UNITED
STATES COURT OF APPEALS
FOR THE
EIGHTH CIRCUIT
Case No. 00-2214
CAROL
HARLEY; LENORA BANASZEWSKI; MICHAEL L. PAYTON;
RICHARD
ZOESCH, individually and on behalf of all others similarly situated
Plaintiffs -
Appellants
v.
MINNESOTA
MINING AND MANUFACTURING COMPANY
Defendant - Appellee
On
Appeal from the United States District Court for the District of Minnesota
Case
No. 96-CV-488 JRT/RLE
BRIEF
OF THE SECRETARY OF LABOR AS AMICUS CURIAE IN SUPPORT OF APPELLANTS AND REVERSAL
HENRY
L. SOLANO |
Sara
Pikofsky |
Solicitor
of Labor |
Trial
Attorney |
|
U.S.
Department of Labor |
ALLEN
H. FELDMAN |
Office of the Solicitor |
Acting
Associate Solicitor |
Plan
Benefits Security Division |
|
200 Constitution Ave., N.W., N4611 |
KAREN L. HANDORF |
Washington, D.C. 20210 |
Counsel for Special Litigation |
(202) 219-4600 ext. 126 |
TABLE
OF CONTENTS
ISSUES
PRESENTED
INTEREST
OF THE DEPARTMENT OF LABOR
STATEMENT
OF FACTS
PROCEDURAL
HISTORY
SUMMARY
OF ARGUMENT
DISCUSSION
I. THIS
COURT SHOULD REVERSE THE DISTRICT COURT
HOLDING THAT THE 3M PLAN SUFFERED NO
LOSS
BECAUSE THE PLAN WAS OVERFUNDED
II. THE
DISTRICT COURT ERRED IN APPLYING EXEMPTIVE
RELIEF UNDER §408(c)(2) TO A
VIOLATION OF 406(b)(1)
A. Section 408(c)(2) Does Not Provide
Independent
Exemptive Relief
B. The
Court Should Defer To Agency Interpretations
CONCLUSION
TABLE
OF AUTHORITIES
Federal
Cases:
Central States, Southeast & Southwest
Area Pension Fund v. Central
Transport, Inc., 472 U.S. 559 (1985)
Chevron v. Natural Resources Defense
Council, Inc., 467 U.S. 837 (1984)
Commissioner of Internal Revenue v.
Keystone Consolidated Indus., 508 U.S. 152 (1993)
Gilliam v. Edwards, 492 F. Supp. 1255 (D.N.J. 1980)
Harley v. Minnesota Mining & Manufacturing Co., 42 F. Supp. 2d 898 (D. Minn. 1999)
Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., -- U.S. --, 120 S. Ct. 2180 (2000)
Hughes Aircraft Co. v. Jacobson, 525 U.S. 432 (1999)
LaScala v. Scrufari, 96 F. Supp. 2d 233 (W.D.N.Y. 2000)
Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992), cert.
denied, sub nom., Henss v. Martin, 506 U.S. 1054 (1993)
Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985)
Pegram v. Herdrich, -- U.S. --, 120 S. Ct. 2143 (2000)
Roth v. Sawyer‑Cleator Lumber Co., 61 F.3d 599 (8th Cir. 1995)
Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986)
Southwestern Bell Tel. Co. v. Federal Communications Comm'n, 153 F.3d 523 (8th Cir. 1998)
Whitfield v. Tomasso, 682 F. Supp. 1287 (E.D.N.Y. 1988)
Statutes:
Employee Retirement Income Security Act of 1974, as amended,
29 U.S.C. § 1001 et seq.:
Section 203, 29 U.S.C. §1053 10
Section 403, 29 U.S.C. §1103
Section404,
29 U.S.C. §1104
Section 406, 29 U.S.C. §1106
Section 406(a), 29 U.S.C.
§1106(a)
Section 406(b), 29 U.S.C.
§1106(b)
Section 406(b)(1), 29 U.S.C.
