Articles Tagged with Erisa

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The ERISA Advisory Council recently announced that, as part of its goals for 2016, it will be focusing on cybersecurity issues affecting retirement plans and, in particular, the extent to which such issues relate to third-party administrators and vendors (TPAs) of retirement plans. By shining the spotlight on the role of TPAs in combatting cyber-related threats to retirement plans, this announcement
demonstrates that retirement plan sponsors would be well-served to proactively assess the cyber risk profiles of their retirement plans. Specifically, retirement plan sponsors should focus on developing and implementing a comprehensive and effective risk management strategy that includes, among other actions, the implementation and periodic review of contractual protections in arrangements
with their plans’ TPAs.

This advisory is the second in a series of advisories dedicated to understanding cybersecurity issues.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert here.

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A group of related private equity (“PE”) funds were found liable for a bankrupt portfolio company’s pension plan debts in the latest and most worrisome decision in the long-running Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund dispute. The novel decision, if upheld on appeal, will trigger a reevaluation of common PE industry practices related to co-investments and management fee offset arrangements. The decision also signals increased transaction risks for PE funds, lenders who provide financing to portfolio companies, and potential buyers of portfolio companies from PE funds.

Background of the Sun Capital Dispute

In 2006, Scott Brass Inc. (SBI) was acquired by three investment funds linked to the Sun Capital Partners Inc. group for approximately $7.8M ($3M invested by the funds and $4.8M funded by debt). SBI participated in an underfunded multiemployer (or union) defined benefit pension plan, and when SBI declared bankruptcy in 2008, the pension plan assessed $4.5M in withdrawal liabilities against SBI. The pension plan pursued payment of the withdrawal liabilities from the deep pockets of the three Sun Capital funds who owned SBI: Sun Capital Partners III, LP (SCP-III), its parallel fund Sun Capital Partners III QP, LP (SCP-IIIQ) and Sun Capital Partners IV, LP (SCP-IV).

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.  You can also download a copy of the Client Alert here.

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On April 14, 2015, the Department of Labor issued its much anticipated re-proposal of regulations defining and expanding the persons who are treated as ERISA fiduciaries.  Under the proposal, subject to certain exceptions, all persons who  provide investment advice or recommendations for a fee to an employer-sponsored  retirement plan, plan fiduciary, plan participant, IRA or IRA owner would be deemed “fiduciaries”.  Other than investment education and “order taking”, most other investment sales related activities will result in fiduciary status.  Some of these advisors are subject to federal securities laws, others are not.

Being a fiduciary means that the advisor must provide impartial advice and put the client’s best interest first and must not accept any compensation payments creating conflicts of interest unless the payments qualify for an exemption (newly proposed) intended to ensure that the customer is adequately protected.  If the regulations are finalized, compliance with the terms of the new exemption will be a necessary condition for continuing many of the compensation practices currently in use by the investment industry.

We expect to issue a Client Alert on the Proposal and new Rule.  If you have any questions, please feel free to contact our Funds or Employee Benefits attorneys.

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Written by:  Jessica M. Brown

The Securities and Exchange Commission (“SEC”) and the United States Department of Labor (“DOL”) announced sanctions today against Western Asset Management Company (“Western Asset”), a subsidiary of Legg Mason.  Western Asset is an SEC-registered investment adviser and reported $442.7 billion in assets under management as of September 30, 2013.

The SEC found Western Asset breached its fiduciary duty to certain ERISA clients when it failed to efficiently correct a coding error that caused losses to over 100 ERISA clients, and did not disclose the error for over two years.  The coding error caused an off-limit private investment to be allocated to the ERISA accounts, and such investment declined significantly in value before the error was discovered.  Western Asset concealed the error rather than reimburse the clients as it was obligated to do under its error correction policy.  In addition to other sanctions for the disclosure violations, Western Asset must distribute approximately $10 million to the harmed ERISA clients.  Further, Western Asset must pay a $1 million civil penalty in the SEC settlement and an additional $1 million penalty in the DOL settlement.

Western Asset was also found to have engaged in prohibited cross trades during the financial crisis.  Instead of crossing the securities at the average price between the bid and the ask price, Western Asset crossed the securities at the bid price.  As a result, the full benefit of the market savings was allocated to the buying clients and the selling clients lost out on approximately $6.2 million in savings.  Pursuant to a separate order settling the cross trade charges, Western Asset must distribute approximately $7.44 million to the clients who were harmed by the illegal cross trading, pay a $1 million penalty in the SEC settlement, and a $607,717 penalty in the DOL settlement.

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Written by: Jeffrey Stern, Dulcie D. Brand and Anthony H. Schouten

The Commodity Futures Trading Commission has issued new “know your customer” and external business conduct rules to give effect to certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under these rules, major dealers in swaps and derivatives (“Swap Dealers”) will be required to, among other things, conduct diligence on counterparties, verify their status as “eligible contract participants” and ensure that swap recommendations are suitable for them. In addition, these rules impose heightened duties on Swap Dealers that trade with employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974, governmental plans as defined in ERISA Section 3, endowments, state and federal agencies, and other protected counterparties (“Special Entities”).

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By Peter J. Hunt, Susan P. Serota, Matthew C. Ryan1

In welcome news for private equity (“PE”) funds, a recent district court opinion determined that two PE funds and their bankrupt portfolio company were not a “controlled group” and thus the PE funds were not responsible for pension liabilities at the portfolio company. The decision, Sun Capital Partners III, LP v. New England Teamsters and Trucking Industry Pension Fund, explicitly rejected a prior Pension Benefit Guaranty Corporation (“PBGC”) ruling on the same question and illuminated best practices for structuring future PE fund investments.

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