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December 31, 2003 at 07:00 PM
NU Online News Service, Dec. 31, 2003, 6:59 p.m. EST – The Employee Benefits Security Administration says benefit plan fiduciaries can settle class-action lawsuits and other suits involving interested parties without necessarily triggering the penalties imposed on “prohibited transactions.”[@@]
The EBSA, an arm of the U.S. Department of Labor, has published a final class exemption that spells out the rules that plan fiduciaries must follow when settling litigation with sponsors, service providers, participants and other interested parties.
The ruling affects financial services firms and other entities that act as fiduciaries for benefit plans subject to the Employee Retirement Income Security Act of 1974.
ERISA prohibits fiduciaries from letting plans under their supervision extend credit, sell property or lease property to interested parties. ERISA also prohibits fiduciaries from letting plans transfer assets to interested parties, except when the plan is conducting routine administrative activities, such as making retirement benefit payments.
The EBSA announced in February that it was looking at the issue because many fiduciaries have asked it about the rules for settling class-action securities fraud cases that involve interested parties.
Sometimes “the plan and/or its participants are shareholders,” according to an analysis written by Ivan Strasfeld, director of the EBSA Office of Exemption Determinations, that appeared in February. “In many securities fraud cases, the plan may also have a cause of action against some of the same parties, based on ERISA violations. The defendants in the ERISA case are likely to overlap with the defendants in the securities fraud litigation.”
Because plan fiduciaries are handling so many cases, the Labor Department wants to make sure fiduciaries have a mechanism for settling cases when doing so clearly will benefit plan participants and beneficiaries, Strasfeld wrote.
The final version of the class exemption provides an exemption for fiduciaries for plans that have settled or will settle court-certified class-action suits, or other cases involving a “genuine controversy,” before Jan. 30, 2004. To qualify for the exemption, fiduciaries must be able to show that plans have negotiated reasonable settlements that reflect the plans’ likelihood of full recovery, the risks and costs of litigation and the value of claims foregone.
