More On Legal & Compliancefrom The Advisor's Professional Library
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
The Department of Labor announced Wednesday that it has reached a settlement with the Cleveland-based Sherwin-Williams Co. that will provide $80 million to current and past participants of its Employee Stock Purchase and Savings Plan.
The agreement comes after the department’s Employee Benefits Security Administration investigated whether Sherwin-Williams, seeking to take advantage of tax breaks, improperly managed the plan in violation of the Employee Retirement Income Security Act.
The settlement also requires Illinois-based GreatBanc Trust Co. to undergo an audit of its pension plan activities.
Phyllis Borzi, assistant secretary of labor for EBSA, said in a statement announcing the settlement that “When fiduciaries expend retirement plan assets, they have to act with undivided loyalty to the plan participants and make sure that the plan receives full value for its money.” The fiduciaries’ job, she said, “is to manage plan investments to provide a secure retirement, not to help the plan sponsor secure tax breaks that are wholly disproportionate to the benefits actually provided to retirees.”
EBSA’s investigation focused on two transactions, one in 2003 and one in 2006, in which Sherwin-Williams and GreatBanc caused the plan to purchase specially designed stock issued by Sherwin-Williams solely for the purpose of the transactions. The investigation also looked at whether Sherwin-Williams had forwarded employee salary deferrals appropriately and promptly to their individual plan accounts, according to EBSA.
After conducting its investigation, the department concluded that as a result of Sherwin-Williams’ and GreatBanc’s violations of their fiduciary duties and the design of the transactions, the stock purchases did not provide benefits to the plan and its participants commensurate with the amount the plan paid for the stock, the transactions were not primarily for the purpose of providing benefits to plan participants, the transactions did not promote employee ownership of Sherwin-Williams and, at times, employee salary deferrals were not appropriately paid to the plan. As a result, the department concluded that Sherwin-Williams and GreatBanc were responsible and liable for violations of ERISA.
EBSA found that “Sherwin-Williams’ purpose in the transactions was to take advantage of substantial tax benefits designed to reward companies that provide their workers with significant stock ownership while, at the same time, ensuring that its employees did not actually receive stock or retirement benefits in amounts close to what the plan spent on the transactions or that the company claimed on its government filings.”
In October 2011, Sherwin-Williams reached a settlement with the IRS in connection with the transactions for excise tax and penalty claims, according to EBSA. The IRS settlement did not address violations of fiduciary duty under ERISA or resolve the department’s concerns relating to Sherwin-Williams’ use of employee salary deferrals.
The settlement will result in payments totaling $80 million to current and former participants in the plan as well as to their beneficiaries. In addition, GreatBanc will audit its engagements involving plan investments in employer stock and submit a full report of that audit to the department.
As of Dec. 31, 2011, the most recent Form 5500 filing, the plan had participants of 34,591 and assets of $2,496,931,983.