The Employee Retirement Income Security Act of 1974 ("ERISA") allows directed trustees of an ERISA employee benefit plan to carry out transactions based on instructions from a named fiduciary. While the burden on a directed trustee should be less than that imposed on a discretionary trustee, recent court decisions have called into question the exact scope of a directed trustee's fiduciary duties, particularly with regard to directions involving employer securities. In Field Assistance Bulletin 2004-3, the U.S. Department of Labor ("DOL") has addressed this issue and provided general guidance regarding certain of the responsibilities of directed trustees under ERISA.

Determining Whether a Direction is Proper

A directed trustee has a duty to follow the proper directions of a plan's named fiduciary that are made in accordance with the terms of the plan and are not contrary to ERISA. When a directed trustee knows or should know that a direction from a named fiduciary is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee may not, consistent with its fiduciary responsibilities, follow the direction.

In Accordance with the Plan Terms

In determining whether a direction is made in accordance with the plan terms, a directed trustee has a duty to review all the documents governing the plan that are relevant to its duties. If the directed trustee fails to review such documents, and it follows a direction contrary to the plan's terms, as would for example be the case when the purchase of a particular stock at the direction of the plan's named fiduciary is contrary to the plan's written investment policy, the directed trustee may be liable for a breach of its fiduciary duty to follow the plan's terms.

A direction is consistent with the plan's terms if the documents pursuant to which the plan is established and operated do not prohibit the direction. If the directed trustee determines that the terms of the relevant documents are ambiguous with respect to the permissibility of the direction, the trustee should obtain a clarification of the plan's terms from the fiduciary responsible for interpreting such terms. The trustee may rely on such fiduciary's interpretation.

Not Contrary to ERISA

A directed trustee cannot follow a direction that the directed trustee knows or should know requires the trustee to engage in a prohibited transaction described in ERISA or to violate ERISA's prudence requirements. This "know or should know" standard has generated controversy in the employee benefit plan community.

With regard to prohibited transactions, the directed trustee must follow processes that are designed to avoid prohibited transactions. This obligation can be satisfied by obtaining from the directing fiduciary a written representation that the plan maintains and follows procedures for identifying prohibited transactions. The directed trustee may rely on such representation unless it knows that such representation is false.

With regard to prudence determinations, the directed trustee has a limited obligation to determine the prudence of a particular transaction, whether it involves buying, selling, or holding particular assets. A directed trustee does not have an independent obligation to determine the prudence of every transaction or have an obligation to second-guess the work of fiduciaries that have discretionary authority over the management of plan assets.

Plan Purchases of Publicly Traded Securities

Much of the DOL's guidance deals with a plan's purchase of publicly traded securities. A directed trustee has a quite limited obligation to question market transactions involving publicly traded securities. However, if the directed trustee possesses material non-public information regarding a security, the directed trustee may have a heightened obligation to question a market transaction in such securities. In such case, the directed trustee, prior to following a direction that would be affected by such information, has a duty to inquire about the named fiduciary's knowledge and consideration of the information. For example, if a directed trustee has non-public information indicating that a company's public financial statements contain material misrepresentations that significantly inflate the company's earnings, the directed trustee should not simply follow a direction to purchase that company's stock at an artificially inflated price.

For these purposes, the possession of non-public information by one part of an organization (such as a bank) will not be imputed to the organization as a whole if the organization maintains procedures designed to prevent the illegal disclosure of such information under securities, banking, or other laws. If, despite such procedures, the individuals responsible for the directed trustee services have actual knowledge of material non-public information, the directed trustee, prior to following a direction that would be affected by such information, has a duty to inquire about the named fiduciary's knowledge and consideration of the information with respect to the direction. In addition, a directed trustee who performs an internal analysis in which it concludes that the company's financial statements are materially inaccurate will have an obligation to disclose this analysis to the named fiduciary. The directed trustee would not have an obligation to disclose analyses and reports that are available to the public.

Absent material non-public information, a directed trustee, given its limited fiduciary duties, will rarely have an obligation under ERISA to question the prudence of a direction to purchase publicly traded securities at the market price solely on the basis of publicly available information. However, where there are clear and compelling public indicators (such as a Form 8-K filing with the Securities and Exchange Commission or a bankruptcy filing) that call into question a company's viability as a going concern, the directed trustee may have a duty not to follow the named fiduciary's instruction without further inquiry.

In situations where a fiduciary who is a company employee gives an instruction to a directed trustee to buy or hold securities of his or her company subsequent to a formal charge against the company, its directors, or officers of financial irregularities, the directed trustee may need to decline following the direction or may need to conduct an independent assessment of the transaction to assure itself that the instruction is consistent with ERISA; however, the mere opening of a governmental investigation, without more, would not necessarily require the directed trustee to conduct such an assessment.

A Plan's Purchase of the Company's Securities When Those Securities Are Not Publicly Traded

There is little guidance in the DOL's Field Assistance Bulletin regarding a directed trustee's duties when it receives directions from a named fiduciary of a plan to purchase privately held securities of the company that sponsors the plan. Many employers today sponsor just such plans. While a number of courts have spoken to this set of circumstances, the DOL has not done so in any clear and thorough manner. In August 2004, the DOL announced that it would issue additional guidance on the obligations of directed trustees and would file amicus briefs in court cases to more fully articulate its view on those obligations. Hopefully, the promised guidance will shed light on the scope of the directed trustee's duties when purchasing privately held securities at the direction of a named fiduciary.

Co-Fiduciary Duties

If a directed trustee has knowledge of a breach by another fiduciary, the directed trustee may be liable as a co-fiduciary unless the directed trustee takes reasonable steps to remedy the breach. Efforts to remedy the breach may include reporting the breach to other fiduciaries of the plan or to the DOL.

Please contact any of the undersigned with comments or questions regarding the fiduciary duties of directed trustees.