DOL Provides Guidance on ERISA Plan Master Trust Reallocations

The Department of Labor (the "DOL") issued Advisory Opinion 2003-10A under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This advisory opinion addresses whether the reallocation of employer securities from the account of one plan participating in a master trust to the accounts of the other plans participating in the master trust constitutes an "acquisition" of employer securities that would be subject to the restrictions of Section 407(a) of ERISA, including the limitation that no more than 10% of each plan’s assets be invested in employer securities. In the situation described in the advisory opinion, a master trust held the assets of five defined benefit pension plans. One of these plans was being merged with another plan not in the master trust and such other plan could not hold the employer securities held by the master trust. To facilitate this plan merger, the employer proposed to reallocate the departing plan’s interest in the employer securities to the remaining four plans, and at the same time allocate to the departing plan a portion of the remaining plans’ interests in the other assets of the master trust (with the same value as the reallocated interest in the employer securities). The DOL stated that the reallocation would be an "acquisition" for this purpose, and therefore that the reallocation could not be made to the extent that it caused more than 10% of the assets of any of the remaining plans to be invested in employer securities. Moreover, the DOL further stated that to the extent a common fiduciary represents all of the plans involved in the transaction, the exchange of assets among the plans participating in the master trust would violate Section 406(b)(2) of ERISA, which provides that a fiduciary shall not in his or her individual capacity or in any other capacity act in any transaction involving a plan on behalf of a party whose interests are adverse to the interests of the plan. This latter statement, if applied broadly, could present significant difficulty for the operation of master trusts generally.

The OTS published a memorandum ("Memorandum") regarding how thrifts and thrift holding companies should concurrently comply with: (1) the SEC’s new rules (pursuant to the Sarbanes -Oxley Act of 2002 ("Sarbanes")) on management reports on financial reporting (see the June 10, 2003 Alert), and (2) the internal control reporting requirements under the Federal Deposit Insurance Act, as implemented by Part 363 of the FDIC’s rules. The Memorandum notes that the reports required under the foregoing are similar, and that the SEC and the banking regulators have coordinated to develop a single management report that satisfies both standards. More specifically, the combined report must contain: (1) a statement of management’s responsibility for preparing annual financial statements, maintaining adequate internal controls, and the company’s compliance with safety and soundness rules; (2) the framework management uses to evaluate effectiveness with internal controls over financial reporting; (3) management’s assessment of the effectiveness of these controls over the past year (and any material weaknesses); and (4) a statement that the public accounting firm has issued an attestation report on management’s internal financial reporting assessment. Thrifts should file reports with the OTS and other appropriate bank regulators and holding companies should file reports with the SEC and appropriate banking agencies. The Memorandum also states that organizations subject to Part 363 reports will not become subject to the SEC requirements until they have filed one or two annual Part 363 reports.

The SEC delcared effective an extension of the expiration date of NASD Interpretive Material 2210-5 ("IM-2210-5") and NASD Rule 2210(c)(3) relating to the use of bond volatility ratings from August 31, 2003 to August 31, 2005. IM-2210-5 permits supplemental sales literature (mutual fund sales material that is accompanied or preceded by a fund prospectus) to include bond fund volatility ratings if the following conditions are met: (1) the word "risk" may not be used to describe the rating; (2) the rating must be the most recent available and be current to the most recent calendar quarter ended prior to use; (3) the rating must be based exclusively on objective, quantifiable factors; (4) the entity issuing the rating must provide detailed disclosure on its rating methodology to investors through a toll-free telephone number, a web site, or both; (5) a statement including information such as the name of the entity issuing the rating, the most current rating and the date it was issued, and a narrative description of the rating containing certain specified disclosures must accompany the rating. Rule 2210(c)(3) requires bond mutual fund sales literature that includes volatility ratings to be filed with the NASD for approval prior to use. Since February 2000, when IM-2210-5 was first promulgated, the NASD received a total of 41 submissions from three NASD members. Because the NASD believes that this number of filings is inadequate to evaluate the IM -2210-5’s effectiveness and that an interest rate evironment more suitable to the use of bond volatility ratings is likely to exist in the next two years, it proposed the extension to allow more filings to be made. Although it declared the extension effective upon filing and requested public comment with a submission deadline of September 11, 2003, the SEC may abrogate the change on or before October 6, 2003 under certain conditions.

The FRB issued a supervisory letter ("FRB Letter 03-6") reminding bank holding companies and state member banks ("Financial Institutions") of the restrictions imposed on Financial Institutions that are in "troubled condition." A Financial Institution is in "troubled condition" if it: (1) has a composite rating of 4 or 5; (2) is subject to a cease and desist order or formal written agreement that requires action to improve the Financial Institution’s financial condition (unless the FRB advises the Financial Institution in writing that it is not deemed in troubled condition); or (3) the FRB otherwise advises the Financial Institution that it is in troubled condition. Financial Institutions that are in troubled condition are subject to restrictions on "golden parachute" severance payments and on the appointment of new directors and senior executive officers. Under Section 18(k) of the Federal Deposit Insurance Act (with certain exceptions), restricted "golden parachute" payments are defined as payments "in the nature of compensation" to a current or former "institution-affiliated party" ("IAP") of the Financial Institution in a troubled condition, which payments are contin gent on the IAP’s termination of employment. Under Section 32 of the Federal Deposit Insurance Act, a Financial Institution in a troubled condition must give the FRB 30 days’ prior written notice of the appointment (or change in the responsibilities of) any director or senior executive officer. The FRB may disapprove a notice if the FRB determines that "the competence, experience, character or integrity of the proposed individual indicates that such service would not be in the best interest of the [Financial Institution’s] depositors or the public. FRB Letter 03-6 states that Financial Institutions in troubled condition should have monitoring programs in place to ensure compliance with these restrictions on severance payments and appointments. FRB Letter 03-6 also notes that in the event a Financial Institution makes an impermissible "golden parachute" payment, appropriate supervisory action (that may include the offending IAP’s reimbursement of the Financial Institution) should be taken. Appropriate supervisory action should also be taken if a Financial Institution in troubled condition fails to file the required prior notice with respect to the appointment or reassignment of a director or senior executive officer.

Seventh Circuit Holds TILA Disclosures Need not Disclose Dollar Amounts The U.S. Court of Appeals for the Seventh Circuit (the "Seventh Circuit Court") held that a lender had not violated the disclosure requirements of Section 1638(a)(6) within the federal Truth In Lending Act ("TILA") simply because the lender did not disclose the exact dollar amount of the final balloon payment of the loan. The lender’s documents instead describe the final payment as "the balance of unpaid principal and interest to be paid in full." While noting that the statute and regulations do not define the term "amount" within TILA, the Seventh Circuit Court relied on the common meaning of the term, as well as the general context of TILA, to rule that "it is safe to conclude that the word ‘amount’ in [Section] 1638(a)(6) does not necessarily equate to ‘dollar figures.’" In addition, the Seventh Circuit Court held that an overdisclosure of the TILA "finance charge" did not constitute a violation. Carmichael vs. The Payment Center, Inc., 7 th Circ. (July 17, 2003).

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