§1106(b)(1)
Section 408, 29 U.S.C. §1108
Section 408(b), 29 U.S.C.
§1108(b)
Section 408(b)(2), 29 U.S.C.
§1108(b)(2)
Section 408(c), 29 U.S.C.
§1108(c)
Section 408(c)(2), 29 U.S.C.
§1108(c)(2) passim
Section 409, 29 U.S.C. §1109
Section 410, 29 U.S.C. §1110
Section 502(a)(2), 29 U.S.C. §1132(a)(2)
Other
Authorities:
29 C.F.R. §2550.408b‑2(e)
29 C.F.R. §2550.408b‑2(e)(1)
29 C.F.R. §2550.408c‑2(a)
29 C.F.R. §2550.408c‑2(b)(1) -
(4)
Reorganization Plan No. 4 of 1978, 43 Fed.
Reg. 47713 (1978)
Restatement (Third) Trusts § 213 cmt.
b (1990)
Restatement (Third) Trusts §213 cmt. c
(1990)
George Bogert, Law of Trusts and Trustees,
2d ed. §708 (1991)
ISSUES
PRESENTED
1. Whether the district court erred when it
held that an employer-fiduciary is not liable under §409 of the Employee
Retirement Income Security Act ("ERISA"), 29 U.S.C. §1109, for
losses suffered by an over-funded defined benefit pension plan as a result of
fiduciary breaches when the amount of over-funding exceeds the loss.
2. Whether the district court erred when it
held that ERISA §406(b)(1) was not violated when a fiduciary received a
performance-based incentive fee, because the compensation was reasonable and,
therefore, exempt from the prohibited transaction rules under ERISA
§408(c)(2).
INTEREST
OF THE DEPARTMENT OF LABOR
The Secretary of Labor has primary
enforcement authority for Title I of ERISA.
The Secretary's interests include promoting uniformity of law,
protecting beneficiaries, enforcing fiduciary standards, and ensuring the
financial stability of employee benefit plan assets. Secretary of Labor v. Fitzsimmons, 805 F.2d 682 (7th Cir. 1986)
(en banc). If affirmed, the district
court's holding that an employer-fiduciary is not liable for losses caused by
fiduciary breaches when a defined benefit pension plan is overfunded will have
a substantial impact on the ability of the Secretary to enforce the
statute. Moreover, the Secretary has a
substantial interest in assuring that the court correctly interprets and
applies regulations promulgated by the Secretary concerning the scope of the
exemptions applicable to prohibited transactions.
STATEMENT
OF FACTS
Minnesota Mining and Manufacturing Company
("3M") sponsors the 3M Retirement Income Plan ("the Plan")
a tax-qualified defined benefit pension plan funded by employer
contributions. Harley v. Minnesota
Mining and Manufacturing, 42 F. Supp. 2d 898 (D. Minn. 1999). As of 1999, the Plan had over $4 billion in
assets. 3M is the named fiduciary of
the 3M plan and is responsible for overseeing plan investments. 3M delegates this responsibility to its
Pension Asset Committee ("the PAC").
In 1990 the PAC invested $20,000,000 of
plan assets in a hedge fund containing collateralized mortgage obligations
("CMO's"). Prior to making
the investment, the PAC met with Tony Estep who worked for Granite Corporation,
the investment manager of the fund.
Although Estep provided the PAC with materials indicating that the fund
would produce high returns with low risks, the PAC also received a Private
Placement Memorandum ("PPM") from the fund shortly thereafter which
indicated that the investment faced substantial risks. The PPM also indicated that the fund
managers could not assure that the fund could achieve a market neutral
position.
Despite this conflicting information,
neither Deborah Weiss, 3M's Manager of Pension Investments, nor any member of
the PAC conducted an independent analysis of the hedge fund investment either
upon purchase or during the course of the Plan's holding of the
investment. Instead, the PAC voted to
make the investment after ten to twenty minutes of discussion. Neither the PAC members nor Weiss knew much,
if anything, about CMO's and nobody conducted a background check on Estep which
would have revealed that Estep had little experience with CMO's prior to his
work with the hedge fund.
