.”[5] In effect, the lower court said that a service provider does not have “discretion” over plan assets if a plan participant can divest before the rate Great-West sets is paid.
There are wide-ranging implications if the Tenth Circuit agrees with the lower court, affecting both a participant’s place in the fiduciary-beneficiary relationship and their ability to appropriately manage their retirement savings. If the onus is put on a participant to determine whether a rate of return is appropriate in given market conditions, they would likely need a crash course in financial literacy (and a new hobby) to benchmark the announced rate of return and determine whether market conditions indicate it is too low.
But most plan participants are not versed in these financial technicalities, which is why ERISA endows fiduciaries with the duty of care owed to the plan participants they serve.[6] Moreover, expecting participants to “vote with their feet” would require those participants to reallocate their retirement account balance. “Asset allocation is one of the most important factors in long-term portfolio performance.”[7] Participants may find themselves between a rock and a hard place if they are unhappy with a suboptimal rate of return from a retirement product, but cannot divest without causing a suboptimal asset allocation in their retirement account.
Given the implications of the Tenth Circuit’s impending decision, the authors of this article expect to hear more about this case in the coming year and beyond.
U.S. Bank: Will the Standard Challenge Finally Make Its Way to the Supreme Court?
The saga of U.S. Bank’s pension plan continued into 2018, and will likely continue into 2019. Participants in the U.S. Bancorp Pension Plan sued the plan’s fiduciary in 2013 for, among other things, mismanaging the pension plan by investing 100 percent of the pension in equities and selecting expensive proprietary mutual funds to do so.[8] This strategy was in place during the financial crisis in 2008, causing the pension plan to become severely underfunded as the stock market crashed — meaning the pension plan would not have enough money to pay the retirement benefits U.S. Bank promised employees.
After the case was filed, U.S. Bank made contributions to the plan sufficient to make the plan overfunded, and moved to dismiss on multiple grounds, including lack of Article III standing. The district court held that the case became moot once the plan became overfunded.[9] The plaintiffs appealed the court’s mootness decision, and U.S. Bank sought to defend the lower court decision by arguing that the plaintiffs no longer had Article III standing once the plan became overfunded.
The Eighth Circuit upheld the dismissal, but not on Article III standing or mootness grounds.[10] Rather, the Eighth Circuit held that, without an underfunded pension, a participant in that plan does not have “prudential standing” — that is, she is not in the class of people Congress authorized to sue under the statute. The dissent was quick to challenge this result, pointing out that ERISA permits wide-ranging injunctive relief separate and apart from restoration of losses, including the removal of fiduciaries, enjoinment of imprudent investment strategies and disgorgement of ill-gotten profits.
The plaintiffs in this case are seeking certiorari, and the U.S. Supreme Court has sought the U.S. solicitor general’s views on whether to hear the case.[11] So there is a decent likelihood that the Supreme Court will resolve this thorny legal issue in the coming year.
A failure by the Supreme Court to reverse the Eighth Circuit’s opinion will have wide-ranging implications for retirement savers. ERISA was promulgated in the wake of high-profile pension failures, to prevent the poor pension management that left retirees scrambling to secure their future after years of hard work and corporate promises. This pragmatic and essential purpose is frustrated if a participant is only authorized to bring a suit to remedy mismanagement once irreversible harm occurs.
Moreover, the Eighth Circuit’s opinion creates a perverse incentive for fiduciaries. Assuming fiduciaries will not sue themselves, the upshot of the Eighth Circuit’s holding is that pension fiduciaries can outright steal from a funded pension plan, and the only entity that can stop them is the U.S. Department of Labor, which has made well known it does not have the resources to police all misconduct.
Whose Burden? Courts Grapple With Which Party Must Prove Loss Causation in a Breach of Fiduciary Duty Case
Following the recent uptick in “proprietary fee cases,”[12] courts were faced with questions concerning which party bore the burden of proving that losses in a plan were caused by financial companies’ preference for in-house products. The First Circuit, in Brotherston et al. v. Putnam Investments LLC et al., recently highlighted a circuit split on this issue.
