UNITED STATES
DISTRICT COURT
NORTHERN DISTRICT OF
OKLAHOMA
IN RE: ) Case No. 02-CV-153-H(M)
WILLIAMS COMPANY ) (Lead Case)
ERISA LITIGATION ) Class
Action
) 02-CV-159-H(M)
) 02-CV-285-H(M)
____________________________________) 02-CV-289-H(M)
BRIEF OF THE
SECRETARY OF LABOR AS AMICUS CURIAE
SUPPORTING THE
PLAINTIFFS' MOTION FOR RECONSIDERATION
HOWARD
M. RADZELY
Acting
Solicitor of Labor
TIMOTHY
D. HAUSER
Associate
Solicitor
Plan
Benefits Security Division
ELIZABETH
HOPKINS
Counsel
for Appellate and
Special
Litigation
U.S.
Department of Labor
Office
of the Solicitor
Plan
Benefits Security Division
P.O. Box
1914
Washington,
D.C. 20013
Phone:
(202) 693-5614
Fax: (202) 693-5610
INTRODUCTION
As discussed below, those who have the authority to appoint
and remove plan fiduciaries are themselves fiduciaries and have an ongoing
obligation to monitor their appointees to ensure that they are fulfilling their
fiduciary obligations to the plan. The
Complaint in this case alleges that the members of the Williams Company Board
of Directors, who admittedly were charged with the duty to appoint, retain and remove
members of the Benefits Committee, breached their fiduciary duties under ERISA
by failing to monitor the Committee members and failing to provide them with
the information that they needed to carry out their investment
responsibilities. Complaint (Compl.) at
¶¶ 238-41, 251-52. The Secretary agrees
with the Plaintiffs that these allegations state a claim under ERISA and
accordingly joins in the Plaintiffs' motion to reconsider.
ARGUMENT
As the Fiduciaries Responsible for Appointing,
Retaining, and Removing Members of the Benefits Committee, the Board Had a Duty
to Monitor The Committee and to Take Appropriate Action If the Committee Was
Not Adequately Protecting the Interests of the Plan's Participants and
Beneficiaries
ERISA provides
that:
[A] person is a
fiduciary with respect to a plan to the extent (i) he exercises any
discretionary authority or discretionary control respecting management of such
plan or exercises any authority or control respecting management or disposition
of its assets, (ii) he renders investment advice for a fee . . . (iii) he has
any discretionary authority or discretionary responsibility in the
administration of the plan. Such term
includes any person designated [by the named fiduciaries to carry out fiduciary
functions] under [section] 405(c)(1)(B).
29
U.S.C. § 1002(21)(A).
The
Plaintiffs allege that the Plan gave the Board the power to appoint, remove,
and retain members of the Plan's Benefits Committee. As the officials responsible for determining the Committee's
composition, the members of the Board have the requisite discretionary
authority over plan management and administration, and are, therefore,
fiduciaries under 29 U.S.C. § 1002(21)(A).
Pursuant
to her authority to interpret and enforce the provisions of Title I of ERISA,
the Secretary has concluded that fiduciaries, such as Board members, who are
responsible for appointing other fiduciaries have fiduciary responsibility with
regard to the selection and retention of those fiduciaries. 29 C.F.R. § 2509.75-8 at D-4. The Secretary has further addressed the
"ongoing responsibilities of a fiduciary who has appointed trustees or
other fiduciaries with respect to these appointments" and concluded that:
At reasonable
intervals the performance of trustees and other fiduciaries should be reviewed
by the appointing fiduciary in such manner as may be reasonably expected to
ensure that their performance has been in compliance with the terms of the plan
and statutory standards, and satisfies the needs of the plan. No single procedure will be appropriate in all
cases; the procedure adopted may vary in accordance with the nature of the plan
and other facts and circumstances relevant to the choice of the procedure.
29
C.F.R. § 2509.75-8 at FR-17. In this
manner, the Secretary has interpreted the duty of appointing fiduciaries to
encompass a duty to periodically monitor the performance of the appointees so
as to ensure compliance with their fiduciary duties under ERISA and the
plan. This interpretation is entitled
to deference. The Black & Decker
Disability Plan v. Nord, 123 S. Ct. 1965, 1972 (2003) (giving deference to
the Secretary's view of the ERISA claims processing system as expressed in a
Q&A on the Department of Labor website); see also Meyer v.
Holly, 123 S. Ct. 824, 830 (2003) (deferring to HUD regulation specifying
that ordinary vicarious liability rules apply in administration of housing
statute); Chevron v. Echazabal, 536 U.S. 73, 83 (2002) (giving deference
to EEOC regulation interpreting Americans with Disabilities Act).
Moreover,
this view of the ongoing duties of appointing fiduciaries is well established
in the case law, which is virtually unanimous in recognizing a duty of
appointing fiduciaries to monitor their appointees. The courts have long recognized that "[t]he power to appoint
and remove trustees carries with it the concomitant duty to monitor those
trustees' performance." Liss v.
Smith, 991 F. Supp. 278, 311 (S.D.N.Y. 1998); accord Leigh v.
