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News May 2, 2005 Issue

DOL: Plan Fiduciary’s Day Job as Advisory Firm CEO Doesn’t Preclude Plan Investments in CEO’s Mutual Fund

A New York City non-profit recently asked the Department of Laborís Employee Benefits Security Administration the following question:

Would it be okay under ERISA to invest part of the non-profitís employee retirement plan in a mutual fund run by one of the non-profitís directors? The directorís fingerprints were all over the mutual fund: he served as one of the fundís portfolio managers, he was the CEO of the advisory firm that managed the fund, and he owned 22.9 percent of the advisory firm.

Despite all that, asked Buchanan Ingersoll lawyer Norma Sharara, could the plan invest, oh, say, up to 25 percent of its assets in the fund?

Interestingly, DOLís answer wasnít a flat No. Instead, Louis Campagna, DOLís chief of fiduciary interpretations, said that the plan could invest in the directorís fund as long as the director himself wasnít involved in the decision-making process (and, of course, the other directors at the non-profit thought it was a good idea).

Campagna noted that each of the non-profitís three directors would be viewed as a plan fiduciary, since the non-profit served as administrator and named fiduciary of the employee retirement plan and the board of directors was responsible for exercising the planís fiduciary responsibilities.

Based on the directorís role at the advisory firm and his involvement in the day-to-day operations of the fund, said Campagna, the director "has an interest in the fund that may affect his best judgment as a fiduciary of the plan regarding the decision whether to invest plan assets in the fund." As a result, if the director used any of his fiduciary authority over the plan to cause the plan to invest in the fund, he would engage in a prohibited transaction. However, if the director took himself out of the decision-making process and there was no "wink-wink, nod-nod," he wouldnít run into trouble if the plan invested in the fund.

Of course, Campagna, being an ERISA lawyer, put it a bit differently: DOL, he said, "has stated in other situations involving a fiduciary who has this type of conflict of interest that the fiduciary can avoid engaging in a transaction described in Section 406(b)(1) and 406(b)(2) of ERISA by removing himself from all consideration of the transaction in question, and not exercising any of the authority, control, or discretion that makes him a fiduciary to cause the plan to enter into the transaction, as long as there is no arrangement, agreement, or understanding regarding the proposed transaction."

Campagna noted that the director still would have a duty to inform the deciding directors if he was aware of any material information necessary for them to make a prudent decision about the planís investments. He acknowledged that this could present issues under the insider trading restrictions under the federal securities laws. He also reminded the other directors that they must act prudently and solely in the interest of plan participants when deciding how to invest the plan assets.