In 1991, David Askin replaced Estep as
investment manager of Granite. He then
formed Askin Capital Management ("ACM") which replaced Granite
Corporation. The PAC minimally
investigated the impact of Estep's removal and did not investigate Askin's
background or experience.
Granite's investment managers received
payment in the form of a performance-based incentive fee. The PPMs which explained the compensation
structure noted that it might create a conflict of interest. 3M paid ACM fees of approximately $1.1
million in March 1993.
By March 1994, the hedge fund had
collapsed and was liquidated. As a
result, the 3M plan lost at least $80,000,000, a figure that 3M does not
contest.
Between 1990 and 1996, the 3M plan was
over-funded according to the district court.
3M continued to make "voluntary" contributions, payments in
excess of contributions required by the Internal Revenue Code, to the plan on
an annual basis. 3M's contributions
during this time totaled over $500 million.
PROCEDURAL
HISTORY
Participants of the 3M Plan brought a
class action lawsuit against 3M in 1996 alleging that 3M breached its fiduciary
duties pursuant to ERISA §404, 29 U.S.C. §1104, when it imprudently
invested plan assets in the highly volatile hedge fund. The class brought its claims under ERISA
§502(a)(2), 29 U.S.C. §1132(a)(2), which allows participants to bring
claims for appropriate relief under ERISA §409, 29 U.S.C. §1109. ERISA §409 requires fiduciaries to make
good to the plan any losses resulting from a breach of fiduciary duty. The relief requested under §502(a)(2)
takes the form of restored funds to the plan rather than restored funds to
individual participants and beneficiaries.
The class also alleged that the
circumstances under which 3M made and maintained the investment constituted a
prohibited transaction under ERISA §406(b)(1). The class claims that Askin violated §406(b)(1) by
influencing his own compensation pursuant to the incentive-based fee
arrangement.
The class moved for partial summary
judgment on the prohibited transaction claim, and 3M moved for summary judgment
seeking dismissal of the entire action.
On March 31, 1999, the court denied the class's motion, and granted in
part and denied in part 3M's motion.
The court opined that a reasonable fact finder "could conclude that
3M's investigatory and monitoring methods and actions were below ERISA's
standard of reasonable care."
Harley, 42 F. Supp. 2d at 907.
It noted that neither Weiss nor the PAC members obtained advice from
outside knowledgeable sources, and that 3M may have breached its fiduciary
duties by failing to properly investigate Granite and the fund before
investing. Id. Consequently, the court ruled that factual
disputes as to whether the PAC conducted a prudent and independent
investigation precluded summary judgment on this issue.
The court granted summary judgment for 3M
on the prohibited transaction claim.
The court held that ERISA §408(c)(2), which allows a fiduciary to
receive reasonable compensation, exempts ERISA §406(b)(1) prohibited
transactions, and found no facts demonstrating that the compensation received
by Askin and ACM was not reasonable.
The court first rejected 3M's argument
that it could offset the $80,000,000 loss to the plan by the plan's gain on
other investments. The court concluded,
however, that if 3M's contributions to the plan and the investment return from
those contributions exceeded the loss, then the breach could not have caused
any cognizable harm. The court reached
this conclusion by relying on Hughes Aircraft Co. v. Jacobson, 525 U.S. 432
(1999), in which the Supreme Court held that a sponsor of an overfunded defined
benefit pension plan did not violate ERISA by amending the plan to provide new
benefits to some but not all of its employees.
The Court in Hughes reasoned that because participants in a defined
benefit pension plan have only a right to their accrued benefit, and "no
plan member has a claim to any particular asset that composes a part of the
plan's general asset pool," participants have no individual right to a
share of a plan's surplus. Hughes 525
U.S. at 440.
