ROLESRESPONSIBILITIES OF ESOP FIDUCIARIES LAS VEGAS CONFERENCE November

ROLES/RESPONSIBILITIES OF ESOP FIDUCIARIES LAS VEGAS CONFERENCE November 8 -9, 2012 Las Vegas, NV Michael R. Holzman Dickinson Wright PLLC Daniel M. Reser Patrick De Craene Fiduciary Services, Inc. Great. Banc Trust Company

Session Introduction The objectives of this session are: Ø Overview of the duties and responsibilities as an ESOP Fiduciary/Trustee Ø Discuss practical situations and “best practices” Ø Share experiences 2

Who is an ERISA Fiduciary? Ø Anyone who has discretion or control over Plan Assets: Ø Plan Sponsor/Board of Directors: appoint/remove other fiduciaries; oversight Ø Trustee (directed or discretionary): Record owner of shares held by ESOP; must act for the “exclusive benefit” of participants; votes shares (but may be directed as to voting) Ø ESOP Committee (if any): interprets plan; reviews claim appeals; may direct trustee as to how to vote shares; may be Plan Administrator also Ø Plan Administrator/Plan Committee Ø Valuation Firm: annually appraises ESOP shares; may perform valuation of, or financial advisory service for, specific transactions? (Are they a “fiduciary” and are they “independent”) 3

Define Trustee’s Role vs. Plan Administrator: Types of Trustees Ø Individual Internal Trustees Ø Frequently officers/employees of the Company Ø Pros and Cons Ø Independent Trustees Ø Could be an independent individual, however, Institutions usually fill this role (banks, trust companies, etc. ) Ø Limited transactional vs. ongoing Ø Pros and Cons Ø Directed Trustees Ø Receives direction from insider fiduciaries or independent fiduciaries Ø Similarities and Differences Ø Responsibilities Ø Risks Ø Judicial deference Ø Duties and responsibilities of the “Fiduciary” are defined in Plan and Trust documents 4

What Are the Legal Aspects of Being an ESOP Fiduciary? Ø A Fiduciary must: Ø Discharge duties solely in the interests of the Plan Participants Ø Discharge duties with care, skill, prudence and diligence Ø Under the circumstances then prevailing Ø That a prudent person acting in a like capacity and familiar with such matters would use Ø In the conduct of an enterprise of a like character and with like aims Ø Act in accordance with plan documents Ø Insofar as such documents are consistent with ERISA and other applicable law Ø Steer clear of prohibited transactions Ø Related-party sales Ø Loans 5

Fiduciary Duties: Plan Sponsor vs. Plan Administrator vs. Trustee: Plan Sponsor/Administrator Trustee Purchases and Sales of Company Stock Invest trust assets Determine value of company stock Repurchase liability Executive Compensation Actions of Prior Fiduciary Vote Shares held within ESOP Process Distributions Non-routine Events 6

Fiduciary Duties Regarding a Purchase or Sale of Company Stock Ø Prudence and the exclusive benefit rule Ø Is the purchase a prohibited transaction? Ø Conduct Due-Diligence Investigation Ø Financial matters (Adequate Consideration) Ø Legal matters Ø Consider impact on existing shares held by the ESOP Ø Ø Ø Ø Negotiate Price – Adequate Consideration Fairness Documentation Role of Conflicts Highly Scrutinized Plaintiffs’ Bar DOL 7

Fiduciary Duties Regarding the Investment of Trust Assets Ø Prudence and the exclusive benefit rule Ø Investment Policy Statement Ø Review of risk and return Characteristics Ø Duty of Diversification Ø Trustee Ø Plan Administrator (if the Trustee is Directed) Ø Investment Advisor 8

Fiduciary Duties Regarding the Valuation of Company Stock Ø Determining Value/Stock Price – The Trustee is responsible. Ø What should the Trustee do with the valuation report? Ø Process for accepting the report from valuation firm Ø Is appraiser independent? Ø Review the report Ø Ask questions Ø Review the approaches Ø Unique circumstances Ø Have questions been answered and documented? Ø Need to understand the valuation 9

Other Valuation-related Information that the Trustee should Consider: Ø Overall solvency of the Company Ø Necessity of the Trustee to discuss issues with management Ø Repurchase Liability 10

Fiduciary Duties Regarding Repurchase Obligation Ø Plan Sponsor must meet the obligation Ø Internal versus External studies Ø Sustainability Ø Effect on Valuation Ø Cash Flow Ø Balance Sheet Ø What happens when you fail to plan? 11