In Putnam, the plaintiffs alleged that defendants breached their fiduciary duties of loyalty and prudence by offering exclusively proprietary mutual funds in the plan, without consideration of nonproprietary investment alternatives, despite alleged issues with performance and fees.[13] Putnam made its way to a bench trial, where the judge refused to hold Putnam liable for having an investment process that was “no paragon of diligence,” explaining that the plaintiffs had failed to show any losses because, even without an “objective process,” the plan could “still end up with prudent investments, even if it was the result of sheer luck.”[14]
On appeal, the First Circuit reversed. The First Circuit explained that there are three elements to a breach of prudence claim — “breach, loss, and causation”[15] — and that the plaintiffs had proved the first two elements by showing that the defendants failed to monitor the plan investments independently, and that those plan investments underperformed alternative investments.[16]
This left the element of causation. The First Circuit explained that, because the plaintiffs had made a prima facie showing of a violation and loss, the burden shifts to the defendants to disprove causation.[17] In so doing, the First Circuit piled on top of a now 4-4 circuit split.
On one side of the split sit the First, Fourth, Fifth and Eighth Circuits. These four circuits have all held that, once a plaintiff makes a prima facie case of a violation and loss to the plan, the burden shifts to the fiduciary to disprove causation. These courts have looked to the common law of trusts for guidance on the burden, in the absence of statutory language expressly placing the burden on one party or the other. The common law of trusts shifts the burden to the trustee to disprove causation.[18]
On the other side of the split sit the Sixth, Ninth, Tenth and Eleventh Circuits. These courts have interpreted language from 29 U.S.C. 1109(a), stating that a fiduciary is liable for “any losses to the plan resulting from each such breach,” as placing the burden on plaintiffs.[19]
Putnam has asked the Supreme Court to settle the score, and with such a decisive split there is a good chance it will do so. If the Supreme Court takes this case and continues grounding its interpretation of ERISA in the common law of trusts, participants that are harmed by fiduciary misconduct will find fewer hurdles to recovery in four of the circuits.
So Long for Now? The Department of Labor’s Fiduciary Rule Meets Its Demise
A look ahead to 2019 would not be complete without discussing the DOL’s hotly contested fiduciary rule. The authors of this article previously wrote about the fiduciary rule near the end of 2017.[20] At that time, legal challenges to the rule had been percolating to circuit courts after surviving litigation in district courts in Texas, the District of Columbia and Kansas.
While the appeals to those cases were pending, the Trump administration poured cold water on the rule by filing a notice of proposed amendments seeking to delay the implementation of the rule’s key provisions, so that the DOL could consider possible changes to the rule.[21] The provisions targeted by the delays included the requirement that a fiduciary under the rule operate in a retirement investor’s best interest. Following the notice and comment period for this proposal, the DOL, on Nov. 24, 2017, officially delayed implementation of the rule’s key provisions for 18 months, until July 1, 2019.[22] The DOL also filed a brief in the Fifth Circuit, stating that the United States Government “is no longer defending” the validity of the rule’s prohibition against class action waivers.[23]
Subsequently, on March 15, 2018, a split panel in the Fifth Circuit vacated the rule in toto, holding that Congress had not given the DOL the authority to “expand[] the scope of DOL regulation” to the individual retirement account market, as the rule purported to do.[24] The Fifth Circuit’s analysis largely focused on whether the definition of “investment advice” provided by the rule conflicted with the term “investment advice” used in ERISA (29 U.S.C. § 1002).
The primary legal question that the Fifth Circuit answered was whether, under Chevron USA Inc. v. Nat. Res. Def. Council Inc., the term “investment advice” in 29 U.S.C. § 1002 was unambiguously defined by Congress such that the DOL was unable to provide a new technical definition to the term through regulation.[25] The Fifth Circuit held that Congress had given the term unambiguous meaning, which it borrowed from the common law fiduciary definition “requir[ing] trust and confidence” stemming from “individualized advice on a regular basis pursuant to a mutual agreement with a client.”[26] Because the rule did not require the relationship between an investor and broker to be founded on “trust and confidence,” the Fifth Circuit held that the rule was at odds with Congressional intent.
