Category: Labor & Employment

Will Auditors Influence How Executives Are Paid?

Recently The National Law Review published an article by Andrew C. Liazos of McDermott Will & Emery regarding Executive Pay:

PCAOB proposals would have auditors reading the employment and compensation contracts of corporate leaders and, possibly, forcing changes to comp programs due to unacceptable risks of material restatement.

Unfortunately, the PCAOB is suggesting that auditors also evaluate whether the design of an executive-compensation program could itself lead to excessive risk taking. Here’s what one of the board members, Steven Harris, had to say about this matter:

“Equity-based compensation arrangements may also provide strong incentives for excessive risk-taking by executives. Studies have shown that these arrangements can position executive officers to benefit from the upside of high-risk investments, while largely insulating them from the downside risks. In addition, excessive risk taking generally is viewed as one of the contributing factors to the recent financial crisis. For example, ‘The Financial Crisis Inquiry Report’ concluded that ‘Executive and employee compensation systems at these institutions disproportionately rewarded short-term risk taking.’ The Board’s proposals would require auditors to focus on the potential opportunities and motivations for executive officers to exaggerate gains, or minimize losses, and to consider any effect compensation incentives might have on the reliability of the financial statements.” (Emphasis added)

That type of statement raises the possibility that an auditor might view the structure of an executive-compensation program to be so problematic that, when coupled with other factors, the auditor may be unable to issue an unqualified opinion. This risk (i.e., not receiving an unqualified opinion on financial statements) could give the auditor significant influence over executive-compensation decisions.

What’s particularly interesting about the timing of the PCAOB release is that its focus on executive compensation is happening when shareholders now have a “say on pay” under Dodd-Frank and there is an increasing focus on “pay for performance.” As discussed in my January column, ISS, the leading shareholder advisory service, recently revamped its guidelines for making recommendations on executive compensation by focusing on total shareholder return (TSR) as compared with peer companies, and it’s reasonable to expect that issuers will start to use TSR performance goals. One can only imagine the reaction of compensation committees if their decisions to restructure executive pay in response to shareholders were to be second-guessed by auditors, particularly in light of the current lawsuits regarding failed say-on-pay votes.

The PCAOB is moving quickly on this change. While the proposed amendments require SEC approval, the PCAOB anticipates that these changes would be effective for audits of financial statements for companies with fiscal years beginning on or after December 15, 2012.

© 2012 McDermott Will & Emery

JOBS Act – Jumpstart Our Business Startups: U.S. House of Representatives Legislation

Recently published in The National Law Review was an article by Jeffrey M. Barrett and Gregory J. Lynch of Michael Best & Friedrich LLP regarding the JOBS Act:

On Thursday, March 8, 2012, the U.S. House of Representatives easily passed a package of bills called the Jumpstart Our Business Startups, or JOBS Act aimed at making it easier for small businesses to go public, attract investors, and hire workers by reducing U.S. Securities and Exchange Commission (SEC) registration requirements and other restrictions.  If it becomes law, the JOBS Act has the potential to significantly reduce the securities compliance costs of raising capital for emerging companies.

The Senate is expected to soon introduce its own version of the legislation and President Obama has indicated his support of the measure.Business Startups, or JOBS Act aimed at making it easier for small businesses to go public, attract investors, and hire workers by reducing U.S. Securities and Exchange Commission (SEC) registration requirements and other restrictions.  If it becomes law, the JOBS Act has the potential to significantly reduce the securities compliance costs of raising capital for emerging companies.

Increase of 500 Investor Threshold to be a Reporting Company

The JOBS Act increases the offering threshold for companies exempted from SEC registration from $5 million – the threshold set in the early 1990s – to $50 million.  The measure also raises the threshold for mandatory registration under the Securities Exchange Act of 1934, as amended, from 500 shareholders to 1,000 shareholders for all companies (and 2,000 shareholders for all banks and bank holding companies) and excludes securities held by shareholders who received such securities under employee compensation plans from the calculation.  Raising the offering and shareholder thresholds is intended to help small companies gain access to capital markets without the costs and delays associated with the full-scale securities registration process.

Crowdfunding

Also included in the legislation is a new registration exemption from the Securities Act of 1933, as amended, for securities issued through internet platforms also known as “crowdfunding.”  To use this new exemption, the issuer’s offering cannot exceed $1 million, unless the issuer provides investors with audited financial statements, in which case the offering amount may not exceed $2 million.  An individual’s investment must be equal to or less than the lesser of $10,000 or 10 percent of the investor’s annual income.  By exempting such offerings from registration with the SEC and preempting state registration laws, the legislation seeks to enable entrepreneurs to more easily access capital from potential investors across the United States to grow their business and create jobs.

Removal of Ban on Small Company Advertisements to Solicit Capital

Lastly, the legislation would remove the prohibition against general solicitation or advertising on sales of non-publicly traded securities, provided that all purchasers of the securities are accredited investors.  The Securities Act of 1933, as amended, currently requires that any offer to sell securities either be registered with the SEC or meet an exemption.  Rule 506 of Regulation D is an exemption that allows companies to raise capital as long as they do not market their securities through general solicitations or advertising.  The legislation would allow small companies offering securities under Regulation D to utilize advertisements or solicitation to reach investors and obtain capital, provided that all purchasers of the securities are accredited investors.  The goal is to allow companies greater access to accredited investors and to new sources of capital to grow and create jobs, without putting less sophisticated investors at risk.