Engle, 727 F.2d 113, 135 (7th Cir. 1984), cert. denied, 489
U.S. 1078 (1989); Martin v. Feilen, 965 F.2d 660, 669-70 (8th Cir.
1992), cert. denied, 506 U.S. 1054 (1993); Mehling v. New York
Life Ins. Co., 163 F. Supp. 2d 502, 510 (E.D. Pa. 2001); Atwood v.
Burlington Indus. Equity, Inc., No. 2:92CV00716, 1994 WL 698314, at *6
(M.D.N.C. Aug. 3, 1994); Henry v. Frontier Indus., Inc., Nos. 87-3879
and 87-3898, 1988 WL 132577, at *3 (9th Cir. Dec. 1, 1988) (unpublished); Sandoval
v. Simmons, 622 F. Supp. 1174, 1211 (C.D. Ill. 1985); Restatement
(Second) of Trusts §§ 184, 224.
"[I]mplicit in [the appointing fiduciary's] power to select the
Plans' named fiduciaries is the duty to monitor the fiduciaries' actions,
including their investment of Plan assets." Mehling, 163 F. Supp. 2d at 510, citing Leigh, 727
F.2d at 134-35.
Moreover,
in discharging their duties, appointing fiduciaries must act in accordance with
ERISA's requirements of prudence and undivided loyalty, 29 U.S.C. §
1104(a)(1)(A) and (B). See Leigh,
727 F.2d at 134. It is simply
impossible for appointing fiduciaries to prudently determine whether to retain,
remove, or replace appointees, if they fail to properly monitor the appointee's
performance, as the Williams Board has allegedly failed to monitor the
performance of the Benefits Committee here.
Furthermore, "[d]epending on the circumstances, the director's duty
to monitor the actions of appointed trustees may impose a duty to prevent
wrongful conduct." Feilen,
965 F.2d at 669-70. This is because the
"duty to monitor carries with it, of course, the duty to take action upon
discovery that the appointed fiduciaries are not performing
properly." Liss, 991 F.
Supp. at 311. The precise contours of
the appointing fiduciaries' obligations will vary depending on the
circumstances of the case, Leigh, 727 F.2d at 135. But in most cases it will be enough that
they adopt and adhere to routine procedures sufficient to alert them to
deficiencies in performance which could require corrective action (e.g.,
the implementation of a system of regular reports on the investment fiduciaries'
decisions and performance). See generally Martin v. Harline, 15 Employee
Benefit Cas. (BNA) 1138, 1149 (D. Utah 1992) (corporate officers who appoint
must "ensure that the appointed fiduciary clearly understands his
obligations, that he has at his disposal the appropriate tools to perform his
duties with integrity and competence, and that he is appropriately using those
tools"); cf. Glaziers & Glassworkers Union Local 252 Annuity
Fund v. Newbridge Sec., Inc., 93 F.3d 1171, 1181-82 (3d Cir. 1996) (if
securities firm was itself a fiduciary, it could not sit silently by while
plans hired an individual to serve as a fiduciary who had left the firm after
an investigation for fraud, who was found by the firm to have engaged in fraud,
and who was referred to the National Association of Securities Dealers based on
his misconduct). See also
Amended Brief of the Secretary of Labor as Amicus Curiae Opposing the Motions
to Dismiss in Tittle v. Enron, CV No. H-01-3913 (S.D. Texas 1992), at
pp. 8-15 (Attached as Exhibit 1 to Plaintiffs' Memorandum in Opposition to
Williams and the Director Defendants' Motion to Dismiss Consolidated Amended
Class Action Complaint).
If,
as the Plaintiffs allege, the Board members failed to properly monitor the
Benefits Committee, they breached their fiduciary responsibilities under ERISA
as established by the uniform body of cases cited above. See, e.g., Whitfield v.
Tomasso, 682 F. Supp. 1287, 1305 (E.D.N.Y. 1988) (union violated its
fiduciary duty "by failing to take appropriate steps to remove
Union-appointed trustees who it knew were breaching their fiduciary obligations
to the Fund"). In such cases,
appointing fiduciaries may be held "indirectly liable" for the injuries
caused by their appointees. See Atwood,
1994 WL 698314, at *6.
The cases relied upon by the
Defendants and by this Court in its order of July 14, 2003, are not to the
contrary. In each of the cases cited,
plaintiffs sought to impose on the appointing fiduciaries obligations that had
been assigned to other fiduciaries, rather than to hold them accountable for
their own failure to monitor the work of their appointees. In Crowley v. Corning, 234 F. Supp.
2d 222, 229 (W.D.N.Y. 2002), the court dismissed claims against Board members
who, as in this case, had the power to appoint, retain or remove members of an
investment committee. However, neither
the decision nor, apparently, the complaint, alluded to a failure to monitor. Instead, the complaint alleged more
generally that the Board was charged with operating the plan in the best
interests of the participants and beneficiaries, and that by misrepresenting
certain information and failing to disclose other information, the Board member
defendants had failed to meet their obligations. Id. The complaint
also alleged that under general principles of respondeat superior,
the Board was liable for the actions of the committee members. Id.