The dissent was split on this point, explaining that Congress had not defined the term “investment advice,” and had expressly authorized the DOL to adopt regulations defining “technical and trade terms used” in the statute.[27]
While this attempt to fill a regulatory gap in the ever-growing IRA market may have failed, a new chapter is likely to be written. The DOL announced that it is “considering regulatory options in light of the Fifth Circuit opinion,” and is slated to issue a revised fiduciary rule in September 2019.[28] Moreover, the Securities and Exchange Commission issued a proposed rule in 2018 that seeks to establish a “best interest” “standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customers.”[29]
By S. Douglas Bunch and Alice Buttrick
A basic premise of the federal securities laws is that investors are entitled to trust the veracity of a company’s public statements. In 2018, defendants in three key securities cases made novel attacks on the idea that corporations and corporate speakers are responsible for the accuracy of the statements they make to the investing public. From the plaintiff’s perspective, these tactics appear to be inspired by the “post-truth” era we have entered in the political realm, where facts are increasingly disregarded.
In re Goldman Sachs Group
In Arkansas Teachers Retirement System v. Goldman Sachs Group,[1] the defendants seek to invert the logic of Halliburton Co. v. Erica P. John Fund Inc.[2] (Halliburton II), which permits defendants to rebut the Basic “fraud-on-the-market” presumption with, among other things, evidence that the challenged misstatements did not impact the stock price. The result could effectively immunize certain types of material misstatements, namely those pertaining to corporate governance.
The plaintiffs in the case allege that Goldman Sachs made false statements regarding its comprehensive conflict management and avoidance processes, and that its stock sold at a premium because of its reputation for such strong corporate governance. Goldman Sachs failed to disclose, however, that it had acted in direct conflict with its clients in several transactions during the same period. When U.S. Securities and Exchange Commission and U.S. Department of Justice enforcement actions based on those conflicts were disclosed, Goldman’s stock dropped.
The Second Circuit recently granted the defendants the opportunity to file a second interlocutory appeal of class certification. In their motion seeking leave to appeal, which will likely track their appellate arguments, the defendants predictably challenge the adequacy of the district court’s factual findings. But the defendants’ primary argument is that they should not have been required to put forth evidence of price impact at all, because the misstatements alleged are too vague and general to support the plaintiffs’ “price maintenance” theory of loss causation.
The defendants’ argument is an attempt to relitigate whether the alleged misstatements are “material,” an issue already decided against them when their motions to dismiss were denied, and which does not bear on whether class certification should be granted. The defendants’ argument also attempts to shift onto the plaintiffs their burden of proof that the elements of the Basic presumption are not met. In Halliburton II, however, the U.S. Supreme Court expressly recognized that plaintiffs do not have an obligation to prove materiality before class certification; instead, assuming the adequacy of plaintiffs’ allegations, Halliburton II merely permits defendants an opportunity to rebut the elements of the Basic presumption.
Even as a materiality argument, the defendants’ position falls short. The notion that statements pertaining to general policies cannot provide the basis for a price maintenance theory, moreover, is consistent with some defendants’ desire to pay lip service to the corporate governance protections that investors expect and demand, without having any intention of delivering on those promises.
Lorenzo v. SEC
The defendant in Lorenzo v. SEC[3] argues that he cannot be held directly liable for false statements he knowingly emailed to investors with the intention of inducing investment because his boss retained the “ultimate authority” over the statements’ contents. Lorenzo’s position would significantly narrow the ability of private plaintiffs to bring securities fraud claims against individuals who knowingly endorse and distribute false statements.
The D.C. Circuit held that Lorenzo knew the statements were false when he sent them and determined, under a narrow reading of Janus Capital Group Inc. v. First Derivative Traders,[4] that Lorenzo did not “make” the statements pursuant to Rule 10b-5(b), because his boss retained the “ultimate authority” over the emails. Ultimately, however, the court concluded, over then-Judge Brett Kavanaugh’s dissent, that Lorenzo could nevertheless be subject to scheme liability for his conduct under Rules 10-b5(a) and (c) and Section 17(a), none of which turn on whether the defendant is the “maker” of the statement at issue.