Emerging Growth Companies

The legislation establishes a new category of security issuers, identified as “Emerging Growth Companies” (EGCs), which will be exempt from certain regulatory requirements until the earliest of three conditions: (1) five years from the date of the initial public offering; (2) the date an EGC has $1 billion in annual gross revenue; or (3) the date an EGC becomes what is defined by the SEC as a “large accelerated filer,” which is a company with a  worldwide market value of outstanding voting and non-voting common equity held by non-affiliates (also known as “public float”) of $700 million or more.  The regulatory relief provided by the legislation is designed to be temporary and transitional, encouraging small companies to go public but ensuring they transition to full conformity with regulations over time or as they grow large enough to have the resources to sustain the type of compliance infrastructure associated with more mature enterprises.

© MICHAEL BEST & FRIEDRICH LLP

Search Warrant Basics

Recently The National Law Review published an article from Risk Management Magazine a publication of the Risk and Insurance Management Society, Inc. (RIMS) regarding Search Warrants in the Office:

When armed government agents enter your office, seize your computers and talk to your employees, the business day has gotten off to a rough start. It only gets worse when the news shows video of agents in raid jackets carrying your eye-catching, focus group-tested logo. As the days go on, you are busy reassuring customers, vendors and employees that despite early reports and comments made by the government and your competitors, it is all going to be fine and you are going to get back to business as usual.

Presented with this hypothetical situation, many adopt a similar response: it won’t happen to me. But any business that operates in a heavily regulated area or partners with any federal agency needs to appreciate that government inquiries are simply part of operating in that space. The FBI is not the only investigative agency; it is just as likely that the Environmental Protection Agency or the Health and Human Services Office of the Inspector General will be at the front desk with a warrant in hand and a team ready to cart away the infrastructure and knowledge of your business. Will you be ready?

Good planning as part of a regular annual review can help settle nerves, avoid costly mistakes, and put you in the best defensive position should that fateful day come when the feds show up at your door. Follow this five-part plan and you will be much better off.

Summon the Team

Just as the agents did the morning before the search, you need to assemble your response team. The government has specialized people with individual roles and you need to have the same type of team. Some people on your team are there because you want them there. Others make the team because they sit at the reception desk or close to the front door. Either way, they are now on the same team.

The point person on the team has to be the in-house counsel. The agent may not let the receptionist place a series of calls, but the receptionist should be permitted to call the in-house counsel to notify her of the situation. From that point on, the command center shifts from the front desk to counsel’s desk.

The next call should be made from the company’s general counsel to outside criminal counsel. A general litigation or M&A background may be well suited for the company’s general needs, but on this day, the needs are quite different. Outside criminal counsel needs to begin the dialogue with the agent and the prosecutor, and should send someone to the scene if possible.

The response team should also include the heads of IT, security and communications. The IT officer must make sure that, as the search is conducted, intrusion into the system can be minimized so that the business may continue operation. If the IT officer is not permitted to assist with the search, it is critical that he observes all actions taken by the government related to any IT matters. This observation may be valuable at some point in the future if computer records are compromised or lost. This is just as important for information that may tend to show some violation of the law as it is for information that may support defense or a claim of actual innocence. The Computer Crime and Intellectual Property Section of the Criminal Division has produced a manual for the search and seizure of computer records and an expert can help evaluate law enforcement’s compliance with its own approved procedures.

If your company is a manufacturer or scientific production company where the question at issue may be the quality, characteristics or integrity of a product, it is important that you demand an equal sample from the same source and under the same conditions as those taken by the seizing agents. This is important so that your own experts can review a similar sample for your own testing in defense. If this is not possible given the type of product seized, your outside counsel will work with prosecutors and agents to assert your rights to preserve evidence for future testing. Just as the IT expert can be a helpful observer, a technical expert who observes the government sampling can also provide valuable insight into issues related to the sampling that may make a world of difference at some time in the future.

The communications expert is the final member of the team, but no less significant. She can be an important point of contact for media inquiries that will inevitably follow. It is vital to be able to communicate to your customers that you are still performing your daily support and that, as you address this matter, you will never take your eye off the customer’s needs and deadlines. With a disciplined response, many companies will survive a search warrant and government investigation. This process will help ensure that your customers are there for you when you get through this difficult time.

Depending on the size of your company, all of the response team roles may be performed by one or two people. Think of the function of the tasks that need to be accomplished instead of job titles alone. The other factor that you must consider at the outset is what role will these people have in the case going forward. Try and identify people who can perform these tasks but will be outside the case itself. If you know that the company lab has been under investigation, the lab director may be a target of the investigation. If that is the case, you do not want to have that employee serving as your only witness observing the search. Instead, an ideal observer might be the outside counsel’s investigator.

Execute a Pre-Established Plan

An important part of this response is that you have a pre-established plan that can be taught and disseminated instantaneously. The first rule of any plan is to not make matters worse. In this case that means, “Let’s not have anyone arrested for obstruction.” If the search team has a signed search warrant for your address, they have a lawful right to make entry.

