Project: Corporate Counsel Part II (Compliance Readiness) - Law Firms Compliance Issues For Retirement Plan Trustees - Part II

Monday, August 1, 2005 - 01:00
Michael S. Melbinger

Part I of this article appears in the July 2005 issue of The Metropolitan Corporate Counsel.

The Pension Benefit Guaranty Corporation

The PBGC is a quasi-governmental entity created by ERISA. The PBGC provides mandatory insurance coverage to defined benefit plans. PBGC imposes a variety of reporting requirements on defined benefit plans. Plan sponsors must make special filings with PBGC in the event of a plan termination or other transaction that could adversely affect the plan or the PBGC's guaranty. PBGC has independent authority to impose penalties of up to $1,100 per day for failure to timely provide any required information.

Information as to Underfunded Plans. The contributing sponsor and each member of its controlled group must provide information to PBGC annually with respect to any pension plan that is underfunded by more than $50 million, has received a minimum funding waiver in excess of $1 million, or has missed a minimum funding payment of $1 million or more and thus is subject to a PBGC lien.

Notice of Reportable Events. A plan administrator must notify PBGC of a "reportable event" within 30 days after the occurrence of the event or 30 days after the plan administrator has knowledge of the event. (Private companies with plans that are, in the aggregate, less than 90 percent funded and have more than $50 million in unfunded vested benefits must notify the PBGC 30 days in advance of certain events.) Although PBGC has waived the notice requirement for some reportable events, others always trigger the 30-day notice requirement, including:

  • transfer of more than 3 percent of benefit liabilities outside the controlled group;

  • when a controlled group member ceases to be such (as a result of an event such as a sale of a subsidiary);

  • failure to meet minimum funding standards or inability to pay benefits when due;

  • bankruptcy or insolvency of the sponsor;

  • liquidation or dissolution of sponsor or member of the controlled group; and

  • a transaction involving a change of the employer.

Withdrawal of Substantial Employer. If a substantial employer withdraws from a single employer pension plan with at least two contributing sponsors who are not under common control, the plan administrator must notify the PBGC within 60 days after such withdrawal and request that PBGC determine the liability of all entities with respect to the withdrawal.

Cessation of Operations. If at least 20 percent of a plan's participants are separated from employment in connection with a cessation of operations, the plan administrator must give written notice to PBGC within 60 days of the cessation.

PBGC Activism. In times of corporate acquisitions and divestitures, retirement plan mergers and spinoffs are common. ERISA authorizes the PBGC to begin involuntary pension plan termination proceedings to protect itself from large liabilities. PBGC has used this authority to intervene in proposed plan spinoff transactions where it ostensibly believes that one plan in the spinoff transaction will receive "more than all of the asset surplus." In theory, the other plan presumably would be left in an underfunded position.


Recently, the PBGC has become more involved in such transactions. In several well publicized cases, PBGC has succeeded in causing the parties to the spinoff transaction to reallocate plan assets in a way that leaves both plans wellfunded. Sometimes the PBGC has accomplished this result by notifying the trustee of its view that the proposed transaction would violate the ERISA and Code requirements governing such transactions. The PBGC announces to the trustee that its participation in such a violation could be a breach of its fiduciary duties. When a trustee receives a letter from a governmental agency suggesting that it may be about to breach its fiduciary duties, it must pause to reconsider the transaction, even if the trustee is only following the directions of the plan sponsor.

The Securities And Exchange Commission

Retirement plans that hold securities for an employee benefit plan are subject to certain aspects of the federal securities laws, including the Securities Act of 1933 (Securities Act), and the Securities Exchange Act of 1934 (Exchange Act). A bank, trust company, or other institutional fiduciary may encounter the following securities law issues in the administration of employee benefit trusts:

  • the Securities Act registration requirements applicable to employee benefit plan purchases and sales of employer securities;

  • prohibitions against insider trading under the Exchange Act;

  • provisions requiring the forfeiture of shortswing profits under the Exchange Act; and

  • restrictions on repurchases of employer securities under the Exchange Act.

Securities Act. Congress designed the Securities Act to give investors material information concerning securities offered for sale to the public and prohibit fraud in connection with sales of securities. The Securities Act prohibits any person from undertaking any securities transaction unless the issuer has filed a registration statement with respect to such securities with the SEC and delivered a prospectus meeting the requirements of the Securities Act.

Compliance with the registration requirements of the Securities Act is not limited to the issuing employer. A trustee may need to deal with the registration requirements under the following circumstances:

  • A trustee's sale of securities as a fiduciary may be subject to the registration requirements.

  • A trustee may hold securities that the issuer did not register under the Securities Act. A trustee cannot sell or transfer unregistered securities, except under certain limited circumstances.

