Compliance March 20, 2009

Investment Advice Rule Implementation Delayed

The U.S. Department of Labor (DoL) has delayed the effective date of its final rules about providing retirement plan participant investment advice.
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In the final rule published in the Federal Register on March 20, the DoL said it is postponing the effective and applicability dates of its final rules from March 23, 2009, until May 22, 2009, “to allow additional time for the Department to evaluate questions of law and policy concerning the rules.”

According to the document, a number of commenters expressed the view that the final rules raise significant issues of law and policy that should be further reviewed by the Department. Specifically, questions were raised as to the scope of the final rules’ administrative class exemption, and disagreement was expressed with the interpretation of the statutory exemption’s conditions contained within the final rules.

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Some commenters said the regulation did not adequately protect those in retirement plans from conflicted investment advice providers, and some lawmakers said the investment advice regulation “exceeds Congressional authorization’ (see “Controversy Brews over Investment Advice Regs’).

The final rule issued in January provided general guidance on the Employee Retirement Income Security Act exemption’s requirements, including computer model certification and disclosures by fiduciaries. The regulation also included a model form to assist advisers in satisfying the exemption’s fee disclosure requirement, and a class exemption expanding the availability of investment advice (see “DoL Finalizes Investment Advice Rule’).

Compliance March 20, 2009

ERISA Breach Suit Filed Too Late

A suit filed by a plan that suffered investment losses in a Ponzi scheme was filed a month too late.
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The 4th U.S. Circuit Court of Appeals ruled that the fiduciary breach suit by a trustee of Browning Equipment’s 401(k) Profit Sharing Plan over $525,000 in investment losses was not filed soon enough. The court said that trustee Jeffrey Browning knew by February 19, 2002, that a $550,000 investment made by the plan had gone bad. The plan was a victim of what a court would later term a Ponzi scheme.

So, in agreeing with the ruling of a lower court, the 4th Circuit decided that Browning’s March 18, 2005, suit over the investment was beyond the three-year time limit under the Employee Retirement Income Security Act (ERISA) that expired February 19, 2005. The plan is maintained by the Purcellville, Virginia-based Browning Equipment, a Virginia tractor sales and services company.

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Browning alleged in the suit that benefits consultant Theodore Reeder and broker David Duvich committed the fiduciary breach through their roles in getting the plan in April 1999 to put $550,000 into what was supposed to be a 180-day note that would pay 9.25% interest.

According to the 4th Circuit, the note never paid off when it was due in October 1999 and “there is no evidence suggesting that the Trustees inquired as to why payment was not received,” the court decision said. The plan ended up only getting one payment of $25,317.

U.S. Capital Funding, the investment firm offering the promissory note investment, was “in reality a Ponzi scheme,” according to the court.

“Because we do not believe that the nature of the transaction was overly factually complex (it involved the purchase of only a single promissory note), and because the alleged breach by the (defendants) is quite egregious (the entire purchase price of $555,000 was unrecoverable), we conclude that the aforementioned facts taken together more than establish that the Trustees had actual knowledge … no later than February 19, 2002,” the court said.

The appellate judges said it was unnecessary to decide whether the defendants were, in fact, ERISA fiduciaries because of the finding about the suit being filed after the deadline.

ERISA generally requires that fiduciary breach claims be brought within six years after the breach occurs or within three years after the claimant has actual knowledge of the breach, whichever is earlier.

The court ruling is available here.

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