Challenging the search warrant is for another day and both state and federal laws prohibit interfering with the execution of a search warrant. This is the time to politely object to the search and document what is happening. With a copy of the search warrant in hand, outside legal counsel may be able to challenge the scope of the search, but that is not an area where the novice should dabble.

While your specialized team members perform their tasks, the company is generally at a standstill while the search continues. Let your team members work and have the rest of your employees go home. You are shut down for the time being just as you would be any other time your business is closed. You do not want to allow employees to wander the halls and interact with agents. Off-hand comments that make it into a law enforcement report may distort the facts and be difficult to explain later.

Make sure that company employees understand what is happening and what their rights are in this situation. It is important to avoid interfering with the actual lawful execution of a search warrant; it is also unlawful to tell your employees to not speak to the agents. If they know they have a right to meet with a company-retained counsel of their own and have a right to remain silent at this point, it may go a long way in calming nerves.

Assert Privilege

This is not a difficult matter to explain, but it is critical: if there are documents that are covered by the attorney/client privilege or any other similar privilege, it is critical that you assert that privilege. One reason for the receptionist to be allowed to call company counsel is that there are materials that are covered by the privilege.

It is critical to make privilege claims at this juncture so that the agents are aware of the assertion and that they formally recognize it. This may simply mean that they put those documents in a different box for review by a team subject to judicial review at a time in the near future or it may mean that the team will review the materials for immediate decisions to be made on scene. Whatever procedure the agents have established can be reviewed later, but if you do not assert privilege now, it changes the options available to you as the proceedings go forward

Record the Search

Given the concerns of civil liability, it is not uncommon for agents to make a video recording of their entry and departure from the scene. Their goal is to document any damage that may have been caused by the lawful execution of the warrant. The agents also want to be able to document their professional execution of the warrant in the event that claims are raised at a later point. But that tape is going to stay in their custody and not be available for your team to review as you prepare the defense.

A video record of the search may provide a key piece of support to the defense that could not possibly be understood on the day of the search. However, this process must be handled in a very unassuming manner and with a clear understanding by the agents that you are doing it, and that, in the event there are undercover officers who are masked, that you will make no effort to record them. In some states, recording voice without consent of all parties is a felony, so this is a matter that you must review with outside counsel when you are developing your procedures for search warrant response. Again, you do not want to do anything to make your situation worse.

Collect Your Own Intelligence

Just as the agents are trying to learn about your operations, they will be giving you valuable information about their own operations and the focus of their investigation. Your first tasks are to determine who is in charge, document the names of the agents in attendance and note all the agencies involved in the search. This is information that you can gather directly by politely asking for the names of the agents and observing the insignia of the agents’ uniforms or badges around their necks.

The other opportunity available to you in this unique situation is the opportunity to listen to the language the agents use, the apparent hierarchy of the agents, and the small bits of casual conversation that may give you valuable insight into the goals of the search. As the day wears on, the agents will feel more comfortable around your response team and they will talk more freely. This is not to suggest that your team should attempt to interrogate the agents, however, because that will open a two-way dialogue that may lead to statements that are difficult to explain or put in context. The suggestion is simply that you serve as an active listener.

Help Establish Rapport

Throughout the day, the agents are going to be forming opinions about your company and your employees. Use this time to make a good impression about your company. A professional, disciplined response in a time of crisis sends a very different message than the one sent by yelling obstructionists. Even though the agents have quite a bit of information about you as their target, it may have all been gathered from third parties. This may be your opportunity to impress them and to help them question the veracity of your accusers. Remember that there will be meetings about your company, your executives and their futures, and the only people in those meetings will be the agents and the prosecutors. You want their memories of this day to weigh in your favor.

Risk Management Magazine and Risk Management Monitor. Copyright 2012 Risk and Insurance Management Society, Inc.

Illinois Federal Court Sides With Circuits Allowing Non-Disabled Individuals to Bring ADA Claims

The National Law Review published an article by the Labor & Employment Group of Schiff Hardin LLP regarding ADA Claims:

An Illinois federal court recently decided that it could be unreasonable for an employer to require an employee take a mental health exam as a condition of keeping his job, and allowed a former employee’s claim to proceed to trial. Sanders v. Illinois Dept. of Central Management Services, 2012 WL549325 (C.D.Ill. Feb. 21, 2012).

The Illinois Department of Central Management Services (the “Department”) employed Michael Sanders as a data processing technician. In 2005, Mr. Sanders was disciplined with suspension for various infractions including not following procedures, leaving his work station and sending an email to his supervisor, Victor Puckett, accusing him of being racist and needing mental health treatment. Thereafter, on August 26, 2005, Mr. Sanders accused Mr. Puckett of screaming, cursing and threatening to throw him out the window during a work dispute, which Mr. Puckett disputed. Mr. Sanders was disciplined for the August 26 incident. On September 9, 2005, the union representative at the pre-disciplinary hearing relating to the August 26 incident notified the Department that Mr. Sanders had threatened to harm Mr. Puckett (which Mr. Sanders disputed).

