Review Of The Trustees’ DutiesUnder ERISA

Patrick J. De Craene

GreatBanc Trust Company

Michael R. Holzman

Dickinson Wright

Christopher T. Horner

Dickinson Wright

By Law (ERISA)• Fiduciary duties under ERISA Section 404(a)

• A fiduciary must discharge its duties:

• Solely in the interests of the participants and

beneficiaries

• For the exclusive purpose of providing benefits

and defraying reasonable expenses of

administering the plan

• With the care, skill, prudence, and diligence

under the then prevailing circumstances that a

prudent man acting in a like capacity would use

• In accordance with the documents and

instruments governing the plan and ERISA

By Law (ERISA)

Employee Retirement Income Security Act of 1974, as amended (“ERISA”):

1. Generally, ERISA requires that the assets of an employee benefit plan,including an employee stock ownership plan, be held in trust by oneor more trustees. ERISA §403(a).

2. The trustee must be either named in a trust instrument or in the planinstrument or appointed by a person who is a named fiduciary.ERISA §403(a).

3. Once the trustee accepts its appointment, the trustee enjoys exclusiveauthority and discretion to manage and control the assets of theplan, except…

By Law (ERISA)

1. Directed Trustee. If the plan instrument expressly provides that thetrustee is subject to the direction of a named fiduciary who is not atrustee, in which case the trustees shall be subject to proper directions ofsuch fiduciary which are made in accordance with the terms of the planand which are not contrary to ERISA, see ERISA §403(a); or

2. Investment Manager. if authority to manage, acquire, or dispose ofassets of the plan is delegated to one or more investment managers.ERISA §403(a).

Do You Have What It Takes to Be An ESOP Trustee?

ERISA charges an ESOP fiduciary with performing its obligations withthe care, skill, prudence, and diligence under the circumstances thenprevailing that a prudent man acting in a like capacity and familiar withsuch matters would use in the conduct of an enterprise of a likecharacter and with like aims. ERISA §404(a)(1)(B).

Quite often, an ESOP trustee is charged with determining the fairmarket value of employer securities. Are you “financially literate”? Areyou familiar with financial reporting, financial statement analysis, andappraisals of assets and equity?

Do You Qualify To Serve As An ESOP Trustee?

No person who has been convicted of, or has beenimprisoned as a result of his conviction of, robbery,bribery, extortion, embezzlement, fraud, grand larceny,burglary, arson, a felony violation of Federal or State lawinvolving substances defined in section 802 (6) of title 21,murder, rape, kidnaping, perjury, assault with intent tokill…any felony involving abuse or misuse of such person’sposition or employment in a labor organization oremployee benefit plan to seek or obtain an illegal gain atthe expense of the members of the labor organization orthe beneficiaries of the employee benefit plan, orconspiracy to commit any such crimes or attempt tocommit any such crimes, or a crime in which any of theforegoing crimes is an element, shall serve or bepermitted to serve as an ESOP fiduciary. ERISA §411(a).

Activities

Determining value of Company

Stock

Voting Employer Stock

Electing Board of Directors

Other General Duties

Long-term Analysis of ESOP

Determining the Value of Company Stock

SORRY……This will be covered in a separate

session on Friday morning

Determining the Value of Company Stock

United States Department of Labor Proposed Regulation2510.3-18(b).

1. ERISA defines the term “adequate consideration” tomean “the fair market value of the asset as determined ingood faith by the trustee or named fiduciary pursuant tothe terms of the plan and in accordance with regulationspromulgated by the Secretary.” ERISA 3(18)(B).

2. The proposed regulation expands on this definition:a) First, the value assigned to an asset must reflect its fair market

value as determined pursuant to proposed §2510.3-18(b)(2) . b)Second, the value assigned to an asset must be the product of a

determination made by the fiduciary in good faith as defined in proposed §2510.3-18(b)(3) .

Determining the Value of Company Stock

Seven DOL “hot topics” when purchasing or selling employer securities

1. Independence of the financial advisor

2. Understanding the financials

3. Question the reasonableness of projections

4. Understand the comparison to public companies

5. Identify and question underlying assumptions

6. Consistency between conclusions and data analysis

7. DOCUMENT YOUR PROCESS

Voting Employer Stock1. Discretionary Trustee vs. Directed Trustee

2. Evaluating Propriety ofVoting Directives

3. ParticipantVote Pass Through Code Section 409(e)(3)

Voting Employer Stock

Events under Section 409(e)

◦ Merger, Consolidation, Recapitalization,

Reclassification, Liquidation, Dissolution, Sale of

substantially all of the assets

Electing the Board of Directors

Follow plan voting provisions (e.g., “pass

through” and directed vs discretionary)

Knowledge of the nominated slate

Internal vs External Directors

Trustee Seat

Removal of a Director

Other General Duties• Understand the terms of the plan and approved policies

• Understand operational administrative forms

• Properly Account For Contributions, Dividends, and Distributions;

• Properly Remit Payments of Principal and Interest to Amortize Exempt Loan

• Coordinate with TPA to Accurately DocumentNumber of Shares Released and Allocated

• Review executive comp arrangements and identifyany concerns (e.g., dilution)

“Uncommon” Duties1. Sale of Sponsor to Third Party Buyer;

1. Applicability of Adequate Consideration Exemption from ProhibitedTransaction Rules. ERISA 406(a)(1)(A); ERISA 408(e)(1); ERISA 2(14)(definition of “Party In Interest”).

2. Corporate Transactions AffectingValue of Employer Securities

1. Stock Redemptions;

2. Repurchase Obligation; and

3. Synthetic Equity Awards.

3. Special Fiduciary Overseeing Civil Litigation.

1. Successor Trustee Liability. ERISA 409(b); ERISA 405(a)(3).

“Uncommon” Duties1. Successor Trustee Review of Predecessor Trustee;

1. No fiduciary shall be liable with respect to a breach of fiduciaryduty if such breach was committed before he became a fiduciary orafter he ceased to be a fiduciary. ERISA 409(b);

2. A fiduciary shall be liable for a breach of fiduciary responsibility ofanother fiduciary with respect to the same plan…if he hasknolwedge of a breach by such other fiduciary, unless he makesreasonable efforts under the circumstnaces to remedy the breach.ERISA 405(a)(3);

3. DOL Advisory Opinion 76-96; DOL Advisory Opinion 77-79; andDOL Advisory Opinion 77-80A.

2. Monitoring Co-Fiduciaries;

1. Knowingly Participates in or Conceals Fiduciary Breach;

2. Own Fiduciary Breach Enables Another Fiduciary’s Breach; and

3. Knowledge of a Breach and Fails to Take Reasonable Efforts toRemedy. ERISA 405(a).

Long Term Analysis of the ESOP Monitor ESOP repurchase liability

Examine the sustainability of the ESOP

Evaluate plan design changes

Collaborate with other ESOP professionals

Investment of non-employer securities

Review and payment of plan expenses

Thank you !

Patrick J. De Craene, GreatBanc Trust Company

Office: 630-810-4528

Email: pdecraene@greatbanctrust.com

Michael R. Holzman, Dickinson Wright

Office: 202-659-6931

Email: mholzman@dickinsonwright.com

Christopher T. Horner, Dickinson WrightOffice: 202-659-6961Email: chorner@dickinsonwright.com