The district court reasoned that "[b]ecause the Class has no
entitlement to any surplus, it obviously has no claim against 3M for an
additional surplus." Harley 42 F.
Supp. 2d at 914. The court thus concluded
that "if there is a surplus due to 3M's contributions, the Granite
investment caused no 'losses to the plan.'" Id.
Because the court could not determine
whether the plan had a surplus, it invited the parties to submit summary
judgment motions and to seek limited discovery on this matter. After conducting discovery, 3M again filed a
motion for summary judgment. On March
29, 2000, the district court issued an order and opinion reiterating its
previous holdings on the issue of participant entitlement to a plan surplus,
finding that the 3M plan had a surplus, and holding that there was therefore no
loss as a result of the hedge fund investment.
The class appealed.
SUMMARY
OF ARGUMENT
The district court erred in holding that
an employer-fiduciary was not liable for losses to an over-funded defined
benefit plan. The court failed to apply
settled case law in determining the amount of the loss realized by the plan as
a result of the plan's investment in a hedge fund. In addition, the court mistakenly applied Hughes Aircraft to the
instant case. Unlike Hughes Aircraft
which involved individual claims for surplus assets and theories based upon
ERISA's anti-inurement provision, this case involves a request for relief to
the plan based on a breach of fiduciary duty by the plan's fiduciary. Furthermore, by creating a special rule for employer-fiduciaries
that does not appear to apply to non-employer fiduciaries, the district court
fashioned a rule that not only is extra-statutory but also engenders
considerable confusion.
The district court also erred in applying
ERISA §408(c)(2) to provide exemptive relief for a prohibited transaction
alleged under ERISA §406(b)(1). The
court recognized that it could not apply the exemption in ERISA §408(b)(2),
but failed to realize that §408(c)(2) does not independently provide
exemptive relief.
DISCUSSION
I. THIS COURT SHOULD REVERSE THE DISTRICT COURT
HOLDING THAT THE 3M PLAN SUFFERED NO
LOSS BECAUSE THE PLAN WAS OVERFUNDED.
Section 502(a)(2) of ERISA allows the
Secretary or a participant, beneficiary, or fiduciary to sue for relief under
ERISA §409. ERISA §409
provides, among other things, that any fiduciary who breaches any of his
responsibilities is "personally liable to make good to such plan any
losses to the plan resulting from each such breach." Recovery under §409 benefits the plan as
a whole, rather than individual participants.
Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 140
(1985).
Based on trust law principals, courts have
consistently held that losses caused by imprudence are determined by comparing
the plan's actual profit on an investment to the potential profit that would
have been realized but for the breach of duty.
Harley 42 F. Supp. 2d at 912 (citing Roth v. Sawyer-Cleator Lumber Co.,
61 F.3d 599, 604 (8th Cir. 1995); See also Martin v. Feilen, 965 F.2d 660 (8th
Cir. 1992), cert. denied, sub nom., Henss v. Martin, 506 U.S. 1054 (1993);
Restatement (Third) Trusts § 213 cmt. b (1990). Under this framework, the losses from the hedge fund investment
are alleged to be $80 million.
The district court assumed the settled
rules for calculating losses would apply if the fiduciary in this case had not
also been the employer. Harley 42 F.
Supp. 2d at n.23. Based on Hughes Aircraft
Co. v. Jacobson, 525 U.S. 432 (1999), however, the district court carved out an
exception for employer fiduciaries of over-funded defined benefit plans and
held that such fiduciaries are only liable if the losses from an imprudent
investment exceed the plan's overfunding.
The district court's exception is not supported by Hughes Aircraft and
is inconsistent with case law, the common law of trusts, and common sense.
First, the district court mistakenly
relied on Hughes. The issue in Hughes
was whether an employer acting in its role as plan sponsor could amend an
overfunded plan to add additional benefits without violating ERISA. The Supreme Court recognized that an
employer may be both a plan sponsor and a fiduciary and not necessarily both at
the same time, and that an employer may make decisions in its role as plan
sponsor that do not implicate its role as a fiduciary. It characterized the action in Hughes as a
non-fiduciary decision. The Hughes
court, therefore, clearly did not depart from the requirement "that the
fiduciary with two hats wear only one at a time, and wear the fiduciary hat
when making fiduciary decisions."