A.    The Discharge Decision

Thereafter, the Department placed Mr. Sanders on administrative leave and directed him to undergo an independent psychological evaluation, but Mr. Sanders did not attend any of the three appointments made for him. The Department initially terminated Mr. Sanders on November 23, 2005 for not undergoing the psychological exam, but voluntarily reinstated him and placed him on administrative leave effective February 1, 2006. During his leave, the Department made additional appointments for him to undergo an independent psychological evaluation, but Mr. Sanders did not attend any of them.

In January, 2007, the Office of Executive Inspector General (“OEIG”) determined that there was no evidence that Mr. Sanders violated Department rules during the August 26, 2005 incident. The Department scheduled another appointment for an independent psychological evaluation on September 5, 2007. Mr. Sanders sent two memos to the doctor who was to examine him, threatening to take legal action, disciplinary action and contact the media if the doctor did not cancel the appointment.

Mr. Sanders was discharged for refusing to undergo the independent psychological examination. He appealed his termination to the Illinois Civil Service Commission. The Commission found that it was not reasonable for the Department to require Mr. Sanders to submit to an independent psychological examination, and the Department’s decision to discharge Mr. Sanders was unsupported, based on a number of factors including that the Department had not interviewed Mr. Sanders to obtain his version of events relating to the alleged incidents, and also that, according to the Commission, there was no “credible evidence” that Mr. Sanders had threatened Mr. Puckett. The Department’s appeals of that decision to the Commission and the circuit court were denied.

B.     The ADA Suit

Thereafter, Mr. Sanders filed suit against the Department in Illinois federal court alleging violation of the Americans with Disabilities Act (“ADA”). The court allowed Mr. Sanders’ suit to proceed to trial on the question of whether Mr. Sanders’ discharge for refusal to undergo a psychological examination violated the ADA. The court noted that an employer’s demand that an employee submit to a medical exam may be permissible if the employer has a reasonable belief that the employee’s ability to perform essential job functions is impaired by, or the employee poses a direct threat due to, a medical condition. Here, however, the court focused on the OEIG’s finding that there was no evidence that Mr. Sanders violated the Department’s rules during the August 26, 2005 incident, and held that a jury should decide if it was reasonable for the Department to continue to schedule the psychological exams for Mr. Sanders after the OEIG’s determination. The court also noted that what may be reasonable in some employment settings, such as law enforcement or school personnel, may not be reasonable in others.

The case is significant because the district court in this case joined a number of federal circuit courts that allow a non-disabled individual to bring suit under the ADA, including the U.S. Courts of Appeal for the Ninth and Tenth Circuits. The Seventh Circuit has not ruled on the issue. Here, the court did not even consider the question of whether the plaintiff was a qualified individual with a disability under the ADA.

The case reinforces that any request for a physical or mental examination must be carefully examined for necessity and job-relatedness. It also highlights the importance of conducting thorough investigations into alleged instances of misconduct before taking any employment actions.

© 2012 Schiff Hardin LLP

Florida Bill Would Preempt Local “Wage-Theft” Ordinances

The National Law Review recently published an article by Jay P. Lechner of Greenberg Traurig, LLP regarding Wage-Theft Ordinances:

GT Law

The term “wage theft” has become popular among commentators and labor groups to describe a variety of employer violations of federal and state laws relating to overtime, minimum wage or lost income to an employee. In 2010,Miami-Dade County enacted a “wage-theft” ordinance, providing for triple damages against employers and establishing a claims filing process for employees alleging that they were underpaid. Other Florida municipalities are contemplating similar regulations. These ordinances are problematic in that they create a statewide patchwork of various additional regulations that businesses are forced to learn and comply with, are largely unnecessary given the adequacy of existing remedies for employees and do not discourage frivolous or unfounded claims.

The Florida House last week passed a bill that would address these concerns by expressly preempting local regulation of “wage theft” and preventing local governments from enacting their own “wage theft” ordinances. The bill also would encourage early resolution of employee complaints by requiring an employee to, as a condition precedent to bringing an unpaid wage claim, notify the employer in writing, identifying the amount owed and the work dates and hours for which payment is sought and allowing the employer 15 days to pay the total amount of unpaid wages. The bill has been sent to the Senate, which has a similar bill pending. If passed, the bill would become effective July 1, 2012.

©2012 Greenberg Traurig, LLP.

Labor & Employment Law Forum 2012

EVENT HAS BEEN POSTPONED – new dates soon!

 

 

 

The National Law Review is pleased to bring you information about the upcoming

Labor & Employment Law Forum

March 21-22, 2012
Hyatt Regency Washington on Capitol Hill
Washington, DC

The Labor & Employment Law Forum provides a unique opportunity for retail executives involved with labor and employment issues to come together to hear from legal experts, fellow retailers and government insiders on the critical employment issues you grapple with every day.

Ensuring compliance with case law and new regulations on employment and labor issues is increasingly difficult for retailers. Issues involving wage and hour, bargaining units, social media usage, and more are continuously changing the retail workplace and your relationship with and obligations to your employees. Through focused sessions and strategic networking, you will gain the tools to address the myriad workplace issues your company faces.

