Internal versus External Trustees

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					Internal versus External Trustees



  Vermont Employee Ownership Center
          Annual Conference
            June 10, 2011
                                PANELISTS:
Merri Ash                            Joe Marx
First Bankers Trust Services, Inc.   Principal Financial Group
1500 Market Street                   5500 Main Street, Suite 304
12th Floor, East Tower               Williamsville, NY 14221
Philadelphia, PA
                                     (800) 428-2021 x3034
(610) 521-1610
                                     marx.joseph@principal.com
merri.ash@fbtservices.com
Dave Fitz-Gerald
Carris Reels, Inc.
49 Main Street
Proctor, VT 05765
(802) 770-3560
dave.fitzgerald@carris.net




                                                                   2
                  ERISA Fiduciary 101
• ERISA Fiduciary Duty Basics
    – Duty of loyalty – To Act Solely in the Interest of Participants
    – Exclusive Purpose rule – for the exclusive purpose of providing benefits
    – Duty of prudence – prudent expert standard (process v. result)
    – Diversification (ESOP exception--but not from prudence)
    – Follow plan documents (if not contrary to ERISA)
    – Avoid Conflicts of Interest
• Potential Liability
    – Personal liability; disgorgement; removal
    – Co-fiduciary liability
    – Indemnification
    – Insurance

                                                                                 3
            Potential ESOP Fiduciaries
• Plan Sponsor/Board of Directors: appoint/remove other fiduciaries; oversight

• Trustee (directed or discretionary): Record owner of shares held by ESOP; acts
  for “exclusive benefit” of participants; votes shares (but may be directed)

• ESOP Committee (if any): interprets plan; reviews claim appeals; may vote
  shares; may be plan administrator also

• Plan Administrator: day-to-day administrative responsibility

• Third-Party Administrator (TPA): recordkeeper; nondiscrimination testing;
  assists Plan Administrator with compliance matters

• Accounting Firm: prepares Plan’s financial statements and tax filings

• Valuation Firm: annually appraises ESOP shares; may perform valuation of, or
  financial advisory services for, specific transactions

                                                                              4
 Application of Fiduciary Standards
• ESOP stock purchase and/or stock sale transactions
    – Initial ESOP formation and stock purchase
    – “Second stage” stock purchase transactions


• Fiduciary’s Issues in connection with the Day-to-Day Operations of an
  ESOP:
    – Valuation
    – Voting ESOP stock / Governance Issues
    – Recordkeeping and Day-to-Day Trust Accounting
    – Recycling and Repurchase Issues
    – Duty to monitor fiduciaries and advisors – Conflicts of Interest


                                                                          5
           Trustee Responsibilities
                     I. VALUATION:
– Determining Value/stock Price - The Trustee is responsible
– What should the Trustee do with the Valuation Report?
   • Review the Report
   • Ask questions
       – Review the approach
       – Market Approach
       – Income approach
       – Asset-based approach




                                                               6
        Trustee Responsibilities

– What should the Trustee do with the Valuation Report
  (Cont.)
   • Look over the methodology
       – How many different methods were used to determine
         value
       – Discounted cash flow
       – Public company comparables
       – Guideline companies methodology
       – Capitalized cash flow method
       – Merger and acquisition method
                                                             7
          Trustee Responsibilities

– Other Valuation-related Information that the Trustee
  should consider:

   •   Overall solvency of the company
   •   Trends exhibited in the report
   •   Plan Liability versus Fair Market Value
   •   Necessity of the Trustee to discuss issues with
       management



                                                         8
           Trustee Responsibilities
II. RECORDKEEPING AND DAY-TO-DAY TRUST ACCOUNTING

  – Payment of the ESOP loan

     • Notify the Company of pending loan payments due.
     • Collect the loan payments from the company and make the necessary
       payments to the bank or back to the company.
         – All loan payments need to be run through the trust even if the
           loan is from the company.
         – Calculate the release of the shares as per the loan documents
           and make sure that all covenants have not been violated.




