Miguel Paredes, MBA, CPFA Independent ESOP Trustee Prudent Fiduciary Services, LLC

Transcription

1 Presented by: Miguel Paredes, MBA, CPFA Independent ESOP Trustee Prudent Fiduciary Services, LLC 1 Field Offices 10 Regional Offices with two primary functions: Enforcement Conduct Investigations Provide Compliance Assistance Benefit Advisors 2 1

2 The Employee Benefits Security Administration protects the security of the retirement, health and other workplace related benefits of American workers and their families. The Agency accomplishes this by: developing effective regulations assisting and educating workers, plan sponsors, fiduciaries and service providers enforcing the law 3 Contributory Plans Criminal Project Rapid ERISA Action Team Employee Stock Ownership Plans Plan Investment Conflicts Health Benefits Security Project Abandoned Plan Program Voluntary Fiduciary Compliance Program 4 2

3 Major Case Enforcement ESOPs play a prominent role as major cases Employee contributions Initiative 5 Participant complaints Form 5500 Reviews Referrals from other agencies Media Other 6 3

4 Civil Plan Service Provider Criminal Individual Plan Service Provider Employer 7 Review of Plan Assets Prudence, Prohibited Transactions, Self Dealing Reporting and Disclosure Bonding General Plan Operations In accordance with Plan Document Remittance of Employee Contributions 8 4

5 Interviews with key personnel and plan fiduciaries Basic operations / services Contributions Benefit payments Expenses Investments Identification of Service providers Record-keeper(s) Record Review 9 Contribution records ESOP Transaction Documents Stock purchase agreements Stock certificates Stock appraisals Promissory notes, loan agreements Loan amortization/repayment schedules Share release schedules Stock allocation reports 10 5

6 Reporting Requirements Annual Report (Form 5500) Disclosure Requirements Summary Plan Descriptions (SPDs) Summary Annual Reports (SARs) Service Provider Disclosures 408(b)(2) Participant Benefit Statements & Disclosures 11 Fiduciary must Act solely in interest of Ps & Bs (Loyalty) Discharge duties prudently (Prudent Expert) (care, skill, prudence and diligence) Diversify plan investments (ESOPs exempt) Follow terms of governing documents (to the extent consistent with ERISA) 12 6

7 Fiduciary must NOT act in his / her / its own self interest act on behalf of a party with adverse interests accept gratuity from those doing business w/ the Plan (kickback) 13 Fiduciaries must NOT cause the Plan to engage in a prohibited transaction Sale / exchange with party in interest (PII) Loan / extension of credit with PII Goods, services & facilities with PII Transfer to, use by or for the benefit of a PII 14 7

8 Influence of DOL enforcement objectives Major Case initiative DOL career performance tied to enforcement results Lack of understanding of technical aspects of ESOPs 15 DOL focus on mostly three issues: Conflicts of Interest Company Stock Valuation Single biggest issue ESOP Company Abuse/Waste 16 8

9 Conflicts of Interest Internal Trustee vs. Independent Trustee No true negotiation Trustee rubber-stamping deals 17 ESOP fiduciaries not serious about their fiduciary obligations of care and loyalty The fiduciary s process itself is flawed Lack of independence Passive Trustees/over-reliance on advisors Lack of sufficient understanding of valuation Lack of proper documentation 18 9

10 ESOP fiduciaries not serious about their fiduciary obligations of care and loyalty The fiduciary s process itself is flawed Lack of independence Passive Trustees/over-reliance on advisors Lack of sufficient understanding of valuation Lack of proper documentation 19 Lack of qualified and independent appraisal firm Flawed valuation methodologies Unreliable or dated financial information Unreasonable financial projections Management projections conflicts Failure to consider different scenarios 20 10

11 Failure to appropriately discount for risk Unreasonable market comps Inappropriate adjustments to financials 21 ESOP equity interest considerations Warrants Too aggressive Not well understood (by DOL) Dilutive impact not evaluated/reflected Stock Appreciation Rights Disguised purchase price Excess compensation Dilutive impact not evaluated/reflected 22 11

12 Discount for lack of marketability Discount for lack of control Control premiums Threshold question is it reasonable to rely on the valuation? 23 Engage an experienced ESOP advisor Full cooperation and disclosure with your ESOP advisor Engage in prudent process when selecting Trustee Full cooperation and disclosure with Trustee 24 12

13 Implement ESOP Company best practices Corporate Governance best practices Involved ESOP Committee Engage experienced ESOP providers Third Party Administrator Trustee Valuation firm ESOP Training/Education 25 Depends on any problems identified If no problems are noted, closing letter If problems are noted, corrective actions are necessary 26 13

14 Usually, EBSA will send Notice Letter Identifies problems Offers chance to discuss correction EBSA encourages Voluntary Compliance Proper Correction >> Closing Letter Identifies problems & corrective actions No Correction >> referral to the Solicitor s Office 27 Depending upon the circumstances, DOL may seek Correction of prohibited transactions Restoration of losses Penalties Removal of fiduciaries Removal of service providers Appointment of independent fiduciary Implementation of new internal controls Supplemental distributions to Ps & Bs Final accounting 28 14

15 Miguel Paredes, MBA, CPFA Prudent Fiduciary Services 2648 E. Workman Ave, Ste West Covina, CA (626)