Seeing the bottom line awash with red ink yet again, Susie Sears reluctantly decided to shut down her family-owned Widgets-R-Us. Pressured by thinning margins, a weakening labor pool and increasing competition from foreign markets, Widgets-R-Us is leveraged to the hilt and profits are insufficient to pay even her secured debt. With no viable assets or business, there’s nothing to mortgage or to sell. How can Susie and her fellow company officers walk away without becoming personally liable?
Board of directors member Y.I. Gnough, who is also president of Algae Company, is in a pickle. Although denying any knowledge of sexual harassment and misconduct by the company founder and deal-maker Iam Algae, three co-board members resigned fearing for their reputational and financial survival. Employees are fueling the rumors of women who complained of unwanted touching, sexual harassment and other over-the-line behavior. Even Algae’s former counsel discloses that several years ago the board and the company were told of three or four confidential settlements with women. Company investors suggest that Y.I. and fellow officers and directors breached their fiduciary duty. Should Y.I. be concerned about his pocketbook and his reputation?
A number of years ago John Drane, owner of Drane Plumbing & Supply, executed a Power of Attorney (POA) naming his eldest daughter LaTrina Drane as his attorney in fact. John’s debilitating stroke last weekend risks placing him in rehabilitation for months. Determined to continue the family business that offers its customers “Let Us Drain Your Swamp,” LaTrina dusts off John’s POA. Will Latrina have any problems? Continue Reading Returning “Power” to the Power of Attorney
Ima Knowitall, owner of All My Business Ideas (AMBI), just read the Wall Street Journal article on new Department of Labor (DOL) regulations and called her financial advisor, Phillip Coffers. Mindful of last fall’s Tilting the Scales post that suggested she might owe her employees a fiduciary duty as the trustee of AMBI’s 401(k), Ima asked Coffers if the new DOL ruling affected either Ima as an investor with Coffers in her own retirement savings or as the owner and administrator of the AMBI 401(k) plan.
Does the ruling affect Ima as an investor? Yes. Because Coffers renders investment advice for a fee or other compensation, he is a fiduciary investment adviser and is subject to the new fiduciary standards of care under ERISA. Coffers will risk becoming personally liable for Ima’s losses resulting from recommendations given by the Coffers team—specifically, the investment losses plus related court costs and attorneys’ fees. Originally passed to require disclosure of hidden fees and allegedly under-performing investments promoted by financial advisers who persuaded customers to “rollover” their 401(k)’s into IRA’s, the new regulation moves the investment adviser’s standard of care from a “suitability” standard to a “best interests of the customer” or fiduciary duty standard.
What about Ima as administrator of the AMBI 401(k) plan? Yes, Ima continues to have at least the fiduciary responsibility to diligently monitor the company 401(k) expenses. Although not originally intended as such, it remains to be seen whether the new regulations might impose increased responsibilities on Ima similar to those of Coffers.
Tilting the Scales in Your Favor.
Whether it’s your broker acting in your best interests for your retirement investments or you as the company administrator acting in the best interest of your employees, both retirement investments represent, for most people, the second largest asset they own—their home being the largest. Every retirement account owner can expect to get new documents from their investment adviser asking them to sign agreements outlining your financial adviser’s disclosures to satisfy the new “Best Interest Contract Exemption” and the “Principled Transactions Exemptions.”
If you would like to learn more about the new DOL regulations, Jason Luter, a Gray Reed attorney and an ERISA adjunct professor at SMU teaching on qualified and non-qualified plans, and I are giving presentations on the new DOL regulations focused on this new directive to act in the “best interests of the clients”—a statutorily imposed fiduciary duty standard.
“What is, and What is Not, a Fiduciary Duty,” focuses on the DOL’s changes subjecting certified financial planners, financial advisers and brokers to an ERISA fiduciary duty standard. We discuss the differences between the DOL regulations, the self-imposed CFP “fiduciary duty” standard and “old-fashioned” common law fiduciary duty that will, almost certainly, impact many clients and client’s families of the financial advisers, including very dire penalties risked by unwitting directors / owners of closely held businesses, their trustees, executors and guardians. While all three may be called “fiduciary duty,” they are very different from each other. Confounded yet? Not surprising.