                                                                      9
           Trustee Responsibilities
– Miscellaneous recordkeeping / Trust Accounting:
   • Maintain Trust Checking Account

   • Retain and Maintain Custody of ESOP Stock Certificates

   • Submit Annual Report and Accounting to Company




                                                              10
           Trustee Responsibilities
– Allocations:
   • The Trustee serves for the exclusive benefit of the participants and their
     beneficiaries. The Trustee should check the Allocation Reports to insure
     that they are correct
        – Verify the release of shares
        – Spot check the allocations
        – Verify the number of shares on the reports to the Trust
        – Statements for both the allocated and unallocated shares.
   • Look at the results of the 409(p) test for Sub S ESOPS. Is there a non-
     allocation year?




                                                                           11
           Trustee Responsibilities
– Distributions:
   • The Trustee makes the distributions to the plan participants as directed
     by the plan administrator.

   • The distributions should be verified to the allocation reports before
     checks are issued.

   • Prepare the check or stock certificates (if shares are to be paid out).

   • Compute income tax withholding. Prepare the appropriate tax
     reporting forms and send withholding timely to the IRS.


                                                                               12
           Trustee Responsibilities
III. Voting of ESOP Shares
   –   Voting Pass-Through: Distribute “adequate” Information to Participants to
       permit an informed vote

   –   Voting Pass-Through: – Confidential Tabulation of Participant Directions on
       allocated shares and voting in accordance with those directions

       –   How does Trustee vote Unallocated Shares?
       –   How does Trustee Vote Unvoted Shares?
       –   How does Trustee Vote voted but disqualified Shares?

   –   Non-Pass Through Voting: – Trustee votes ESOP Shares on shareholder issues
       which are not subject to Pass-Through requirements (e.g., Election of
       Directors)

                                                                                 13
            Trustee Responsibilities
IV. ESOP Stock Recycling vs. Corporate Stock Repurchase

–   If the Company purchases distributed ESOP shares, is it a Fiduciary
    decision?

–   If the ESOP purchases distributed ESOP shares, is it a Fiduciary decision?

–   What if Company offers to repurchase ESOP Shares from the ESOP so that
    the ESOP can distribute cash in lieu of shares?

    •   If stock is sold by the ESOP to the Company, the sale is a party-in-
        interest transaction and must be done at a fair market value as
        determined at time of the sale, not as of last annual valuation date.


                                                                           14
           Trustee Responsibilities
V. Conflicts of Interest

–   Officers or directors of sponsor may serve as trustee, plan
    administrator, or ESOP committee member
–   Duty to all shareholders as officer/director, but ERISA
    fiduciary duty is “solely” to and for participants
–   General: ESOP’s interests may conflict with management’s




                                                                  15
           Trustee Responsibilities
V. Conflicts of Interest (Cont.)



    Conflicts Issue:   Conflicts Issue:   Conflicts Issue:

     Value of ESOP         Equity         “Power” Sharing
  Stock vs. non-ESOP   Compensation       Former Owner /
         Stock         Arrangements       Current Officers




                                                             16
              Which Hat is On
 When a Company Executive or Owner is also the
     Internal fiduciary, there may be a conflict
(duty to stockholders v. duty to plan participants)

                     THINK:

     In what capacity am I acting in
         making this decision?
                                                 17
Trustee’s Annual ESOP Checklist
Note 1: the "Period" represents the time either Before (-) or After (+) First Day of Plan Year to complete the task
Note 2: specific due dates are for calendar year end. Dates marked with an " * " are date certain

                     Period             Duty                                                         Description
 1                     - 2 mos Distribution           Ensure Diversification & RMD Distributions for current & next plan year
 2                     - 2 mos Investment             Engage Valuation Firm
 3                     - 1 mos Distribution           Engage Third Party Administrator

 4                  31-Jan *     Compliance           Last day to Prepare and Mail IRS Form 1099-R AND IRS Form 945
 5                     + 1 mos   Distribution         Determine Participant Eligibility
 6                  28-Feb *     Compliance           Last day to Prepare and Mail IRS Form 1096
 7                     + 2 mos   Distribution         Review Share Release Calculation & Allocation
 8                     + 2 mos   Investment           Review Financial Statements of underlying Company
 9                   15-Mar      Compliance           Last day to Receive Company Contribuiton for prior plan year (unless corporate return is extended)
 10                    + 3 mos   Investment           Read Valuation Report & Establish Price
 11                    + 3 mos   Distribution         Review Allocation Report & Distribute Participant Statements
 12                    + 3 mos   Compliance           Distribute Diversification Notices

