Trustees “First Do None Harm.”

Despite repeated warnings from the DOL, SEC and other regulators, professional fund consultants persist in trying to provide multiple and conflicting services including procurement of regulated products (i.e. securities, mutual funds, insurance, etc.) as part of a “total package of services” or as an “accommodation.”

If this pitch persuades your fund to hire one of these consultants, then at a minimum a "prudent trustee" must:

1. Find out if the consultant is receiving a commission (both an up front commission and/or eligible for a contingent commission) from any vendor. Is such an arrangement inconsistent with your contract with the consultant?

2. Receive a copy of the individual consultant's license to sell any regulated product for the relevant jurisdiction. Do not accept the statement, “that we run it through our ________ office.” Ask, “is your company licensed to sell this product in our state.” Obtain a copy of the license.

3. Review the consultant's professional negligence policy to make sure it covers the sale of regulated products such as securities, mutual funds, insurance, etc., not just professional errors and omissions. Check with your Fund’s fiduciary carrier whether the proposed arrangement creates additional risk. Even if the arrangement is covered, it may be and is perhaps costing the Fund more in the way of additional premium.

4. Most importantly, obtain from the consultant a hold harmless agreement that protects your Fund should a claim be made against the Fund or any trustee as a result of a potential conflict of interest. Ask for language like the following:

“Consultant agrees to hold Fund, its trustees, its employees and its agents harmless from any and all claims, lawsuits, causes of action, etc that might arise, regardless of its origin, that asserts, claims, alleges or accuses the Fund, its trustees, its employees, its agents, and or its consultants for acting improperly or imprudently by reason of the Fund allowing Consultant to procure for the Fund regulated products while performing other services for the Fund.”

The safest approach for a prudent Trustee is, of course, to avoid potential conflicts of interest; but if you can’t resist the lure, protect your Fund and yourself. Be prepared to answer the following question, “What steps did I, as a prudent trustee, take to make sure that the Funds assets were not exposed by this arrangement.” If the answer is simply, the “consultant said it was not a problem,” you are likely to have failed the “prudent trustee” rule.

New Grace Period for Filing LM-10s

> >
>
>
> The Labor Department's Office of Labor-Management Standards
>announced March 7 that many employers will have extra time to file LM-10
>forms disclosing payments and gifts made to unions and their officers and
>employees.
> OLMS said employers whose fiscal year ends Dec. 31 will have until May 15 to file fiscal 2005 LM-10s. Normally, LM-10s must be filed 90 days after the
>end of an employer's fiscal year; thus, organizations whose fiscal year
>ends Dec. 31 normally would have to file LM-10s by March 31.
>
> A separate March 7 advisory OLMS included an updated list of
>frequently asked questions regarding the LM-10, including who must file it
>and what must be disclosed.
>
> Under the Labor-Management Reporting and Disclosure Act, employers
>must report any payments and loans made to unions and union officials, as
>well as payments to employees designed to persuade them regarding their
>bargaining and representation rights, and payments to labor relations
>consultants.
>
> In announcing the grace period, OLMS said it received many inquiries
>following its last update of the frequently asked questions in November
>2005. The new guidance is
>designed to address some of the questions raised, but the Labor Department
>acknowledged that employers utilizing the new guidance would have only a
>short period of time to incorporate the answers prior to the normal March
>31 deadline. Thus, while the department does not have the authority to
>extend statutory deadlines, OLMS said it would use its discretion and not
>take any enforcement measures against employers with fiscal years ending
>Dec. 31 as long as they file by May 15.
>
> The November guidance from OLMS also said that as an incentive to
>get employers to file LM-10s for the first time, organizations filing their
>fiscal 2005 forms on time would not have to file delinquent forms for such
>years. Under the new extension, employers with fiscal years ending Dec. 31
>can file their LM-10s for the first time by May 15 and not have to file
>back LM-10s, the department said.
>
>
> Clarification of Who Is 'Employer.'
>
> The new list of frequently asked questions includes new guidance on
>when businesses are considered employers for LM-10 purposes. For example,
>it clarifies that any person acting directly or indirectly as an agent of
>an employer is covered. Thus, an individual hired by a financial services
>firm to generate new business and who provides a union official with season
>tickets to sporting events would have to file an LM-10, even if that
>individual does not employ anyone.
> In addition, the guidance now states that outside attorneys retained
>by unions "will in most, if not all, cases" have to file LM-10s. A law firm
>providing representation to an employer for collective bargaining purposes
>also would have to disclose the value of lunches provided to union
>officials during bargaining, subject to the $250 annual de minimis
>limitation. However, sole proprietors generally are not employers for LM-10
>purposes, according to the guidance.
>
> The guidance also specifies that certain payments from employers to
>unions and union officials are not reportable if the union reimburses the
>employer for those payments. Thus, a law firm that provides a meal during a
>meeting to prepare for collective bargaining would not have to report the
>value of that meal if the food costs are billed to the union, the
>department said. If one employer reimburses another for a reportable
>payment, the entity responsible for the final cost must file the LM-10, it
>added.
>
> The department added language to the guidance making it clear that
>employers must disclose otherwise reportable payments to union employees
>who earn $10,000 or less per year, even though such employees do not have
>to be mentioned by name on LM-2 financial disclosure reports for unions.
>The guidance also clarified that employers do not have to report payments
>to individuals who are officers or employees of unions composed entirely of
>state, county, or municipal employees and thus not covered by the LMRDA.
>
> OLMS also introduced new exemptions for reporting payments and gifts
>to union officials associated with widely attended gatherings, which the
>department defined as events that many people attend, including a
>substantial number with no union connection. Employers that sponsor such an
>event and spend $20 or less per attendee do not have to report such gifts,
>nor do they have to track such payments. In addition, an employer can
>sponsor up to two widely held events per year and spend up to $125 per
>participant without reporting or tracking such expenses.
>
> The $125 exemption also applies to union officials. They can attend
>up to two events not costing more than $125 each without reporting the
>benefit on LM-30s, which are the corresponding forms filed by union
>officers and employees. In addition, such payments would not count toward
>the de minimis threshold for LM-30 purposes; thus, if a union official
>attended two employer-sponsored events that cost $120 each and also
>received a reportable payment of $50, he or she would still not have to
>file an LM-30 because of de minimis rules.
>
> However, OLMS cautioned that if an employer does not know at the
>beginning of its fiscal year that it will hold no more than two such
>events, it should keep records of its expenses and attendee lists.
>
> OLMS added language to its LM-10 guidance specifying how such forms
>are different from LM-30s. For example, employers filing LM-10s must
>disclose payments to unions officers, agents, shop stewards, and other
>representatives, while union officers and employees must file LM-30s if
>they--or a spouse or minor child--receive a reportable payment. In
>addition, employers filing LM-10s must disclose any payment to any union
>employee. Meanwhile, a union employee who is a member of the clerical staff
>would not have to report the receipt of such a payment on an LM-30.
>
> As for past-due forms, the guidance said that in order to comply
>with the department's grace period offer, employers were required to file
>an LM-10 for fiscal 2005. Now, however, employers can take advantage of the
>grace period even if they did not make any reportable payments for fiscal
>2005. Rather than filing a blank form, employers should maintain records
>demonstrating that they identified no reportable interest after making a
>good-faith effort to track such payments, according to OLMS.
>
> The new guidance is available on the Web at
>http://www.dol.gov/esa/regs/compliance/olms/lm10_advisory.htm.
>
>
>
> >
>
>
>_____________________________________________________________________
>>

