At the ALI-ABA Annual Spring Employee Benefits Law and Practice Update held last week, Louis Campagna, Jr., Chief of the Division of Interpretations, from EBSA, discussed the recent mutual fund investigations and reiterated what has already been set forth in the DOL’s statement issued in February, 2004. Mr. Campagna stated that after the mutual fund scandals broke, the DOL was flooded with questions from plan fiduciaries wanting guidance regarding their duties under ERISA with respect to the investigations. Mr. Campagna discussed how statements made by the DOL in speeches (here and here) and in the statement issued in February are designed to reinforce that fiduciaries should not panic, but can take applicable steps to fulfill their duties under ERISA as follows:

(1) First and foremost is the requirement that plan fiduciaries be informed. He stated that prudence requires that, if fiduciaries are not informed, they are not exercising prudence as required under ERISA. If plans are invested in funds with providers under investigation, fiduciaries have a duty to contact the fund directly in an effort to obtain specific information about the nature of any alleged abuses. If the funds have been involved in market timing or late trading, fiduciaries have a duty to investigate the possible economic impact of the abuses on plan investments and perform an evaluation regarding such impact, as well as evaluate the steps being taken by the funds to limit the potential for such abuses in the future.

(2) Fiduciaries should take appropriate action where necessary. The guiding principle for fiduciaries, as stated in their guidance, is to to ensure that appropriate efforts are being made to act reasonably, prudently and solely in the interests of participants and beneficiaries, and that actions taken are fully documented.

(3) Plan fiduciaries should consider any steps available to make the plan participants whole, such as participating in lawsuits. However, fiduciaries should weigh the costs to the plan against the potential for recovery in such lawsuits before participating.

(4) Plan fiduciaries should consider other plan assets, not just mutual fund investments, which could also involve similar abuses and take additional action with respect to such investments, such as pooled separate accounts and collective trusts. Mr. Campagna mentioned that the DOL is currently investigating these type of investments for possible abuses.

(Comment: Please note that in remarks of Assistant Secretary Ann L. Combs To the Washington Forum of the U.S. Institute on March 8, 2004, Ms. Combs mentioned this investigation by the DOL and stated as follows:

EBSA is currently conducting its own review of practices by mutual funds and other pooled investment vehicles, such as bank collective trusts, as well as service providers and so-called “intermediaries” to such funds, to determine whether there have been any violations of ERISA. We are examining a sample of mutual fund and other financial service providers to see whether activities such as market timing or illegal late trading may have harmed retirement plan beneficiaries. Under ERISA, a mutual fund affiliate or other retirement plan fiduciary that engages in or facilitates market timing or late trading, causing losses to an ERISA covered plan, is liable to restore losses to the plan.

We are focusing on investment companies and banks that offer 401(k) services to plans more than employers who run their own retirement plans. We are looking for improper payments for directed investments, and whether retirement accounts have been used to facilitate market timing or late trading for clients.

I should note that this review is exploratory and not the result of specific evidence that investment professionals serving as fiduciaries have engaged in improper or illegal activity. We don’t know yet if there are any real problems here but we have an obligation to look.)

(5) Mr. Campagna discussed how plan fiduciaries have been very concerned about whether they can take any steps to address market-timing by plan participants. Fiduciaries have been particularly concerned with the impact these restrictions on market-timing might have on ERISA section 404(c) safe harbor protection. In an effort to address these concerns, the DOL stated in its guidance that imposing reasonable redemption fees on sales of mutual fund shares and/or placing restrictions on the number of times a participant can move in and out of a particular investment within a particular period would not affect the safe harbor protection of section 404(c). Mr. Campagna also emphasized that any such restrictions must be clearly disclosed to the plan’s participants and beneficiaries.

Pam Perdue, attorney with Summers, Compton, Wells & Hamburg and a panelist, emphasized the importance of disclosure. If the plan fiduciaries receive a statement from the provider regarding alleged abuses, her position is that the plan fiduciaries should make this information available to participants and beneficiaries. She also noted that courts have upheld the validity of market-timing restrictions on plan investments where there was adequate and prior disclosure of such restrictions to plan participants.

Panelists noted that fiduciaries should beware of targeting certain plan participants with market-timing restrictions since this could run afoul of the 3-day advance notice requirements for blackout periods under Sarbanes-Oxley.

(What is being referred to here are the requirements that apply to so-called “black-out periods” in participant-directed retirement plans under Sarbanes-Oxley. Black-out periods occur when the ability of plan participants (or of a plan participant) to take certain actions is temporarily suspended. Under Sarbanes-Oxley, participants must receive advance written notice of certain black-out periods, and corporate insiders are restricted in trading in employer securities during such black-out periods. The DOL and the SEC have issued final rules implementing the new requirements. Substantial penalties may be imposed for non-compliance with the black-out notice requirement or the insider trading prohibition under Sarbanes-Oxley.)

The DOL also emphasized this point in its guidance, stating that “[t]he imposition of trading restrictions that are not contemplated under the terms of the plan raises issues concerning the application of section 404(c), as well as issues as to whether such restrictions constitute the imposition of a “blackout period” requiring advance notice to affected participants and beneficiaries.”

(6) In the Q & A portion of the seminar, a question was asked as to whether or not the mutual fund guidance issued by the DOL applies to self-directed brokerage accounts. Mr. Campagna remarked that under SEC rules, the plan is the customer which buys the mutual fund product. Therefore, if information regarding funds targeted in an investigation is in the possession of the fiduciary, the plan fiduciaries would likely have fiduciary responsibility regarding the investment, and therefore the guidance would be applicable.