Registration of Employer Securities Sold by Trustee. Usually, a benefit plan trustee is purchasing or holding securities of the employer/plan sponsor on the open market, which have been the subject of a registration statement filing by the employer. Under these circumstances, the trustee generally need not worry about filing a registration statement for its sale of the employer securities. Occasionally, however, the trustee will find itself holding unregistered securities or otherwise subject to the registration requirements of the Securities Act in the same manner as if the trustee were selling the securities as the issuer:

  • where the trustee acquired the employer securities in a private transaction, either from the employer or an affiliate of the employer, the employer may not have filed a registration statement;

  • where the employee benefit plan is considered an "affiliate" of the employer, because the board of directors of the employer has the power to establish the plan and appoint the plan administrator and trustee; and

  • where the employee benefit plan is considered an "underwriter" because it acquired a large portion of a registered public offering.

Registration of Employer Securities Purchased by Trustee. The purchase of employer securities by an employee benefit plan trust ordinarily would not require the filing of a registration statement. The exception, however, is where voluntary employee contributions can be used to purchase employer securities. The SEC treats these purchases as purchases by the employees themselves, not the trustee. Thus, where a 401(k) plan permits employees to direct the investment of their contributions into an employer stock fund the securities laws require that the issuing employer file a registration statement with the SEC. SEC Form S-8 is the form used to register employer securities that the employer offers to employees under an employee benefit plan.

The Exchange Act. The antifraud provisions of the Exchange Act apply to purchases or sales of employer securities in the open market. Generally, bank trustees encounter three main problems under the antifraud provisions of the Exchange Act:

  • trading based on nonpublic information gained in its normal commercial relations with a corporate customer, in violation of the insider trading prohibitions of Rule 10(b)(5) of the Exchange Act;

  • problems involving transactions in stock under Section 16 of the Exchange Act; and

  • manipulative trading in employer securities.

Rule 10b5 prohibits "insiders" from purchasing or selling securities while in possession of "material, nonpublic information" regarding an issuer of securities. Although the trustee of an employee benefit plan could be considered an "insider," generally, the knowledge of employees or directors participating in the plan would not be attributable to the trustee.

Section 16(a) of the Exchange Act requires that officers, directors, and owners of employer securities greater than 10 percent (so called "insiders") file periodic reports disclosing their ownership of employer securities. Where an employee is allocated employer securities under a plan subject to ERISA, the employee will be deemed the beneficial owner of the securities, not the plan.

Office Of The Comptroller Of The Currency

The OCC is the primary regulator of national banks under the National Bank Act. The OCC is authorized to adopt regulations to enforce compliance with 12 U.S.C. § 92a, which it has done at 12 C.FR. § 9. A main focus of so called Regulation 9 is the provisions governing common and collective investment trusts.

A bank or trust company may establish and maintain common trusts or collective investment trusts for the investment of qualified retirement plan funds. Under a common or collective investment trust, a bank commingles the assets of several individual trusts and invests those assets collectively. This permits each participating trust to enjoy greater diversification and investment opportunities than otherwise might be available to it individually. This also permits each participating trust to benefit from the economies of scale offered by collective investments.

Common Trusts. Banks generally establish "common trust" funds for personal trust accounts (e.g., estate planning customers). These accounts are usually taxable. However, banks often establish separate common trust funds for commingling tax-exempt foundation monies (separate from the taxable, personal trust funds). OCC Reg. § 9.18(a)(1) provides that a national bank may invest assets it holds as a fiduciary in the following collective investment funds:

(1) A fund maintained by the bank, exclusively for the collective investment and reinvestment of money contributed to the fund by the bank, or by one or more affiliated banks, in its capacity as trustee, executor, administrator, guardian, or custodian under a uniform gifts to minors act.

Accordingly, we sometimes call common trust funds "9.18(a)(1) funds." A common trust will need to satisfy the requirements of OCC Reg. § 9.18 even if a state chartered bank or trust company establishes it.

A common trust is taxed as a partnership under Code Section 584. The income of the common trust is passed through to the investing entities and taxed (if at all) at that level only. Where the investing entities are tax exempt entities, such as endowments or qualified retirement plans, such entities do not pay tax on the passthrough investment income of the common trust.

Collective Investment Trusts. Banks generally establish "collective investment trusts" for employee benefit plan investors. OCC Reg. § 9.18(a)(2) provides that a national bank may invest assets it holds as a fiduciary in a collective investment fund "consisting solely of assets of retirement, pension, profit sharing, stock bonus, or other trusts that are exempt from federal income tax."

Securities Law Issues. Interests in common and collective investment trusts that are "maintained by a bank" are securities exempt from registration under the federal securities laws. If the bank is deemed to "maintain" such funds, the common and collective investment trusts also are excluded from the definition of investment companies required to register under the Investment Company Act of 1940 (ICA).

The SEC consistently has taken a position that is hostile to bank-sponsored common and collective investment trusts by narrowly construing the explicit registration exemption under the ICA. The SEC is spurred on by the Investment Company Institute, which represents mutual funds (providing competing investment products). Specifically, the SEC interprets the exemption to apply only when the underlying trust relationship is created for bona fide fiduciary purposes rather than as an investment vehicle for the public.

Michael S. Melbinger is the lead partner and global head of Winston & Strawn's employee benefits and executive compensation practice group. He can be reached at (312) 558-7588.

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