Author Archive

Pension Plan Investments 2013

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On April 2, 2013, in New York City, John Valentine will be part of a panel addressing Regulatory Reform. This session will keep you up to date on how Dodd-Frank will affect your operations or your clients. To register, go to www.pli.edu.

Category : Conferences | Uncategorized | Blog

August, 1012 — New Client Memo Available: Dodd-Frank Changes Fiduciary Oversight and Duties

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This Memo provides valuable insights for fund sponsors, investment managers, trustee/custody banks and service providers.  It identifies new fiduciary duties and new types of risk created by Dodd-Frank.  It has a specific list of things sponsors, managers and banks will have to do to avoid potential liability under the new law.

Obtain a copy of the memo by emailing John Valentine directly at jvalentine@ValentineLawLLC.com, or signing up for the periodic Client Bulletin.

Category : Articles | Blog

Case Study: Developed Specialized Group Trust to enable government plan to invest globally.

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Problem:

An investment manager for several participants in a major government pension fund, consisting of the assets of multiple state and local governmental plans, wanted to be able to invest globally. While counsel for the business units wishing to gain global exposure wanted to proceed, several state attorneys believed that the fund’s enabling statute was antiquated, but precluded non-US investment. ( I disagreed with this interpretation, but as bank counsel, I could not give them advice! This is not for the case study!!!)

Solution Provided:

I suggested the creation of a US-based Group Trust in which several of the governmental units could participate. Units of the trust owned by the investing plans could be considered US investments, even though the Group Trust would invest abroad.

Results:

The door was opened for indirect foreign investment, the participating plans gained from higher returns available in global funds — and the investment manager and the bank were able to earn new fees from global investment activity. Everyone won.

Category : Case Studies | Blog

Case Study: Posting Plan Assets as Collateral – The Contract Rights Approach

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Problem:

ERISA plans posting collateral for OTC derivative transactions want to have the same terms as non-ERISA investors—but broker-dealers, which routinely rehypothecate collateral posted by non-ERISA clients (use it as their own to lend out), cannot accept fiduciary responsibility for investing ERISA plan assets, because their on-lending activities would result in prohibited transactions.

Solution Provided:

I developed a work-around referred to as the “contract rights” approach — to contractually transfer title of collateral posted by an ERISA plan to the secured broker-dealer, subject to a contractual right of return when collateral is no longer required under the terms of the Prime Broker or swap agreement being used. (This is how swap collateral is handled under the UK format of the standard ISDA swap agreement.

Results:

ERISA plans can utilize Prime Broker and swap agreements on the same terms as non-ERISA investors.

NOTE: Managers or sponsors wishing to use this approach need to consider the risk of placing their assets with the broker.

Category : Case Studies | Blog

Case Study: Prior to recent statutory relief for the provision of foreign exchange, developed and introduced to industry use of negative consent for the approval of Foreign Exchange trades.

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Problem:

While custody banks had always routinely provided foreign exchange to other institutional investors, the Department of Labor had taken the position that it constituted a sale of currency from the bank to its ERISA-plan client which constituted a “party-in-interest” prohibited transaction. Banks were prohibited from providing a routine and essential service for ERISA plan clients. In 1994, when relief was finally provided by the Department of Labor (DOL), it only extended to transactions individually directed and approved in writing by independent plan fiduciaries—routine transactions were not permitted based on standing instructions.

Solution Provided:

As in-house counsel to a major custody bank, I devised a procedure to automate the provision of foreign exchange to clients in a way that would comply with the DOL’s exemption for directed foreign exchange transactions. Under the procedure, each morning, the bank would, in writing, propose all terms for pending foreign exchange transactions to its clients, including ERISA clients. Under the procedure, which was agreed to, in writing, by each client participating in the program, the bank would proceed with the transactions as proposed, based on “negative” or “implied” consent, unless the client objected by a set time each morning. An “opinion of counsel” was issued by a major DC law firm, and shared with other custody banks, establishing a new industry practice.

Results:

The procedure was broadly adopted by major custody banks, enabling them to capture income from the provision of routine of foreign exchange to ERISA clients at fair rates approved by plan fiduciaries. When the DOL issued relief for “standing instructions” in 1998, they were broadly regarded as being problematic, but the industry had broadly adopted procedures which worked. (The problems with the DOL’s 1998 relief for “standing instructions” were effectively acknowledged when definitive relief was provided for foreign exchange transactions in the Pension Reform Act of 2006.)

Category : Case Studies | Blog

Case Study: Lead Industry to initiative to obtain ruling from Dept. of Labor limiting duties of Directed Trustees.