Labor & Employment Law Forum 2012

Labor & Employment Law Forum

March 21-22, 2012
Hyatt Regency Washington on Capitol Hill
Washington, DC

The Labor & Employment Law Forum provides a unique opportunity for retail executives involved with labor and employment issues to come together to hear from legal experts, fellow retailers and government insiders on the critical employment issues you grapple with every day.

Ensuring compliance with case law and new regulations on employment and labor issues is increasingly difficult for retailers. Issues involving wage and hour, bargaining units, social media usage, and more are continuously changing the retail workplace and your relationship with and obligations to your employees. Through focused sessions and strategic networking, you will gain the tools to address the myriad workplace issues your company faces.

Finally the Final … 408(b)(2) Regulation

Recently The National Law Review published an article by Fred Reish and Bruce L. Ashton of Drinker Biddle & Reath LLP regarding The DOL Service Provider Fee Disclosure Regulations:

The Department of Labor (DOL) has issued the long-anticipated final service provider fee disclosure regulation (the “408(b)(2) regulation”). (A complete copy of the final regulation and its preamble is at http://www.drinkerbiddle.com/files/ftpupload/pdf/408b2reg. pdf) In this Alert, we describe what the amendment says; in a subsequent piece, we will explain the impact on various service providers.

>   The extension of the compliance date from April 1, 2012 to July 1, 2012

>   The fact that service providers are not required to provide a summary of the disclosures, though the DOL provided a sample “guide” that is not mandatory

>   The addition of the requirement to describe the arrangement between the service provider and the payer of indirect compensation

>   Limited relief for disclosures for brokerage accounts and similar arrangements

>   Clarification that electronic disclosure of the disclosures is permitted

>   Relief from the disclosure requirements for “frozen” 403(b) contracts

>   The requirement that plan sponsors terminate the relationship with a service provider who fails or refuses to provide information on request

Background

The 408(b)(2) regulation requires most service providers to retirement plans – including pension, profit sharing, 401(k) and 403(b) plans subject to ERISA – to make written disclosure of their services, fiduciary and/or RIA status and total compensation. The regulation was first proposed in 2007, was issued as an “interim final” regulation in July 2010 and has now been finalized with today’s release.

In light of its “interim final” status, it had been widely anticipated that amendments to the regulation would be issued; and the DOL invited comments on several issues in the 2010 release. In August of this year, the DOL publicly announced that it was working on an amendment and as a result extended the compliance date. Now, in issuing the final rule, the compliance date has once again been extended, though for only three months (i.e., July 1, 2012). Given the scope of some of the changes, this may not be sufficient time for covered service providers to develop and disseminate the required information on an orderly basis…which could result in errors.

Because of the delayed compliance date, some service providers have deferred starting the process of preparing the forms and creating the systems needed to comply with the disclosure requirements. Some did so to avoid having to make changes and others may have hoped for a more extended delay. That is not going to happen, and service providers should circle July 1, 2012 (barely five months away) on their calendars to make sure they are in full compliance by that date for existing clients and that they are prepared to comply with advance disclosures for any new clients.

The Final Regulation

The most important changes in the newly released amendment are:

  • Covered Plan – The definition of covered plan now excludes annuity contracts and custodial accounts in 403(b) plans that were issued to employees before January 1, 2009, where no additional contributions have been made and the contract is fully vested and enforceable by the employee.
  • Indirect Compensation – The final regulation has made a fairly significant change in the disclosure of indirect compensation (that is, compensation received from a source other than the plan or plan sponsor). The disclosure must now include both identification of the payer and a description of the arrangement between the payer and the covered service provider, affiliate or subcontractor pursuant to which the indirect compensation is paid. There is limited relief for disclosures related to brokerage accounts and similar arrangements.
  • Investment Information – The regulation modifies the information that must be provided by recordkeepers and others to better track the disclosures required in the participant disclosure regulation. It also adds a requirement to disclose information that is within the control of (or reasonably available to) the covered service provider and that is required for the plan administrator to comply with the participant disclosure regulation.
  • Form of Disclosure – There was speculation that the DOL would require service providers to include a summary of the disclosures and a “roadmap” for finding the disclosures in the documents provided. It did not do so and has indicated that it will be issuing a proposed rule regarding a summary or roadmap (now referred to as a “guide”) requirement in the future. In the meantime, the DOL did provide a sample guide that may, but is not required, to be used. That said, in the preamble, the DOL states, “Similarly, to the extent a responsible plan fiduciary experiences difficulty finding and reviewing the required disclosures in lengthy, technical, or multiple disclosure documents received from a covered service provider pursuant to the requirements of the final rule, the fiduciary should consider requesting assistance from the covered service provider, for example, discussing with the covered service provider the feasibility and cost of using the attached sample guide.”
  • Manner of Delivery – The final regulation clarifies that nothing in the regulation limits the ability to use electronic media.
  • Change Notice – The interim final regulation required that changes in the information previously provided had to be given to the responsible plan fiduciary not later than 60 days after the service provider becomes aware of it. This “update requirement” applied to all disclosures, including investment-related information. The final rule changes this requirement to say that the deadline for disclosure of investment-related information is “at least annually.” In other words, for this type of information, the updating requirement is now annual.
  • Reporting and Disclosure Response – The interim final rule required a service provider to give information necessary for a plan administrator to comply with the plan’s reporting and disclosure requirements under ERISA within 60 days after a written request. This has been changed to say that the information must be provided (in response to a written request) reasonably in advance of when the plan administrator must comply with its reporting obligation.
  • Compensation Definition – The final regulation amends the definition of compensation to permit a service provider to provide a “reasonable and good faith” estimate of compensation if it is not otherwise readily able to describe its compensation, though the covered service provider in this case is also required to explain the methods and assumptions used for the estimate.
  • Plan Fiduciary Relief – The regulation provides an exemption for plan fiduciaries if the service provider fails to provide required disclosures so long as various requirements are met. The exemption originally stated that if the service provider failed to provide the information upon request, the plan fiduciary was required to consider whether to continue the relationship with the service provider. The final rule now requires the plan fiduciary to terminate the relationship if the service provider fails to provide requested information relating to future services.