Pegram v. Herdrich, U.S. , 120
S. Ct. 2143, 2152 (2000). Thus, Hughes
lends no support to the district court's conclusion that the employer sponsor
in this case was relieved of its obligations as a fiduciary when, as here, it
wore its fiduciary hat and made fiduciary investment decisions.
Hughes is, of course, distinguishable in
another important respect. In that
case, the class of employees sued for individual relief, not for relief to the
plan. The question before the Court was
whether, as long as their accrued benefits had not been compromised, the class
had any interest in actions relating to the plan's surplus that were taken by
the employer in its role as plan sponsor.
The Court's decision does not even begin to address the issues involved
here of the employer's obligations to the plan when it acts in its fiduciary
capacity. In our view, these factors so
completely distinguish Hughes that the district court's reasoning that Hughes
nevertheless applies simply cannot stand.
There is no other basis to support the district court's conclusion.
ERISA imposes on employee benefit plan
fiduciaries the highest fiduciary standards derived from the law of trusts.
Pegram, 120 S. Ct. at 2152.
"'Perhaps the most fundamental duty of a trustee is that he must
display throughout the administration of the trust complete loyalty to the
interests of the beneficiary and must exclude all selfish interests and all
consideration of the interests of third persons'." Central States, Southeast & Southwest
Area Pension Fund v. Central Transport, Inc., 472 U.S. 559, 570-71 (1985).
ERISA §409 does not distinguish
between employer and non-employer fiduciaries.
Rather, the statute imposes personal liability on all fiduciaries for
losses associated with breaches of fiduciary duty. This is not only for the purpose of making the plan whole, but
also to insure strict compliance with fiduciary standards. Neither the statute nor the legislative
history indicates that some fiduciaries are protected from liability for losses
while others are not. By holding that
an employer fiduciary can offset any loss to the plan through contributions
made by the employer in its role as plan sponsor, employer fiduciaries are
effectively held to a lesser standard of fiduciary duty than are non-employer
fiduciaries. This holding eviscerates
the purpose of ERISA's fiduciary duty provisions by allowing certain
fiduciaries to avoid their obligations under ERISA.
The court's loss analysis is also
inconsistent with trust law and its own reasoning. The common law of trusts offers a "starting point for
analysis of [ERISA] . . .[unless] it is inconsistent with the language of the
statute, its structure, or its purposes."
Harris Trust & Sav. Bank v. Salomon Smith Barney Inc., U.S.
, 120 S. Ct. 2180, 2189 (2000)(citing Hughes, 525 U.S. at 447). Trust law provides that one cannot offset
losses in one part of the trust with gains from another portion of the trust
holdings. Restatement (Third) Trusts
§213 cmt. c (1990). See also George
Bogert, Law of Trusts and Trustees, 2d ed. §708 (1991). In one part of its decision the district
court followed trust law. In analyzing
3M's argument that no loss should be associated with the Granite investment
because the plan's portfolio as a whole profited during the relevant time
period, the court held that this is not a situation in which "gains in
other parts of the portfolio should be offset against losses resulting from the
challenged investment." Harley 42
F. Supp. 2d at 912. The court went on
to state that assuming that "3M breached its duty by investing in Granite,
the loss is the difference between the Plan's actual profits and the profits it
would have achieved" but for the breach.
Id.
The court, however, in analyzing 3M's
argument that its voluntary contributions offset the loss resulting from the
Granite investment, does exactly what it had said it should not do. Instead of finding that losses in one part
of the portfolio cannot be offset by gains from another source, the court held
that 3M's contributions can, in fact, offset any losses by creating a surplus
in the plan's assets. Id. The court should have applied its reasoning
regarding the unavailability of an offset defense to both of 3M's arguments and
not allowed the contributions to the plan to offset the clear loss which
resulted from the Granite investment.