The court did not opine on the Board's duty to monitor, or dismiss
allegations based on the appointing fiduciaries' failure to monitor. See also Independent Ass'n
of Publishers v. Dow Jones & Co., Inc., 671 F. Supp. 1365, 1367
(S.D.N.Y. 1987) (the court dismissed the plaintiffs' claims because they had
failed to allege any breach with respect to the company's power to appoint and
remove the fiduciaries, not because the court rejected the duty to
monitor).
Likewise,
Hull v. Policy Management Sys. Corp., No. CIV.A.3:00-778-17, 2001 WL
1836286 (D.S.C. Feb. 9, 2001), does not directly speak to the existence or contours
of a duty of appointing fiduciaries to monitor those whom they appoint. Responding to a motion to dismiss, the Hull
plaintiffs sought to recharacterize their allegations against the Board members
as a claim for failure to supervise, but the court concluded that the complaint
did not support such a reading. Id.
at *6. Instead, the complaint had
alleged breaches based on a duty to provide information and not to
mislead. Without deciding whether the
duty to appoint and remove committee members includes a duty to supervise those
appointees (which the court seemed to believe was a "stretch[]"), the
court concluded that "there are simply no allegations in the complaint
adequate to support a claim for failure to supervise." Id. at *7.
Thus,
the cases cited in the Court's July 14, 2003, order do not contradict or
undermine the Secretary's regulations or the uniform body of case law
recognizing that corporate officials, including Board members, who have the
authority to appoint and remove plan fiduciaries, are themselves fiduciaries
who have the obligation to monitor those they appoint. This is not to say, however, that an
appointing fiduciary's obligations are limitless. ERISA itself, in providing that fiduciary liability only attaches
"to the extent" that a fiduciary has or exercises discretionary
authority or control, 29 U.S.C. § 1002(21)(A), makes it clear that fiduciary
status "is not an all or nothing proposition." Beddell v. State Street Bank & Trust
Co., 137 F.3d 12, 18 (1st Cir. 1998).
Rather, the "fiduciary liability for 'functional' (as opposed to
named) fiduciaries extends only so far as the fiduciary has discretionary
authority in the administration of a plan." Liss, 991 F. Supp. at 311.
Accordingly,
the appointing fiduciaries are not charged with directly overseeing the
investments and thus duplicating the responsibilities of the investment
fiduciaries. But they are required
to have procedures in place so that on an ongoing basis they may review and
evaluate whether the investment fiduciaries are doing an adequate job. See Leigh, 727 F.2d at 135
(appointing fiduciary did not have to examine every action taken by the plan
administrators, but he was obligated to act with appropriate prudence and
reasonableness in monitoring the administrators' management of the plan). Appointing fiduciaries are not directly
responsible for management of the plan's portfolio; they simply have the
responsibility of effectively reviewing their appointees' performance to ensure
that they are doing their job (for example, by requiring periodic reports on
their work and the plan's performance, and by ensuring that they have a prudent
process for obtaining the information and resources they need). The important point is not that the
appointing fiduciaries must follow one prescribed set of procedures for
monitoring the investment fiduciaries, but that they apply procedures that
allow them, under the applicable circumstances, to assure themselves that those
they have entrusted with discretionary authority to invest the plan's assets
are properly discharging their responsibilities.
In
other words, prudent fiduciaries with responsibility for appointing investment
fiduciaries need not themselves manage the investments, but should periodically
review the appointees' work to "ensure that their performance has been in
compliance with the terms of the plan and statutory standards, and satisfies
the needs of the plan." 29 C.F.R.
§ 2509.75-8 at D-17. See also
Amended Brief of the Secretary of Labor as Amicus Curiae Opposing the Motions
to Dismiss in Tittle v. Enron, at pp. 8-15.
Here,
the Board members were given the express authority under the plan to appoint,
retain and remove the investment fiduciaries.
Plan § 7.1. The fact that Board
members, as appointing fiduciaries, may have "had only limited fiduciary
responsibilities, does not mean that they had no responsibility
whatever." Leigh, 727 F.2d
at 134-35. They did have the duty under
ERISA to monitor the performance of the investment fiduciaries, to ensure that
they had the tools necessary to effectively protect the interests of the Plan's
participants, and to take appropriate corrective action if the investment
fiduciaries' conduct fell short of meeting their central responsibility to the
Plan, its participants and beneficiaries.
Because the Complaint alleges that the Board failed to properly
discharge its duty to monitor, Compl. at ¶¶ 238-41, 251-52, it states a claim
and should not be dismissed.
Respectfully
submitted,
HOWARD
M. RADZELY
Acting
Solicitor of Labor
TIMOTHY
D. HAUSER
Associate
Solicitor
Plan
Benefits Security Division
_____________________________
ELIZABETH
HOPKINS
Counsel
for Appellate and
Special
Litigation
U.S.
Department of Labor
Office
of the Solicitor
Plan
Benefits Security Division
P.O. Box
1914
Washington,
D.C. 20013
Phone:
(202) 693-5614
Fax: (202) 693-5610