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Problem:

In the wake of the massive Enron fraud, the Department of Labor sided with private claimants to hold the directed trustee of Enron’s company stock fund liable for failing to take independent action to prevent losses to plan participants—a position which alarmed the industry, and lead to a rash of “stock-drop” cases against banks acting as directed trustees of Company Stock Plans. Custody banks serving as directed trustees had never thought that they had accepted fiduciary duties to over-see plan sponsor activities or to act proactively to protect plan participants when company stock funds were jeopardized by a company’s weakened financial condition.

Solution Provided:

Working with both the ABA and major Washington firm, I assembled and worked with industry representatives to develop the industry position and was a principle industry spokesperson in discussions with the Department of Labor.

Results:

The ramifications of the Enron decision on directed trustees were nullified. The DOL issued Field Assistance Bulletin 2004-3 on directed trustee duties, which, while requiring directed trustees to have procedures in place to avoid prohibited transactions, established an extremely high threshold before a directed trustee has a potential duty to raise issues to the attention of a plan’s named fiduciary.

Category : Case Studies | Blog

Case Study: Facilitated Class Action Recovery for Institutional Investors

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Problem:

The Worldcom SEC Fairfund Distribution was structured with filing requirements and deadlines which effectively precluded institutional investors from participating in the Distribution.

Solution Provided:

I alerted industry participants of the problems with the court-approved settlement terms, which included not only an unreasonably short filing period and certifications, but the application of tax-lot accounting, which would have precluded pension funds from participating in the settlement. Working through the American Banker’s Association, I coordinated the industry response and set up meetings with the SEC-appointed Fund Administrator.

Results:

The Fund Administrator extended filing periods, changed claim authentication requirements to meet the needs of institutional investors and adjusted claim calculation/proof methods to enable ERISA plans to participate in the Distribution Fund.

Category : Case Studies | Blog

Case Study: Obtained Ruling Permitting Recovery of Fees for Overdrafts Extended to ERISA Plans

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Problem:

Custody banks routinely fund anticipated transactions for institutional clients, including pension funds subject to ERISA, on the assumption that the necessary funds are, or will soon be in the client’s account. When an account is not funded as or when anticipated, an overdraft –a cash advance- is incurred, and the bank should be entitled to reasonable interest charges for the use of its funds. However, in 1999, the Department of Labor (DOL) took the position that overdrafts could be provided by a bank only if it did not charge interest.

Solution Provided:

Exercising industry contacts, I organized an industry coalition, developed the industry position and approached the DOL through the American Bankers Association to convince the DOL to change its position.

Results:

On February 12, 2003, the DOL issued the requested Advisory Opinion, finding that overdrafts were properly viewed as a “service” under existing statutory prohibited transaction exemptions, for which the banks were entitled to “reasonable compensation.”

Summary of minimal requirements under the DOL Advisory Opinion:

  • Plan fiduciaries must be fully informed of the terms and procedures governing overdrafts, and it must be clear that any overdraft charges are in addition to other fees.
  • Plan fiduciaries must approve overdraft charges explicitly or by implied consent.
  • Written guidelines must exist, requiring:
    • Timely notice to an appropriate plan fiduciary of overdrafts and related charges;
    • Monitoring of overdraft duration and usage; and
    • Procedures to discourage or prevent the use of overdraft protection as an effective line of credit.
Category : Case Studies | Blog

Case Study: Assisted small law firm recover additional ERISA-based Long Term Disability Benefits for their Worker’s Compensation client.

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Problem:

A small law firm had handled a Worker’s Comp case for a man who had a heart attack on the job. The man subsequently became too disabled to work. (He had had 4 by-pass surgeries and 9 angioplasties.) His employer processed his claim for disability benefits by off-setting his Worker’s Comp Award — effectively denying him any further benefits. The law firm had no experience in ERISA benefits law, and could not help it client further—but they were reluctant to merely send him to a larger, full-service firm with an ERISA partner.

Solution Provided:

Working with his counsel, I advised them to take the position that, while the heart attack for which he received the Worker’s Comp Award was caused by exertion at work, his underlying heart disease was not caused by his work, and it was inappropriate for the employer to off-set his award. Several hard-hitting letters were sent, not only making the legal arguments, but demonstrating how the employer had acted in bad faith during the course of handling his claim. The employer resisted the arguments, so a federal court case was filed. Hard-nosed negotiations ensued.

Results:

The case was settled at full value – with the employee receiving a lump sum representing the present value of all benefit payments he would have received up to his retirement age. The client was happy, and the law firm did not have to send its client to another firm.

Category : Case Studies | Blog