 12                  1-Apr *     Compliance           Last day for RMD payments to any participant who turned 70&1/2 in prior year
 13                    + 4 mos   Distribution         Review & Prepare Participant Distribtuions
 14                    + 5 mos   Corp Governance      Review Proposals & Nominated Directors
 15                    + 5 mos   Corp Governance      Distribute Proxy Information to Participants
 16                    + 6 mos   Compliance           Last day to Execute Diversification Elections
 17                    + 6 mos   Corp Governance      Attend Annual Meeting
 18                    + 6 mos   Corp Governance      Vote Proxy

 19                     +7 mos Compliance             Last day to file 5500 (can be extended 2&1/2 mos)
 20                  30-Sep    Compliance             Last day to Distribute Summary Annual Report (within 2 mos after filing tax return)
 21                   +10 mos Distribution            Review Repurchase Obligation Study
 22
 23                 31-Dec *     Compliance           Last day for RMD distributions

 24               Occasionally   Compliance           Distribute Summary Plan Discription to new participants
 25               Occasionally   Corp Governance      Review Corporate Actions, Budgets & Plans
 26               Occasionally   Corp Governance      Engage Plan & Trust Legal Advisor
 27               Occasionally   Custody              Collect, Receive and Invest Asset revenues (divs or S-Corp earnings)
 28               Occasionally   Custody              Accept Employer Contribution(s)
 29               Occasionally   Investment           Engage in Assets Purchases or Sales
 30               Occasionally   Investment           Prepare and Process Loan Payments
 31                Recurring     Compliance           Monitor Plan & Trust compliance with apllicable laws & regulations
 32                Recurring     Custody              Hold, Control and Maintain assets
 33                Recurring     Investment           Determine Plan Investment Prudence
          Premise

   “Is it possible to put in
sufficient safeguards to allow
an insider to do a good job of
 acting as an ESOP trustee?”
    Many Hats
CFO – BOD - Trustee
    Carris Reels
Internal Trustee Perspective
More Disciplined Since Majority ‘95
•   Training for Trustees
•   Checklists of Tasks
•   Scheduled Meetings
•   Meetings Documented
•   More than just
    determining stock
    value
                                                             Trustee Meeting Schedule and Checklist



Trustees                                                                Meetin
                                                                         g#
                                                                          1
                                                                          2
                                                                                           2009                 2010
                                                                                    Monday 2/16/2009 Monday 2/15/2010
                                                                                   Wednesday 3/11/2009 Wednesday 3/10/2010


Duties
                                                                          3        Wednesday 5/13/2009 Wednesday 5/12/2010
                                                                          4        Wednesday 8/12/2009 Wednesday 8/11/2010
                                                                          5        Wednesday 11/11/2009 Wednesday 11/10/2010

                                                                                    Quarter


•   Administration
                                                                         Task
                                          Task
                                                                        number
                                                                                       1          2         3          4       5

                      Engage Administrator                                     1                                       √

•
                      Review Administration                                    2       √
    Investing         Engage Recordkeeper
                      Review Recordkeeper's Allocation Reporting
                                                                               3
                                                                               4                            √
                                                                                                                       √



•
                      Statements Distributed                                   5                            √
    Diversification   Diversification Notice
                      Required Minimum Distributions
                                                                               6
                                                                               7
                                                                                                            √
                                                                                                            √
                      Eligibility Properly Determined                          8                            √

•   Valuation         Distributions Properly Made
                      Engage Attorney
                                                                               9
                                                                              10
                                                                                                            √
                                                                                                                               √
                      Engage Valuation Advisor                                11                                               √

•   Oversight         Review Valuation Report
                      Determine Stock Value
                                                                              12
                                                                              13
                                                                                       √
                                                                                       √
                      Review Loan Payments to the Bank                        14                            √