Fiduciary Duties Regarding Executive Compensation Ø Board of Directors Ø Fair and Reasonable Ø Trustee Duty to monitor Board actions Ø Dilutive effects of equity compensation Ø 409(p) Ø Effect on valuation - Delta Star, Inc. vs. Patton 76 F. Supp. 2 d 617 (W. D. Pa. 1999); Johnson vs. Couturier 2009 WL 2216805 (9 th Cir. July 27, 2009) 12

Fiduciary Duties Regarding the Actions of a Prior Fiduciary Ø Duty to Investigate Barker v. American Mobile Power Corp. (9 th Cir. ) Ø Department of Labor view, DOL 1976 Advisory Opinion Ø In Fernandez v. K-M Indus. Holding Co. (9 th Cir. ), the Court relied upon a Department of Labor opinion and the common law of trusts and held that while the Successor Trustee could not be held vicariously liable for the breaches of fiduciary duty by Moore, it was potentially liable under § 1005 for its failure to remedy the alleged breaches of fiduciary duty that took place before it was appointed trustee if it failed to act despite its knowledge of the breaches Ø Co-fiduciary liability Silverman v. Mutual Benefit Life Insurance Co. (2 nd Cir. ) 13

Fiduciary Duties Regarding the Voting Ø Trustee Votes Ø Is the Trustee directed? Ø Investigation and documentation Ø Pass-Through Vote to Participants Ø Merger, consolidation, liquidation, sale of substantially all company assets, “organic changes” Ø Voluntary Participant Voting for Board of Directors Ø Adequacy of information provided to participants Ø Ensure Voting Safeguards, confidentiality Ø Potential for Conflicts Ø Voting for yourself Ø Should you abstain? 14

Fiduciary Duties vs. Ministerial Duties Ø Recordkeeping Trust/Accounting Ø Payment of the ESOP loan Ø Notify the Company of pending loan payments due Ø Collect the loan payments from the company and make the necessary payments to the bank or back to the company (DOL) Ø All loan payments need to be run through the trust even if the loan is from the company (IRS and DOL) Ø Working with TPA, calculate the release of the shares as per the loan documents and make sure that all covenants have not been violated (DOL) 15

Fiduciary Duties vs Ministerial Duties Ø Allocations/5500/Annual Audit: Ø Who should check the Allocation Reports to insure that they are correct? Ø Verify the release of shares Ø Spot check the allocations Ø Verify the number of shares on the reports to the Trust Ø Statements for both the allocated and unallocated shares Ø Look at the results of the 409(p) test for Sub S ESOPS. Is there a non-allocation year? 16

Fiduciary Duties vs Ministerial Duties Ø Distributions: Ø The Trustee makes the distributions to the plan participants as directed by the Plan Administrator. Ø The distributions should be verified to the allocation reports before checks are issued. Ø Prepare the check or stock certificates (if shares are to be paid out). Ø Compute income tax withholding. Prepare the appropriate tax reporting forms and send withholding timely to the IRS. 17

ESOP Stock Recycling vs. Corporate Stock Repurchase Ø If the Company purchases distributed ESOP shares, is it a Fiduciary decision? Ø If the ESOP purchases distributed ESOP shares, is it a Fiduciary decision? Ø What if Company offers to repurchase ESOP shares from the ESOP so that the ESOP can distribute cash in lieu of shares? Ø If stock is sold by the ESOP to the Company, the sale is a party-in-interest transaction and must be done at or below fair market value as determined at time of the sale, not as of last annual valuation date. 18

Fiduciary Duties in Non-Routine Events Ø Sale of Company Ø Asset sale or merger Ø Stock sale Ø Acquisitions of other companies Ø Refinancing of ESOP loan balance(s) 19

Liability for Breach of Duty Ø ERISA Section 409(b) Ø Penalties for Violation of Prohibited Transaction Rules Ø Indemnification Ø Liability for Breach of a Co-Fiduciary 20

Indemnification Issues Ø Review indemnification agreements Ø Review level of ERISA fiduciary liability coverage for adequacy; take defense costs into account Ø Board of Directors – annual review of actions of ESOP Trustee (including stock valuations); seek independent, competent advice of executive compensation and board fees 21

Thank You Michael R. Holzman Daniel M. Reser Patrick J. De Craene DICKINSON WRIGHT PLLC 1875 Eye Street NW, Washington, DC 20006 Tel: 202 -659 -6931 mholzman@dickinsonwright. com FIDUCIARY SERVICES, INC. 369 -B Third Street, #543 San Rafael, CA 94901 -3581 Tel: 415 -482 -9513 Fax: 415 -276 -1736 dreser@fiservinc. com GREATBANC TRUST COMPANY 801 Warrenville Road Suite 500 Lisle, Illinois 60532 Tel: 630 -810 -4500 Fax: 630 -810 -4501 pdecraene@greatbanctrust. com