DIRECTORS & OFFICERS AND FIDUCIARY LIABILITY INSURANCE FOR ESOPS: The Exposure, the Solutions, the Marketplace

Transcription

1 DIRECTORS & OFFICERS AND FIDUCIARY LIABILITY INSURANCE FOR ESOPS: The Exposure, the Solutions, the Marketplace ESOP MIDWEST REGIONAL CONFERENCE Bloomington, Minnesota September 11, 2015 TED BECKER Drinker Biddle & Reath LLP 191 North Wacker Drive Suite 3700 Chicago, IL RYAN ANDERSON Vice President Hays Companies of Minneapolis IDS Center Suite South 8 th Street Minneapolis, MN randerson@hayscompanies.com MICHELLE CARTER AVP Executive Risk Hays Companies of Minneapolis IDS Center Suite South 8 th Street Minneapolis, MN mcarter@hayscompanies.com

2 Agenda o Overview o Types of Claims o Practices to Avoid Litigation/Defend Claims o Fiduciary Protection o When Claim is Made 2

3 Overview o Who gets sued? o ESOP Fiduciaries o Trustee o Fiduciary Committees (and members) o Appointing Fiduciaries o Functional Fiduciaries o Recordkeeper o Company Directors and Officers o Other Service Providers 3

4 Overview o Lawsuits o Participant actions o Plaintiffs must report lawsuits to Department of Labor (DOL) o DOL actions o Successor Trustee actions 4

5 Overview o Government Investigations o Department of Labor investigations/irs audits o Disgruntled employees/plan participants may file complaints with DOL o DOL ESOP Task Force 5

6 Types of Claims o ESOP Transaction Claims o Prohibited Transactions o Valuation Claims o Stock declines (or increases) in value postvaluation o Misrepresentation/Omission Claims o Plan fiduciaries knew or should have known about the circumstances adversely affecting the company, and breached their fiduciary duty by affirmatively misleading or failing to act appropriately 6

7 Types of Claims Department of Labor Actions: o Broad subpoena and investigatory powers o o o Standing is not an issue o ERISA grants Secretary of Labor standing to sue Can lead to criminal indictments in addition to civil penalties o Willful violation of ERISA reporting and disclosure requirements up to $5,000 in fines per individual, $100,000 for entities, and o possible 1 year imprisonment Knowingly making false statements or concealing or failing to disclose any fact needed to prepare ERISA reports - $10,000 fine, 5 years imprisonment, or both Statute of Limitations o May be suspended under Tolling Agreement 7

8 Types of Claims Remedies Sought: o Recovery of money due Plan o Equitable remedies o Attorney Fees o Statutory penalties o $110/day for reporting violations o 502(l) penalty for fiduciary breach; 20% of recovery amount o DOL may seek removal of trustees and bar orders o Report to IRS 8

9 Practices to Avoid Litigation/Defend Claims o More formalized corporate governance structures to eliminate possible conflicts of interest o Outside directors o Independent trustees/fiduciaries o Pro-active management and monitoring o Board committees to delineate roles and responsibilities o Audit, Compensation, Corporate Governance, ESOP, Investment, and Nominating Committees 9

10 Practices to Avoid Litigation/Defend Claims o Counseling and Advice o Attorneys o Financial Advisors o Valuation Advisors o Third-Party Administrators o Compensation Consultants o Independent Fiduciary 10

11 Practices to Avoid Litigation/Defend Claims o Communication o Communication among Board of Directors, management, and fiduciaries o Accurate and timely communications with employees/plan participants 11

12 Practices to Avoid Litigation/Defend Claims o Properly Appoint Fiduciaries o Carefully evaluate candidates and document the selection process o Verify that candidates qualifications are consistent with their duties o Require that those to whom responsibility has been formally delegated assume an active role and exercise that responsibility o Provide training to internal fiduciary candidates 12

13 Practices to Avoid Litigation/Defend Claims o If you are an Appointed Fiduciary Know your Fiduciary Duties o Follow the Plan documents o Avoid: o Conflicts of Interest o Self-Dealing o Prudent investment of Plan assets o Proper disclosure to participants 13

14 Practices to Avoid Litigation/Defend Claims o Monitor Fiduciaries o Appointing fiduciaries should communicate with appointed fiduciaries and monitor their actions o Performance o Fees and costs o Significant events o Replace non-performing fiduciaries 14

15 Practices to Avoid Litigation/Defend Claims o Properly utilize committees o ESOP Committee Consider baking plan administration into the plan document o If the ESOP Committee is the Plan Administrator, the ESOP Committee should administer the plan o Investment Committee o Consider non-officers and non-board members for appointment to committees o Confirm and monitor compliance with investment policy o Work with independent fiduciary with respect to company stock 15

16 Practices to Avoid Litigation/Defend Claims Valuation - Know the requirements o Fair Market Value o The Trustee is the responsible party for setting value o Prudent Process: o Review the report o Ask questions o Review the valuation approach(es) o Review and question methodology used to determine value o Document the review process 16

17 Practices to Avoid Litigation/Defend Claims o Results versus Process ( Prudence, not Prescience ) o Courts are concerned with Process o Proof of process is often the key component of a winning case o Fair market value a matter of opinion a good faith determination is required o Investigation o Prudent Process vs. End Result 17

18 Practices to Avoid Litigation/Defend Claims o Document the Process o Document all decisions, including steps taken to make decisions o Develop and follow written investment policy o Take minutes of meetings 18

19 Fiduciary Protection o Protecting ERISA Fiduciaries o Hold Harmless provisions are void under ERISA o Indemnification agreements can be valid if properly structured and drafted o Indemnification Agreements o Review structure o Review parties o Review legal fee advancement provisions o Review limitations o Review Board authorization o Review for compliance with ERISA 19

