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Ms. Judith A. McCormick
Federal Counsel, American Bankers Association
1120 Connecticut Avenue, NW
Washington, DC 20036
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Dear Ms. McCormick:
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Thank you for the invitation to respond to an editorial entitled
"Special Analysis, Perspectives on the `Float' Issue," which
appeared in the American Banker's Association January 1994 edition of the
Trust Letter. We appreciate this opportunity to clear up an apparent
misunderstanding in the editorial regarding prohibited self-dealing by banks
that serve as fiduciaries to employee benefit plans under the Employee
Retirement Income Security Act of 1974 (ERISA).
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The focus of the editorial is an ERISA advisory opinion, A.O. 93-24A (Sept.
13, 1993), which concluded that a bank trustee's unilateral exercise of
discretion to earn income for its own account from the "float"
attributable to outstanding benefit checks constitutes prohibited fiduciary
self-dealing under ERISA. The editorial questions whether the analysis in
A.O. 93-24 is limited to its facts -- which involved the use of accounts and
repurchase agreements with a third-party national bank to earn income for
the bank trustee during the period of the float -- or whether the opinion
has broader implications for the procedures banks commonly utilize in
issuing benefit checks. Although advisory opinions apply only to the
specific factual situations that they describe, (ERISA Procedure 76-1, §
10, 41 Fed. Reg. 36281, 36282 (Aug. 27, 1976)), the essential analysis of
A.O. 93-24 is not unique to its facts.
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The editorial notes that, in contrast to the facts presented in A.O. 93-24,
banks commonly issue benefit checks drawn on a disbursement account within
the same institution. The editorial points out that, as a technical matter
depending upon the type of account used, the actual amounts in such
disbursement accounts may no longer be considered plan assets. From this,
the editorial concludes, in our view erroneously, that "[i]f these
balances are no longer plan assets once transferred to such an account, then
no prohibited transaction occurs." This conclusion misses the
fundamental principle of A.O. 93-24 that, without regard to the status of
the funds after they are placed in a disbursement or other account, a bank
fiduciary's unilateral decision to handle plan assets in such a way as to
benefit itself constitutes prohibited self-dealing.
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We also take issue with the suggestion in the editorial that section
408(b)(6) of ERISA exempts such fiduciary self-dealing. That section affords
conditional relief from the prohibitions on self-dealing for the providing
of "ancillary" services by a bank to a plan for which it is a
fiduciary if, among other requirements, the services are provided for no
more than reasonable compensation. The legislative history of this section
indicates that "in determining whether a plan pays more than reasonable
compensation for its checking account services, the interest available on an
alternate use of the funds is to be considered." H.R. Conf. Rept. No.
93-1280, 93d Cong., 2d Sess. (1974) at 315. Given the widespread
technological advances in cash management during the twenty years since
ERISA was enacted, it is by now generally recognized that banks have the
capability of investing daily all but small amounts of cash in trust-quality
investment vehicles at competitive market rates. (See Board of Governors of
the Federal Reserve System letter to Stephen R. Steinbrink, Deputy
Comptroller, Office of Comptroller of the Currency dated May 17, 1991).
Accordingly, section 408(b)(6) does not provide relief for a bank trustee
who maintains cash balances in a zero-interest disbursing account within the
same institution to the extent that it is reasonably possible to earn net
returns for the plan on those monies. Nor would such an exercise of
discretion that is intended to benefit the bank at the expense of the plan's
interests comport with the requirements of section 404(a)(1)(A) of ERISA
that fiduciaries act prudently and solely in the interest of participants
and beneficiaries.
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Of course, if a bank fiduciary has openly negotiated with an independent
plan fiduciary to retain earnings on the float attributable to outstanding
benefit checks as part of its overall compensation, then the bank's use of
the float would not be self-dealing because the bank would not be exercising
its fiduciary authority or control for its own benefit. Therefore, to avoid
problems, banks should, as part of their fee negotiations, provide full and
fair disclosure regarding the use of float on outstanding benefit checks.
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Again, thank you for opening a dialogue on this important matter. We hope
that this exchange will help to clarify any misunderstanding concerning the
"float" issue.
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Sincerely,
Robert J. Doyle
Director of Regulations and Interpretations
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