•   Exercise          Review Reconciliation of Bank Account
                      Review Contributions from Company to Plan
                      Review Nominated Slate of Directors
                                                                              15
                                                                              16
                                                                              17                  √
                                                                                                            √
                                                                                                                       √


    shareholder       Receive Instruction from Steering Committee
                      Attend Annual Shareholder Meeting
                                                                              18
                                                                              19
                                                                                                  √
                                                                                                  √
                      Review Corporate Actions                                20                  √
    rights            Review Corporate Financial Statements
                      Review Corporate Planning
                                                                              21
                                                                              22
                                                                                       √          √         √          √       √
                                                                                                                               √
                      Confirm Physical Location of Stock Certificates         23                            √
                      Review Plan Documents                                   24                                       √
                      Review Audit                                            25                                       √
                      Engage Auditors                                         26                                       √
                      Filing of IRS form 5500                                 27                                       √
                      Filing of IRS form 1099-Rs and form 1096                28       √
                      Filing of IRS form 945                                  29       √
 Reevaluated our Trustee Program
           2009 - 2010
• Worked with a leading
  ESOP consultant
• Entire ESOP committee
  was trained in Trustee
  Duties (25 people)
• Researched what other
  ESOP companies do
• Set pre-requisites,
  training requirements and
  evaluation procedures
 Which Has A Higher “Standard”?
Board of Directors or Board of Trustees?
              Trustees Standard
           “highest known to law”
Board of Directors                    Board of Trustees
• “Run” the company                   •   “Run” the trust
• Answer to the shareholders          •   For Benefit of participants
• Duty of care, i.e. being            •   IRS/DOL/ERISA - Government
  informed                            •   Beyond Prudent
• Duty of loyalty, i.e. interest of       – with the care, skill, prudence and
  the company                               diligence under the
                                            circumstances then prevailing
• As “appointing fiduciaries,”              that a prudent person acting in a
  Board has a duty under ERISA              like capacity and familiar with
  to monitor the actions of the             such maters would use in the
  ESOP Trustee and, if necessary,           conduct of an enterprise of like
                                            character and with like aims
  take corrective action
Prudent Person?
Who Wants to be Interrogated by
  the Department Of Labor?
Fantasy Fiduciary




    IDUCIARY
 Fantasy Trustee Committee?
A) 5 Trustees


B) 4 Trustees


C) 3 Trustees


D) 2 Trustees
Fantasy Trustee Committee
         Choice A
Fantasy Trustee Committee
         Choice B
Fantasy Trustee Committee
         Choice C
Fantasy Trustee Committee
         Choice D
Reevaluated our Trustee Program

 Composition               Criteria

               Trustee

   Selection             Structure of
    Process                Position
                   Composition
                              •   Minimum 3
Composition        Criteria   •   Maximum 7
                              •   Probably end up at 5
                              •   1 finance, 1 HR
         Trustee              •   + 1-2 “experts”
                              •   + 2-3 “non-experts”
                                  representation of
 Selection    Structure of
  Process       Position          locations
                         Criteria
                              • For “non experts”
                              • HS diploma or GED
Composition        Criteria   • Understand and support the
                                Carris culture
                              • Strong math aptitude
                              • Ability to read and understand
         Trustee                legal documents in English
                              • Ability to understand business
                                dynamics
                              • No felonies?
 Selection    Structure of
                              • Employee owner in good standing
  Process       Position
                              • Must attend ESOP committee
                                meetings
              Selection Process
                              • Application process
Composition        Criteria   • Subcommittee screens
                                for eligibility
                              • ESOP Committee votes
         Trustee



 Selection    Structure of
  Process       Position
             Structure of Position
                              • Annual re-appointment by
                                Board of Directors
Composition        Criteria
                              • Otherwise, minimum 6 year
                                expectation
                              • ESOP committee reviews
         Trustee                trustees annually, with
                                Board of Directors oversight
                              • 12 hour annual education
 Selection     Structure of     requirement
  Process        Position     • Stipend
            Circular Loop
Each Has Some Responsibility For The Other

                   ESOP
                 Committee



    Board of             Board of
    Directors            Trustees
                   ESOP
                 Committee
Reevaluated our Trustee Program

 Composition               Criteria

               Trustee

   Selection             Structure of
    Process                Position
 Even after evolving the role of the
trustee over the past 16 years, most
people in the company take most of
  what the trustees do for granted!
QUESTIONS?

				
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