Finally, the compliance effective date for the participant disclosures has also been pushed back. For calendar year plans, the initial disclosures of plan and investment information must be provided by August 30, 2012, and the first quarterly expense statement is required by November 14, 2012 (covering the third quarter).

We will be discussing the impact of the changes and the compliance issues in a month or so in another, more detailed bulletin. However, we wanted to get this information to you as quickly as possible.

©2012 Drinker Biddle & Reath LLP

The Inside Job: Can Employees Walk Out The Door With Your Company's IP?

Recently in The National Law Review was an article by Katie L. Clark, Rohan Massey, and Hiroshi Sheraton of McDermott Will & Emery regarding IP Security:

With the economic downturn forcing redundancies, most employers are aware that the Q1 period brings an increase in employee movement. But have employers considered how much value could be walking out the door when an employee leaves? In today’s “knowledge economy”, businesses increasingly understand the value of intangible assets in the form of information.  Yet few businesses give thought to how and where those assets reside, or consider how much can be lost or passed to a competitor when employees move on.

The ease with which knowledge can be taken by employees has increased exponentially in recent times.  USB drives are now large enough to store literally millions of documents and cloud computing can provide limitless secure storage.  The increase in remote working also allows employees to download your documents and information in the privacy of their own homes.

There is also a growing international market for transferable knowledge, making the temptation even greater for employees to maximise their value to their new employer.  Emerging economies, with different laws, regulations, and cultural values, provide a ready market into which intellectual capital can be dispersed.

This issue affects every industry.  A number of high profile cases in the United States and China have seen former employees jailed for theft of trade secrets relating to consumer electronics and financial trading software, but every business has a wealth of internal knowledge that is used to give it a competitive advantage over its rivals.  Business plans, presentations, strategies, customer lists, market positioning, and protocols and procedures are all valuable assets that can find their way to new employers.

Most worryingly, this movement of information is not confined to “rogue” employees.  Many salespeople will claim that their address books of contacts belong to them, not to their employer.  Each type and level of employee and each type of business is likely to have a different understanding of what belongs to the company.  In addition, international cultural differences play an enormous role in determining where employees perceive the boundary to be between legitimate and illicit use of information.

So, how do you distinguish between what an employee is free to take away and what should remain with the business before it’s too late?  What procedures should be in place to maximise the intangible value retained by the business when employees move?  To what extent do data protection and privacy laws permit monitoring of employees’ activities?  What procedures are available when employees are suspected of taking valuable information and/or passing it to competitors?

In 2012, McDermott will be running a number of IP- and employment-focused seminars to provide an overview of how intellectual property and employment laws can help your company to protect it, and the policies and procedures that can be used to mitigate value walking out the door.

© 2012 McDermott Will & Emery

The Employee Benefits Landscape in 2012: PART I

Kristy N. Britsch of Dinsmore & Shohl LLP recently had an article about Employee Benefits published in The National Law Review:

As we start a new year, plan sponsors and plan administrators should be aware of important upcoming changes affecting employee benefits in 2012. This Part I discusses changes impacting qualified plans, including recently released final 408(b)(2) regulations regarding fee disclosure requirements. Part II will discuss changes impacting health and welfare plans.


REMEMBER: The following amendments were due by December 31, 2011. If you are not sure as to whether these amendments have been adopted, please contact one of our benefits attorneys.mployee benefits in 2012. This Part I discusses changes impacting qualified plans, including recently released final 408(b)(2) regulations regarding fee disclosure requirements. Part II will discuss changes impacting health and welfare plans.