At the Supreme Court argument, held on Dec. 3, several justices appeared skeptical that Janus could cabin the plain language of Rules 10b-5(a) or (c), or Section 17(a). Crucially, Francis Lorenzo suggested that his role in the dissemination of the emails was too minor to incur primary liability, in part because his conduct wasn’t sufficient to constitute the “substantial assistance” required for secondary aiding-and-abetting liability. But the prior Supreme Court precedent distinguishing between primary and secondary liability, and precluding private plaintiffs from pursuing the latter, turned on the fact that private plaintiffs could not demonstrate the reliance necessary to support aiding-and-abetting claims. Lorenzo sent false statements directly to potential investors under his own name, inducing those investors to rely on his own reputation as an assurance that the content was correct. That Lorenzo may have played a minimal role in drafting the email’s contents may have some implications for scienter (which he does not contest) but has no effect on whether the investors relied on his own conduct, rather than somebody else’s.
Shifting the dividing line between primary and secondary liability away from the guiding principle of investor reliance could create significant obstacles for investors, who reasonably assume that a professional who sends and signs a statement regarding securities is taking responsibility for its contents. And limiting primary liability to a single “maker” with the ultimate authority over a statement could immunize the knowing dissemination or advertisement of a false statement “made” by a subordinate whose supervisor lacked scienter.
First Solar
In First Solar Inc. v. Mineworks Pension Scheme,[5] for which a petition for certiorari is pending, the defendants argue that they cannot be held liable for losses caused by the revelation of the effects of their fraudulently concealed conduct until the fact of the fraud itself is also disclosed.
The plaintiffs in this case argue that their loss was caused, in part, by the market reaction to poor earnings statements that incorporated the costs of the concealed product defects. The defendants contend that their fraudulent concealment of the defects could not have caused the plaintiffs’ losses because the market was only reacting to the economic effects of the undisclosed defects, without knowing that any conduct had been fraudulently concealed. The Ninth Circuit, applying a standard proximate cause analysis, determined that revelations of the fraud’s effect were sufficient to demonstrate loss causation and affirmed the denial of summary judgment.
Dura Pharmaceuticals Inc. v. Broudo,[6] makes clear that the proper standard for assessing the loss causation element of a Section 10(b) claim is proximate cause. And the defendants do not contest that the plaintiffs put forward evidence that the earnings statements, rather than other intervening causes, reflected the defendants’ fraudulently concealed conduct and caused the decline in stock price that harmed them.
Nevertheless, the defendants claim that the market must specifically learn about the fraudulent nature of their conduct in order to demonstrate loss causation — that is, the defendants argue that investors are not harmed by their fraudulent misstatements unless the investors know that their injury is being caused by a fraud. That position would give defendants a road map for drastically narrowing the potential damages resulting from securities fraud; as the defendants did here, corporations would be incentivized to reveal the economic impact of their fraud, allow the market to react, and then face liability only for the losses incurred after the concealed conduct itself was admitted, which might amount to a mere fraction of the overall loss.
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Each of the arguments highlighted above, if successful, would make it more difficult for investors to rely on the accuracy of corporate representations and hold defendants accountable for deliberately misleading the public. In 2019, we anticipate that some defendants, emboldened by a clearly corporation-friendly Supreme Court, will continue their creative efforts to evade responsibility for their actions.
By Julie G. Reiser, Raymond M. Sarola, Molly J. Bowen, and Sally Handmaker Guido
Given the epidemic levels of gun violence in America and the increasing shift to online commerce, a recent suit in Oregon established new legal precedent at the state and federal level to hold dealers accountable for unlawful straw sales and provides a roadmap for attorneys representing gun violence victims.
The wrongful death lawsuit was brought by attorneys at Cohen Milstein and the Brady Center to Prevent Gun Violence on behalf of the family of Kirsten Englund, who was murdered by a mentally troubled man who had illegally obtained a gun from an online dealer via a straw purchaser. In this case the straw purchaser was his mother, herself a mental health professional, who used her credit card and had her background checked before the purchase despite allegations that the son was the true purchaser. (Estate of Kirsten Englund v. World Pawn Exchange et al., No: 16-cv-598 (Coos Cty. Circuit Court)).