This would have been consistent with trust law principles. Moreover, its sole basis for departing from
statutory and trust principles was the court's reliance on Hughes, which, as we
have shown, was unfounded.
Finally, the district court's holding also
creates an unworkable framework for determining losses. It is unclear, for example, when the loss is
measured. Until a plan actually
terminates and all of its liabilities are satisfied, a plan surplus is simply
an actuarial construct. In order to
determine the value of a plan, actuaries must make numerous assumptions about
future salaries, future numbers of participants and future interest rates. A plan can rapidly go from overfunded to
underfunded with a change in any one of the underlying assumptions. It is also unclear from the court's decision
whether a loss is measured at the time of the breach, at the time of suit, at the
time the court calculates losses or at some other time during the
litigation. By tying loss
determinations to a plan's ever-fluctuating funding level, the court invites
uncertainty.
II. THE DISTRICT COURT ERRED IN APPLYING
EXEMPTIVE RELIEF UNDER §408(c)(2) TO
A VIOLATION OF 406(b)(1).
A. Section
408(c)(2) Does Not Provide Independent Exemptive Relief.
The class alleged that Askin Capital
Management possessed the ability to influence the prices of the securities in
its fund and to thereby affect its own compensation, in violation of ERISA
§406(b)(1), 29 U.S.C. §1106(b)(1).
Specifically, 3M was to pay ACM based on a percentage of the increase in
the value of the assets ACM had invested on behalf of 3M. Because it was difficult to obtain fair
market values for CMO's from neutral sources, ACM's manager determined the
value of the CMO's held by ACM.
According to the plaintiff class, this resulted in ACM effectively
setting its own compensation, as the value of the CMO's determined the compensation
received by ACM. The plaintiff class
therefore pled a violation of ERISA §406(b)(1) which prohibits a fiduciary
from dealing with plan assets for its own account. The district court erred when it dismissed this claim on the
grounds that the alleged prohibited transaction was exempt under ERISA
§408(c)(2).
ERISA §406 flatly bars specified types
of transactions unless exempted by statutory and administrative exemptions
contained in ERISA §408. Subsection
(a) bars certain transactions between the plan and parties in interest,
including the furnishing of goods, services or facilities between a plan and a
party in interest. Subsection (b) bars
a fiduciary from engaging in self-dealing transactions including dealing with
assets of the plan in his own interest or for his own account.
ERISA §408(b)(2) provides that a plan
may contract with a party in interest for services necessary for operation of
the plan, as long as the plan pays the service provider no more than reasonable
compensation. As the district court
acknowledged, ERISA §408(b)(2) applies only to transactions prohibited by
ERISA §406(a), and does not provide an exemption for self-dealing
transactions prohibited by ERISA §406(b).
29 C.F.R. §2550.408b-2(e).
ERISA §408(c)(2) provides in relevant
part that §406 should not be interpreted to prohibit a fiduciary from
receiving reasonable compensation for services rendered. In essence, ERISA §408(c)(2) establishes
that Congress intended for fiduciaries to be compensated for services they provide
to plans as long as certain conditions are met. Department of Labor regulations explicitly state that
§408(c)(2) and §§2550.408c-2(b)(1) - (4) "clarify what constitutes reasonable compensation for . . .
services" referring to the services provided in §408(b)(2). 29 C.F.R. §2550.408c-2(a). ERISA §408(c)(2) and the regulations
thereunder do not provide a roving defense for any other alleged ERISA
violation simply because "reasonable compensation" was received.