20 Fiduciary Protection What if a claim cannot be avoided? INSURANCE! 20

21 Fiduciary Protection Basic review of Management & ERISA-related policies o Directors & Officers (D&O) o Fiduciary Liability o Fidelity Bond 21

22 Fiduciary Protection o Directors & Officers (D&O) Liability o What is it? o Written primarily to protect the personal assets of a company s directors & officers (and company assets to the extent that it indemnifies the directors/officers) o What types of claims does it cover? o Claim alleging a breach of duty: o Duty of Care o Duty of Loyalty o Duty of Obedience 22

23 Fiduciary Protection What is not covered in a D&O policy: o misconduct claims (dishonest acts, fraud, criminal behavior, etc.) o insured versus insured claims (one director suing another director) o Claims arising from data breaches o ERISA claims and ERISA (ESOP) Plan fiduciaries 23

24 Fiduciary Protection o Fiduciary (ERISA) Liability Insurance o What is it? o Intended to protect the personal assets of ERISA (ESOP) Plan fiduciaries and the Company s assets to the extent that it indemnifies the plan fiduciaries o Also can protect the Plan from administrative errors 24

25 Fiduciary Protection When does Fiduciary Liability coverage respond? o Claim alleging a plan fiduciary breached its duty, as defined by ERISA: o Duty of Loyalty o Duty of Diversification o Duty of Non-Deviation o Duty to comply with plan documents 25

26 Fiduciary Protection Fiduciary Liability Insurance: o Coverage does not respond to dishonest or criminal acts such as fraud o Most Fiduciary Liability Insurance policies are silent on non-indemnifiable loss, but Fiduciary Liability Insurance policies should be written to expressly cover non-indemnifiable loss o Common Exclusions found in Fiduciary Liability Insurance policies 26

27 Fiduciary Protection o Fidelity Bond o ERISA requirements for each plan o Marketable securities = $1,000,000 27

28 Fiduciary Protection Higher D&O limits? Higher Fiduciary limits? Both? o Who are the key decision makers for the business? o Internal/External Trustee? o What is the appropriate amount of coverage? Limits a philosophical question o Risk averse? o Attracting & retaining top talent for your company o Benchmarking data 28

29 Fiduciary Protection Underwriting o How can I make my ESOP more attractive to an underwriter? o How policies are rated o D&O o Fiduciary Liability Insurance o What do underwriters look for? 29

30 When a Claim is Made o Contact Attorney Immediately o Promptly Notify insurance carrier of Claim/Suit o Issue Litigation-Hold Memorandum o Communications Issues o Multiple Defendants Issues 30

31 Questions? TED BECKER Drinker Biddle & Reath LLP 191 North Wacker Drive, Suite 3700 Chicago, IL RYAN ANDERSON Vice President Hays Companies of Minneapolis IDS Center Suite South 8th Street Minneapolis, MN MICHELLE CARTER AVP Executive Risk Hays Companies of Minneapolis IDS Center Suite South 8th Street Minneapolis, MN

32 Theodore M. Becker Ted Becker is a partner in the Drinker Biddle & Reath LLP law firm. He has a national practice with more than 25 years of experience in litigation and dispute resolution. He has represented companies that sponsor ESOPs and other benefit plans, their directors and officers, external and internal plan fiduciaries, administrators, investment advisors, and service providers in lawsuits and investigations by regulatory agencies. He represents clients along the entire dispute continuum, from litigation avoidance and pre-litigation planning through pre-trial motions, discovery, trial, and appeal. He practices before the U.S. Supreme Court, federal and state trial and appeals courts, and bankruptcy courts, as well as before administrative and regulatory agencies, and in arbitration, mediation, and alternative dispute resolution proceedings. He has successfully represented clients ranging from individuals and small companies to the largest financial institutions and multinationals. He earned his law degree with highest honors at Northwestern University, and was a fellow at Yale Law School, where he taught. 32

33 Ryan Anderson Ryan Anderson is a Vice President and the Executive Risk Practice Leader of Hays Companies, a holding company with operations that specialize in risk management consulting, insurance placement, employee benefits and retirement planning for businesses with all levels of risk and benefit requirements. Mr. Anderson has over 12 years of experience in the insurance industry, with particular focus on the Executive Risk Industry, including but not limited to Director s and Officer s Liability, Professional Liability, Fiduciary Liability and Fidelity Bonds. Mr. Anderson started his career in insurance in 2003 when he joined The St Paul Companies, which eventually merged with The Travelers Companies. Ryan continued on at Travelers serving as an Account Executive Officer in the Bond and Financial Products Division. During his years at Travelers, Ryan was able to focus on a vast array of customer segments including publicly- and privately-held organizations in a variety of industries as well as several niche markets such as Insurance Companies, Investment Advisers, and Private Equity Firms. In 2008 Ryan brought his experience and expertise to Hays Companies where he continues to broaden his industry knowledge. Mr. Anderson received his B.S. in Finance from the Carlson School of Management at the University of Minnesota. 33

34 Michelle Carter Michelle Carter is an Assistant Vice President at Hays Companies and consultant in the Executive Risk and Management Liability Insurance practice group. Michelle focuses on Cyber Liability Insurance and Technology Errors and Omissions placements working with clients nationwide and in a variety of industries. Prior to broking, she practiced law for 10 years in state and federal courts litigating and handling insurance coverage disputes. She earned her JD and MBA from the University of South Dakota. 34

35 Disclaimer o This communication is provided as a general informational service. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. 35