DoL: No 404(c) Safe Harbor in Fiduciary Breach Case

Solis issued the warning in a friend of the court brief filed with the 6th U.S. Circuit Court of Appeals in Tullis v. UMB Bank, in which Solis argued that the lower court misread the safe harbor clause in the Employee Retirement Income Security Act (ERISA). The 404(c) provision was never intended to remove all legal liability from a fiduciary against the impact of their own failures in carrying out their plan duties, Solis contended.

“The Secretary has a significant interest in ensuring that section 404(c), and her regulations giving effect to that provision, are not read to immunize fiduciaries from liability for losses caused by the fiduciaries’ own failure to disclose its knowledge of the investment advisor’s history of misconduct with plan assets, its negligent processing of imprudent and even fraudulent transactions at the direction of the advisory, and its uncritical transmittal of inflated account values provided by the advisor,” the brief said.

Solis asserted that the 404(c) safe harbor defense applies only where a participant exercises control over his or her investments and the loss caused by imprudent conduct “results from” such exercise of control, which was not true in the current case.

Physicians David H. Tullis and Michael S. Mack participated in the Toledo Clinic Employees’ 401(k) Profit Sharing Plan. In the early 1990s, Tullis and Mack chose William Davis of Continental Capital Corp. as their investment adviser (see “Case Sensitive: Shield Law”).

In 1999, the Securities and Exchange Commission (SEC) entered a temporary restraining order against Continental Capital because two of its brokers were engaged in fraudulent activities. Tullis and Mack alleged that the plan’s trustee, UMB Bank, knew of this fraud, yet failed to inform them of it.

In 2001, UMB Bank filed a lawsuit against Davis and Continental Capital on behalf of the plan alleging that several investments made by David and Continental Capital were improper or simply never took place. Tullis and Mack asserted that UMB, even after filing the lawsuit, never informed them of the fraudulent activities.

Tullis alleged that as of February 2003, UMB had represented that his plan account was $724,561, when in fact it was only $142,269. Mack asserted that UMB represented that his account was valued at $1.6 million when it was worth only $420,794.

Also included in the DoL brief was an argument that the losses stemming from UMB’s actions resulted from UMB’s breaches of its ERISA fiduciary duties. “Allowing a fiduciary to engage in such conduct that directly contributed to the participants’ losses effectively renders hollow ERISA’s fiduciary provisions in section 404(a) and reads the causation limitation implicit in the ‘results from’ language in section 404(c) out of the act,” the brief said.