Courts
which have addressed the issue have also held that §408(c)(2) serves merely
to clarify the language of ERISA §408(b)(2) and does not provide
independent relief for prohibited transactions. Because §408(b) cannot be used to provide an exemption for
§406(b) activity, §408(c) cannot be used for that purpose either. LaScala v. Scrufari, 96 F. Supp. 2d 233
(W.D.N.Y. 2000)(holding that §408(c)(2) does not provide an exemption of an
alleged §406(b) violation); Whitfield v. Tomasso, 682 F. Supp. 1287, 1304
(E.D.N.Y. 1988)(holding that "the exemptive provisions of sections
408(b)(2) and 408(c)(2) apply only to violations of section 406(a), not
violations of section 406(b)"); Gilliam v. Edwards, 492 F. Supp. 1255,
1264 (D.N.J. 1980) (holding that §408(c)(2) serves solely to clarify the
meaning of reasonable compensation as found in §408(b)(2) and has no
"independent exemptive power").
The Gilliam court explained that
Department of Labor regulations make clear that §406(b) creates "a per
se ERISA violation." Gilliam 492 F. Supp. at 1262-63 (citing 29 C.F.R.
§ 2550.408b-2(e)(1) which provides that 406(b) violations may not be
exempted under §408(b)(2)). Reading
§406 and §408 together, the Gilliam court held that when self-dealing
is involved, a fiduciary may not use as a defense the argument that the compensation received was
reasonable. Gilliam 492 F. Supp. at
1263. The Gilliam
court relied on the
explicit statement in 29 C.F.R. §2550.408c-2(a) that §408(b)(2) refers
to reasonable compensation for services and that §408(c)(2) and
§§2550.408c-2(b)(1) - (4) "clarif[y] what constitutes reasonable
compensation for [such] services."
The Gilliam court therefore declined to apply either §408(b)(2) or
§408(c)(2) to the alleged §406(b) violation.
In analyzing the prohibited transaction
claim, the district court looked only at whether Askin had received more than
reasonable compensation. The court
failed to recognize the direction in the regulations indicating that the
reasonableness of the compensation did not provide an exemption from the
alleged violation. This court should
clarify that §408(c)(2) merely clarifies §408(b)(2) and does not
provide an independent defense.
Assuming the court holds that the claim was pled correctly, this court
should remand the prohibited transaction claim to the district court to
determine whether the transaction violated §406(b).
B. The
Court Should Defer To Agency Interpretations.
Courts should defer to the regulating
agency when the agency's interpretation of the statute it administers is
reasonable. Chevron v. Natural
Resources Defense Council, Inc., 467 U.S. 837, 843 (1984); Southwestern Bell
Tel. Co. v. Federal Communications Comm'n, 153 F.3d 523, 535 (8th Cir.
1998). In Chevron, the Supreme Court
reasserted the long standing rule that "considerable weight should be
accorded to an executive department's construction of a statutory scheme it is
entrusted to administer." 467 U.S.
at 844.
The Secretary of Labor has primary
interpretative and enforcement authority for Title I of ERISA, 29 U.S.C. §
1001 et seq. Pursuant to Reorganization
Plan No. 4 of 1978, the Department of Labor has exclusive authority to make
interpretations necessary to enforce ERISA, which expressly includes Parts 1,
4, 5, 6, and 7 of Subtitle B of Title I of ERISA. See Reorganization Plan No. 4 of 1978, 43 Fed. Reg. 47713
(1978). Because the prohibited
transaction provisions of Sections 406 and 408 are contained in Part 4 of
Subtitle B of Title I of ERISA, the Department of Labor has primary
interpretative authority with respect to these provisions. The Court should therefore defer to
Department of Labor regulations and hold that ERISA §408(c)(2) does not
provide independent exemptive relief.
CONCLUSION
For the reasons recited above, the Court
should reverse the district court decisions on the issues of loss and exemptive
relief.
Respectfully submitted this 12th day of
July, 2000,
Sara Pikofsky
Trial Attorney
U.S. Department of
Labor
Office of the Solicitor
Plan Benefits
Security Division
P.O. Box 1914
Washington, D.C.