In this first-of-its-kind litigation, Englund established that online gun dealers can be liable for shooting deaths despite the bifurcated nature of online firearms sales and a major obstacle in the Protection of Lawful Commerce in Arms Act (PLCAA).
Before Englund: Dealers Must Verify ID
A fundamental premise of our federal gun control regulatory scheme is that firearms dealers must know who is buying a firearm, perform a background check on that person, transfer the firearm only to the person who cleared the background check, and maintain certain records regarding the purchaser.
This framework ensures that the dealer looks the true purchaser in the eye and determines whether he is legally permitted to purchase a gun. Firearms dealers also are required to consider whether a purchaser presents red flags that call into question the legality of the purchase and whether it is acting reasonably in selling a gun to that purchaser.
As evidenced in Enrique Marquez’ plea agreement in the 2015 San Bernadino shooting that killed 14 people and wounded 22 more, in a straw purchase the true purchaser and ultimate user of the gun does not go into the store and purchase it; instead, he sends in another person to pretend to be the purchaser, undergo the background check, complete the forms, and accept the gun. In Following the Gun: Enforcing Federal Laws Against Firearms Traffickers (June 18, 2000), the Bureau of Alcohol, Tobacco, Firearms & Explosives identifies straw-purchased guns as “a significant overall crime and public safety problem” due to their use by criminals and firearms traffickers.
Despite their illegality, straw sales are alarmingly frequent – in part because firearms dealers have not consistently identified and stopped these sales.
As decided in Abramski v. United States (134 S. Ct. 2259, 2269 (2013)), because straw purchases involve the provision of false information on federally mandated forms, they violate gun control statutes even if the purchaser is otherwise legally entitled to buy a gun. Therefore, prior to Englund, the illegality of straw purchases from brick-and-mortar sellers was well-established.
Online Gun Transactions: Different Process, Same Rules?
In online firearms sales, the transaction responsibilities are split between two different federally-licensed dealers. First, the online seller interacts with the customer at the point of purchase. However, because federal law prohibits a dealer from shipping a firearm directly to a customer, the online seller must ship the firearm to another dealer in the customer’s home state.
Next, the customer selects the dealer to which the gun will be transferred, and that dealer is required to perform the background check on the customer, obtain completed ATF transaction documents, and transfer the firearm to the actual purchaser and to no one else.
In Englund, the online dealer was the principal “seller” of the firearm, as it was sold from the dealer’s inventory to the purchaser. An unemployed, mentally ill young man alleged to be the true purchaser selected the weapon and interacted with the online seller through a web portal and email. Over the course of multiple transactions, his name and email were identified, as were those of the straw purchaser, his mother. The online seller neither asked any questions about the disparity between these individuals nor spoke directly with either one.
More people living near the Chemours plant could qualify for alternate water supplies if the EPA’s initial findings on the toxicity of GenX, released last week, are finalized.
The basis for the potential switch is the EPA’s draft report proposing a chronic reference dose for GenX that translates to a health goal of 110 parts per trillion in drinking water. (The EPA is taking public comment on the draft. Scroll down for instructions.)
A chronic reference dose is the daily amount of GenX a person can be exposed to for decades without suffering adverse health effects. A health goal is non-enforceable but is widely used by states and tribal nations to issue recommendations. North Carolina’s provisional health goal for GenX in drinking water is 140 ppt.
In the Wilmington area, concentrations of GenX in drinking water are already below 110 ppt.
However, some people who live near the Chemours plant are on private wells that have tested between 110 ppt and 140 ppt. Those households could switch to bottled water, whole-house filters or connection to a public water system. Chemours would be responsible for the cost of installing or connecting those systems.
The wells of 225 households in that area have already tested above 140 ppt.
The full article can be accessed here.