A. Required Minimum Distribution Suspension Amendment

The Worker, Retiree, and Employer Recovery Act (“WRERA”), enacted in 2008, and among its other provisions, waived required minimum distributions (“RMDs”) from defined contribution plans (i.e., 401(k) plans, ESOPs, profit sharing plans, etc.) for the 2009 calendar year. Employers/plan sponsors must have adopted this amendment by the last day of the 2011 plan year (i.e., December 31, 2011 for calendar year plans)

B. Code Section 436 Funding Based Restrictions on Defined Benefit Plans

Section 436 of the Internal Revenue Code (the “Code”) (added to the Code by the Pension Protection Act of 2006) imposes restrictions on benefit distributions and accruals for underfunded single-employer defined benefit plans. The restrictions that apply are determined by the plan’s Adjusted Funding Target Attainment Percentage (“AFTAP”). If a plan’s AFTAP is less than 80%, the plan cannot be amended to increase benefits. If a plan’s AFTAP is less than 80%, but at least 60%, the portion of benefit that may be paid in a single lump sum or other prohibited payment is limited. If the AFTAP is less than 60%, the plan may not pay any lump sum distribution or other accelerated payments. Employers/plan sponsors must have adopted this amendment by the last day of the 2011 plan year (i.e., December 31, 2011 for calendar year plans).

QUALIFIED PLAN COMPLIANCE ITEMS IN 2012

Plan Restatements for Cycle B Plans (IRS Determination Letter Program)

For employers with an employer identification number (“EIN”) ending in a two (2) or a seven (7) and who sponsor individually designed plans, the period to restate a qualified plan and submit the plan with the IRS for a favorable determination letter began on February 1, 2012 and ends on January 31, 2013.

Cost of Living Adjustments

Plan sponsors should review the cost of living adjustments (“COLA”) to determine what, if any, changes must be considered.

2010

2011

2012
Annual compensation for plan purposes 
(for plan years beginning in calendar year) 401(a)(17)		 $245,000 $245,000 $250,000
Defined benefit plan, basic limit 
(for limitation years ending in calendar year) 415(b)		 $195,000 $195,000 $200,000
Defined contribution plan, basic limit
(for limitation years ending in calendar year) 415(c)		 $49,000 $49,000 $50,000
401(k) / 403(b) plan, elective deferrals
(for taxable years beginning in calendar year) 402(g)		 $16,500 $16,500 $17,000
457 plan, elective deferrals
(for taxable years beginning in calendar year)		 $16,500 $16,500 $17,000
401(k) / 403(b) /457, catch-up deferrals 
(for taxable years beginning in calendar year) (Age 50+) 414(v)		 $5,500 $5,500 $5,500
SIMPLE plan, elective deferrals
(for calendar years) 408(p)		 $11,500 $11,500 $11,500
SIMPLE plan, catch-up deferrals
(for taxable years beginning in calendar year) (Age 50+) 408(p)		 $2,500 $2,500 $2,500
IRA contribution limit
408(a)		 $5,000 $5,000 $5,000
IRA catch-up contribution 
(Age 50+)		 $1,000 $1,000 $1,000
Highly Compensated Employee 414(q) $110,000 $110,000 $115,000
SEP Coverage 408(p)
(Compensation limit)		 $550 $550 $550
FICA Covered Compensation $106,800 $106,800 $110,100
Key Employee $160,000 $160,000 $165,000
ESOP 5- Year
Distribution period
409(o)(1)(c)(ii)		 $985,000 $985,000 $1,015,000

Fee Disclosures Requirements: Plan Level Disclosures and Participant Level Disclosures

Plan administrators will be subjected to two new disclosure rules this year. One rule affects disclosures made at the plan level and the second rule affects disclosures made at the participant level. Under the final ERISA Section 408(b)(2) regulations, issued by the Department of Labor on February 2, 2012, the plan level disclosures take effect on July 1, 2012 (extended from its April 1, 2012 effective date). The participant level disclosures take effect August 30, 2012 (extended from its May 31, 2012 effective date).

A. Plan Level Disclosures

Effective July 1, 2012, “covered service providers” must disclose to an ERISA plan fiduciary any compensation that they or their affiliates receive for services related to an ERISA covered plan. This rule applies to both defined benefit plans and defined contribution plans. If a covered service provider fails to provide the required disclosures, the plan’s service contract or arrangement with that covered service provider will not be considered “reasonable” under ERISA and thus, will be a prohibited transaction subject to penalties and which could expose plan fiduciaries to liability.

To provide background, ERISA Section 408(b)(2) requires plan fiduciaries to ensure that contracts or arrangements with their service providers, and the compensation paid under such arrangement, is “reasonable” in order for the arrangement to be exempt from ERISA’s prohibited transaction rules. To ensure that compensation paid by a plan is “reasonable,” the new fee disclosure regulations impose a new disclosure obligation on service providers.

ERISA Section 406(a)(1)(C) prohibits the “furnishing of goods, services or facilities between a plan and a party in interest.” Because a “party in interest” includes any party that provides services to a plan, service arrangements generally are prohibited unless they qualify for an exemption. ERISA Section 408(b)(2) provides such an exemption by permitting a party in interest to provide “services” to a plan if:

  1. the contract or arrangement is reasonable; and
  2. the services are necessary for the establishment or operation of the plan; and
  3. no more than reasonable compensation is paid for the services.

A covered service provider includes any service provider that enters into a contract or arrangement with an ERISA covered plan and expects to receive at least $1,000 in direct or indirect compensation. The types of covered service providers subject to these new rules include the following:

  1. Fiduciaries and investment advisors.
  2. Recordkeeping or brokerage services that allow participants to self-direct the investment of his or her accounts.
  3. Certain other service providers who receive indirect compensation. Indirect compensation means compensation received from a source other than the plan, the plan sponsor, the covered service provider, or an affiliate or subcontractor. This category includes accounting, auditing, actuarial, appraisal, custodial, banking, insurance, investment advisory, legal, valuation, or third-party administration services.