20013
(202) 219-4600
ext. 126
CERTIFICATE
OF COMPLIANCE
I hereby certify that the brief of amicus
curiae, the Secretary of the United States Department of Labor, uses a
mono-spaced font, Times Roman 14, and contains 4343 words. The enclosed
disk containing an electronic version
of the brief created in Word Perfect 8 has been scanned for virus and is virus
free.
SARA
PIKOFSKY
CERTIFICATE
OF SERVICE
I hereby certify that a true and correct
copy of the foregoing brief by the Secretary of Labor as amicus curiae was
served upon the clerk of the Eighth Circuit Court of Appeals and counsel of
record listed below by depositing copies thereof, with Federal Express, charges
prepaid, addressed as follows, this
12th day of July 2000:
Michael
E. Gans, Clerk
United
States Court of Appeals
for the Eighth Circuit
United
States Court and Custom House
1114
Market Street
Room
511
St.
Louis, MO 63101
Alan M.
Sandals
Scott
M. Lempert
SANDALS,
LANGER & TAYLOR, LLP
One
Liberty Place
50th
Floor
1650
Market Street
Philadelphia,
PA 19103
Seymour
J. Mansfield
Debra
S. Nelson
MANSFIELD,
TANICK & COHEN, P.A.
1560
International Centre
900
Second Avenue South
Minneapolis,
MN 55402
Steven
L. Severson
John D.
French
FAEGRE
& BENSON LLP
2200
Norwest Center
90
South Seventh Street
Minneapolis,
MN 55402
I also
certify that a true and correct copy of the foregoing brief by the Secretary of
Labor as amicus curiae was served upon the following by deposit with a courier
for hand delivery on July 13, 2000 on this 12th day of July, 2000.
J. Alan
Galbraith
Paul M.
Wolff
WILLIAMS
& CONNOLLY
725
Twelfth Street, N.W.
Washington,
DC 20005
SARA PIKOFSKY
The
court cites evidence offered by the class that many PAC members thought Granite
was a low-risk investment, did not understand the risks of CMO's, did not know
of Granite's lack of experience with CMO's, did not know of Granite's potential
illiquidity problems, and did not understand Granite's strategy.
"That
the Plan's portfolio as a whole profited during the period of the Granite
investment does not immunize 3M from liability for its alleged breach of
fiduciary duty." Harley, 42 F.
Supp. 2d at 912.
The
plaintiffs in Hughes alleged violations of ERISA's vesting, anti-inurement and
fiduciary provisions. ERISA §§
203, 403, 404.
The
district court concluded that Hughes applied here because the Supreme Court did
not "state that its conclusions regarding surpluses in defined benefit
plans do not implicate fiduciary claims relating to an employer's management of
plan assets." Harley 42 F. Supp.
2d at 913.
Other
provisions of ERISA demonstrate its purpose of protecting the plan and its
participants by prohibiting certain transactions between the plan and its
employer-sponsor. ERISA §406(a), 29
U.S.C. §1106(a); Commissioner of Internal Revenue v. Keystone Consolidated
Indus., 508 U.S. 152, 160 (1993).
ERISA
§410 provides that provisions relieving fiduciaries from any of the
responsibilities set forth in ERISA are void as against public policy.
We
offer no opinion on the merits of this claim.
The facts are provided for the sole purpose of distinguishing this
compensation arrangement from other incentive-based arrangements. We are not
suggesting that incentive-based compensation arrangements are per se prohibited
under ERISA §406(b), but only that this arrangement, if proven, where the
fiduciary effectively sets his own compensation, violates the Act.
The
district court found 3M's contention that the class did not properly plead the
prohibited transaction claim was "not without merit". Harley 42 F. Supp. 2d at 910. We do not address this issue.
In our
view, even if §408(c)(2) could be read to apply to all of §406, it
still would not serve to relieve violations of §406(b). The gravamen of the §406(b) violation
here is that the fiduciary has self dealt by determining his own
compensation. ERISA §408(c)(2) does
not address the question of who determines compensation, but only the issue of
the amount of compensation.