A group of twenty-seven legislators has authored a letter asking President Trump and the Department of Labor (“DOL”) to provide the ESOP industry with guidance on substantive issues, most importantly the issue of valuation, and to stop engaging in what it termed “regulation through litigation”. The letter asks the DOL to collaborate with the ESOP community and basically requests the President and the DOL to stop engaging in enforcement activities until such meaningful guidance is provided.
ESOPs, ERISA, and the DOL
An ESOP is a qualified defined-contribution employee benefit plan designed to invest primarily in the stock of the sponsoring employer. While ESOPs are often used to give the employees a vested interest in the company’s success, they can be used for improper purposes, which harms employees and violates the Employee Retirement Income Security Act (“ERISA”), a federal statute that protects employee retirement assets from abuse. Because ESOPs must comply with ERISA, there is a fiduciary duty for those who administer, manage, or control ESOP plan assets, and the fiduciaries must act solely in the interest of plan participants and beneficiaries.
EBSA’s Role
The Employee Benefits Security Administration (“EBSA”) is the division of the DOL responsible for investigating ESOPs for compliance. Although the letter from Congress suggests that no guidance is provided by the DOL, EBSA’s website lists ESOPs as a national enforcement project, a position held since 2005, and EBSA makes clear that it investigates and enforces ERISA violations in ESOPs in several areas:
- Ensuring that when plan sponsor stock is bought or sold by an ESOP the plan fiduciaries make such exchanges for the fair market value of the stock;
- Conflicts of interest in ESOP purchase and sale transactions, particularly when one of the persons engaged in the transaction also serves in some fiduciary role over the plan itself;
- Ensuring the duty of fiduciaries to control waste and monitor the plan, as well as the duty to pay benefits due under the ESOP, are complied with; and
- Ensuring that sound procedures and practices are in place by the institutional trustees overseeing plan operations
What does Congress Want?
The signatories of the letter are seeking drastic action:
We request your assistance in protecting ESOPs and employee ownership. Specifically, we believe the Department could immediately eliminate some of the regulatory uncertainty by collaborating with the ESOP community to develop clear guidance with respect to valuation and other important issues. Furthermore, the Department should consider immediately halting controversial oversight practices currently in use while the agency develops more efficient investigatory mechanisms that limit the burdens and costs on small businesses.
Anyone reading that would be under the impression that DOL has given no guidance, or murky guidance, with respect to valuation. Yet nothing could be further from the truth.
DOL Guidance on Valuation and other ESOP-related Issues
The letter from Congress is puzzling, given that the DOL EBSA enforcement site has a clickable link titled ESOP Agreement – Appraisal Guidelines. Clicking on that link provides all the guidance an ESOP practitioner could want, and indeed everything sought in this letter. The link is to a 2014 settlement agreement with GreatBanc. It gives guidance on a myriad of issues, including how to select a valuation advisor, how to avoid conflicts of interest with the valuation advisor, how to exercise proper oversight of the advisor, the necessary financial statements, how to engage properly in the fiduciary review process, how to use the valuation report, the fair market value transaction requirements, and additional concerns. While the appraisal guidelines in the GreatBanc settlement are legally binding only on GreatBanc, the DOL suggested that the ESOP industry would “do well to take notice” of the process steps it put in place. There are more recent settlements in two other cases which build on the guidance set forth in GreatBanc and explain in detail every question raised in the Congressional letter.
Conclusion
It appears as if certain Congressional constituents (or donors) are annoyed at being aggressively monitored and sued by the DOL and want the government to lay off. The letter appeals to the current administration’s desire to undo and rollback regulations from the prior administration, noting that the enforcement tactics being employed against ESOPs “began under the prior Administration, but unfortunately have continued under this Administration.” Of course, since ESOP’s have been a national enforcement project since 2005, heightened action actually began under the Bush administration, and hopefully the current administration is not fooled by the naked appeal to stop enforcing the law against the ESOP community.
Contact Us
If you think you may have suffered losses to your retirement savings because of an ESOP transaction, we would be interested in investigating your case. Cohen Milstein’s attorney Michelle Yau is here to answer your questions and to learn about your experience with your ESOP. To schedule a phone appointment, please call our office at (202) 408–4600.