Covered service providers must provide plans with a description of the services provided to the plan, a description of direct and indirect compensation that the covered service provider expects to receive (includes commissions, finders fees and Rule 12b-1 fees) from the plan, a statement of the covered service provider’s status (such as registered investment advisor or fiduciary), and a description of the fees that will be charged against the investments under the plan.

One significant change made by the final 408(b)(2) regulations is that the definition of covered plan now excludes frozen 403(b) annuity contracts and custodial accounts that were issued to employees prior to January 1, 2009 (i.e., 403(b) plans where no additional employer contributions have been made and the contract is fully vested and enforceable by the employee). For more information on the final 408(b)(2) regulations, please contact one of our benefits attorneys.

B. Participant Level Disclosures

As stated above, the extended effective date of the plan level disclosures affects compliance with the participant level disclosures. Calendar year plans will now be required to make their initial annual disclosure to participants no later than August 30, 2012 and provide their initial quarterly statements no later than November 14, 2012.

Under the participant level disclosure requirements, plan administrators of retirement plans with participant directed accounts (such as 401(k) plans) will be required to disclose to participants (including employees who are eligible to participate) the fees and expenses associated with the funds in that retirement plan. This increased disclosure obligation includes “plan related disclosures” and “investment related disclosures.”

Investment Related Disclosures

Plan administrators must provide participants and beneficiaries with performance and investment fee information for each investment option available under the plan, on or before the date that a participant could first direct his or her investments, and annually thereafter. The investment related information that must be disclosed includes the following:

  1. Identifying information for each investment option under the plan, including the name of each investment option and the type or category of the investment option (i.e., large or small cap, money market fund, etc.).
  2. Performance data and benchmark information for each investment option available under the plan.
  3. Fee and expense information for each investment option.
  4. Website address and a glossary of investment related terms so that participants can access additional information about each investment option available under the plan.
  5. 1-year, 5-year and 10-year investment performance returns and applicable benchmark returns for each investment option that does not have a fixed rate of return. For investment options with a fixed return, the annual rate of return and the term of the investment must be disclosed. The disclosure must also include a statement that an investment’s past performance is not necessarily indicative of future performance and that the rate may be adjusted.

Investment related information must be provided to participants and beneficiaries in a chart (or similar scheme) that allows participants or beneficiaries to compare information about each of the investment options offered under the plan. The chart must include the date, the name, address and telephone number of the plan sponsor (or its designee), and an explanation that additional investment related information about the plan’s investment options can be accessed via the web, and a description of how participants and beneficiaries can obtain (free of charge) paper copies of the information contained on the website.

In addition to the information that must be automatically provided to participants, plans must also provide the following information to participants upon request:

  1. Prospectuses for any SEC registered investment options.
  2. Financial statements and reports, such as shareholder reports.
  3. Share value of each investment option and valuation date.
  4. A list of assets that constitute the investment alternatives under the plan.

Plan Related Disclosures

Plan administrators must provide to each participant and beneficiary, on or before the date in which a participant can first direct his or her investments and annually thereafter, certain plan information, which may be categorized into three areas: (1) general plan information, (2) administrative expense information, and (3) individual expense information. If there is a change to this information, the updated information must be provided at least 30 days, but no more than 90 days, in advance of the effective date of the change.

  1. General Plan Information: General plan information must be provided to participants and beneficiaries explaining the structure and mechanics of the plan, such as an explanation of the circumstances under which a participant or beneficiary may give investment instructions; an explanation of any limitations on such instructions, including transfer restrictions to or from a designated investment option; a list of investment options available under the plan; the identification of any investment managers, and a description of any “brokerage windows” or brokerage accounts that enable participants and beneficiaries to select investment options beyond those offered by the plan.
  2. Administrative Expense Information: Plan administrators must provide participants and beneficiaries with an explanation of fees and expenses for general plan administrative services (e.g., legal, accounting or recordkeeping costs that may be charged against participants’ accounts on a plan-wide basis) and an explanation of the basis on which such charges will be allocated (e.g., pro rata) to each individual account under the plan. Administrative expenses must be reported to participants in a quarterly statement.
  3. Individual Expense Information: Plan administrators must provide to participants and beneficiaries an explanation of any fees and expenses that may be charged to an individual’s account based on an individual basis (not plan-wide basis). This includes costs associated with fees and expenses for processing plan loans or qualified domestic relations orders (“QDROs”), fees associated with investment advice that may be rendered, or transfer fees. Similar to the administrative expenses, individual expenses must be disclosed to participants in a quarterly statement.

In light of the new fee disclosure requirements, at both the plan level and participant level, we urge plan sponsors to begin thinking about the compensation paid to covered service providers as part of its fiduciary review. We also urge plan sponsors and to begin thinking about participant communication strategies with respect to the new participant disclosures. If you have any questions about your “fiduciary review” or about this alert, please contact one our benefits attorneys.

© 2012 Dinsmore & Shohl LLP.