Lobbyists and Associations Need Fiduciary Insurance

A new rash of lawsuits are on the horizon.

Clients and members of associations are, in light of recent scrutiny of lobbyists activities, becoming more concerned about how their funds are being spent in DC, whether directly or through their lobbyists. Lobbyists who handle or direct client's funds may be determined to be fiduciaries for their clients. The SEC, the Courts, and other regulatory bodies are rapidly expanding the definition of a fiduciary.

For lawyers this is usually not a problem, most Professional E&O policies cover fiduciary exposures, although if I were a lawyer-lobbyist I would want to make sure there is not an exclusion in my firm's policy for fiduciary responsibilities. However there are many lobbyists who are not lawyers or lawyers who do not carry professional E&O who have this exposure. They direct the client where to spend money or do it themselves.

The same goes for associations who use their member's funds to promote certain causes in many ways. There is an exposure to a claim that funds were not used in a "prudent" manner. The association's assets or lobbyist assets can very quickly be used up defending such a claim. The McLaughlin Company is developing with its carriers a low-priced exclusive product targeting lobbyists, but we also think that the exposure to associations is possibly even greater. Although the exposure is even greater, most evidence indicates that less than 10% of associations carry fiduciary coverage. A "prudent" association Board of Directors should consult with its Independent agent about fiduciary coverage.

As always we would both really appreciate your thoughts and insights.

Professional Advisors = Fiduciaries -- Are you insured?

Scandals that have rocked the financial services industry and have raised awareness among investors of the potential for conflicts of interest, misrepresentations and other alleged wrongdoings by investment advisers, actuaries, brokers and money managers. As a result, professionals increasingly are subject to lawsuits alleging various forms of misfeasance, including breach of fiduciary duty, misrepresentation or omission of material facts, conflict of interest and fraud. Lawsuits of this kind also entail the possibility of personal liability.

Financial planners, investment advisers, actuaries, securities dealers, registered representatives and others in the financial field often act in a fiduciary role.
Recently, the SEC has moved toward treating all brokers as fiduciaries, as well.
Those advisers who deal with pension, employee benefit and other benefit plans are subject to additional fiduciary duties under the Employee Retirement Income Security Act of 1974. In our litigious times, even the most circumspect professionals may find themselves sued for breach of fiduciary duty or other misfeasance. Insurance is therefore of paramount importance as a defense against fiduciaries’ liability exposure.

Due diligence on the insurance front entails more than simply the purchase of the right kinds of policies. Policyholders must be aware of common provisions routinely inserted by insurance providers that raise the likelihood of coverage denials in time of need. Over the past few years, there has been a significant restriction in the insurance marketplace for investment advisers and asset managers. Many companies pulled out altogether, and those that remained increased their pricing and retentions significantly while at the same time carving out important areas of coverage. Recently, however, the underwriting conditions have improved. Companies that withdrew from the market have stepped back in, and new entrants have begun to surface. With this opening up of the marketplace has come a reduction of the pricing scale, somewhat lower retentions and a willingness to consider broadening the scope of certain coverage.

Although underwriters remain stringent regarding the amount of limits to which they are willing to commit, the addition of these new markets allows for the layering of much higher limits than has recently been available. There are significant differences among the various insurers’ policy forms.

Although the market has improved carriers continue to try and reduce their exposure by addining exclusionary language. The following is a sampling of some actions taken by insurance companies of which to be aware:

* Limiting regulatory-investigation coverage.

* Widening the exclusions for personal profit and wrongful acts.

* Narrowing the severability language of their policies, which protects innocent officers from the
wrongful conduct of other officers.
* Issuing specific additional exclusions, such as market timing and late trading.

Since the policy forms, exclusions and available endorsements are changing frequently, it is advisable that someone well versed in financial insurance, like The McLaughlin Company, review your current policies.