Cohen Milstein Sellers & Toll PLLC
1100 New York Avenue, N.W., Suite 500
Washington, D.C. 20005
Telephone: 888-240-0775 or 202-408-4600
Florida’s statute of repose for product liability actions is found at §95.031(2)(b), Fla. Stat., and provides, in part, that “[u]nder no circumstances may a claimant commence an action for products liability, including a wrongful death action or any other claim arising from personal injury or property damage caused by a product, to recover for harm allegedly caused by a product with an expected useful life of 10 years or less, if the harm was caused by exposure to or use of the product more than 12 years after delivery of the product to its first purchaser or lessee who was not engaged in the business of selling or leasing the product or of using the product as a component in the manufacture of another product.”1
With limited exception, all products, including motor vehicles, are conclusively presumed to have an expected useful life of 10 years or less.2 However, “[a]ircraft used in commercial or contract carrying of passengers or freight, vessels of more than 100 gross tons, railroad equipment used in commercial or contract carrying of passengers or freight, and improvements to real property, including elevators and escalators” are not subject to the statute of repose.3 For these products, “except for escalators, elevators, and improvements to real property, no action for products liability may be brought more than 20 years after delivery of the product to its first purchaser or lessor who was not engaged in the business of selling or leasing the product or of using the product as a component in the manufacture of another product. However, if the manufacturer specifically warranted, through express representation or labeling, that the product has an expected useful life exceeding 20 years, the repose period shall be the time period warranted in representations or label.”4
The full article can be accessed here.
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1. Fla. Stat. §95.031(2)(b)
2. Id.
3. Fla. Stat. §95.031(2)(b)(1)
4. Fla. Stat. §95.031(2)(b)(3)
With bipartisan politics virtually nonexistent, the upcoming midterm elections could have an outsized impact on federal policy, not only for the hot-button issues that have dominated the headlines since President Trump took office, but also in areas like investor protection.
Whether or not that happens depends on whether Republicans maintain control of both the House of Representatives and the Senate, or cede one or both of their majorities to the Democrats. All 435 members of the House are subject to elections, as they are every two years. For the Democrats to take back the House, they would need to add 25 new seats to their current 193. For the 100-member Senate to change hands, the Democrats would have to pick up two of the 35 seats up for election to gain a majority (if they win only one seat, the Senate would be tied 50-50, with Vice President Pence breaking any deadlock). To secure additional seats, Democrats are keenly focused on potential pickup opportunities in Arizona, Nevada and Tennessee, while the Republicans are looking to flip seats in Florida, Missouri, Montana, North Dakota and Indiana.
As of October 1, the Realclearpolitics.com “poll of polls” gives Democrats a 7.4% advantage in the generic Congressional ballot, which along with historical trends would indicate the Democrats have a good chance of winning control of the House. On September 27, Kyle Kondik, Managing Editor of Larry J. Sabato’s Crystal Ball of the University of Virginia’s Center for Politics said, “Our best guess right now is a Democratic House gain of somewhere in the low-to-mid 30s. But there are enough very close races that something like a 30-seat gain could turn into more like a 20-seat gain and leave the Democrats short of a majority. Back in July, we said the Democrats were ’soft favorites‘ to win the House. Their odds have likely gotten better since then, or at the very least have not gotten worse, but the GOP still has an opportunity to retain the House with some breaks.”
As for the Senate, most pundits think it will likely stay within a vote or two on either side, especially given the particular seats up for election, with Democrats needing to defend 26, including some in states where President Trump is very popular, and Republicans defending only nine, all but a handful considered relatively safe. Charlie Cook, Founder of The Cook Political Report, said on September 23 that: “What we are dealing with this year is actually very simple: there is a blue wave and a red sea wall. This election all turns on whether the blue wave rises above the Republican sea wall.” From Cook’s perspective, the sea wall has been created by the Republican institutional advantages from the 2010 redistricting effort and the fact Republican voters are more evenly spread out, whereas Democratic voters are clustered generally on the coasts and specifically in large cities.