Semi Urgent - When Is A Custodian Not A Fiduciary???

[fidu]

Hope everyone had a happy and peaceful new years eve'

i would really appreciate any and all responses (CAVEAT: limited to marginally intelligible responses as usual please)

my question - which is time sensitive, is - when is a custodian NOT a fiduciary????

thanks in advance.

[Guest stryan]

My question would be, "When IS a custodian a fiduciary?"

To my way of thinking, the custodian (be it a brokerage house, bank, insurance company or ?) is just the repository for the plan assets. Unlessl they excersize some control what investments are made and when, I can't see where they would be a fiduciary.

Now the Nationwide situation may change how this is all viewed.

[MoJo]

I would suggest that a custodian of plan assets is ALWAYS a fiduciary. They have the money, and must hold and protect it as a fiduciary (despite not having investment control).

[fidu]

NOW THAT'S AMAZING. !!!!!!!!!!!

I could not have created two answers more in conflict.

Thank you both - do either of you, or anyone else have any case law, regulatory guidance, or advisory opinions to justify your position?

[jaemmons]

I don't necessarily agree with MoJo. The determination of fiduciary status is a functional one. In order for a custodian to be deemed a fiduciary, as defined under ERISA 3(21)(A), they would need to generally exercise any DISCRETIONARY authority or control over the management of the plan, including its administration, and disposition of any and all plan's assets, or render investment advise for a fee.

As always, there may be other facts we are missing, but at first guess, if the custodian is only "housing" the assets for investment and distribution AND is directed by the trustees listed in the plan document as to what to do with plan $'s, I don't feel they would be a fiduciary of the plan. If this were the case, alot of banks and other financial institutions wouldn't be offerring custodial services, because of the bonding costs and added liability issues.

I guess you would need to look at the contract that the employer signed with the custodian, normally contained in the custodial agreement, which outlines the services and functions the custodian will perform for the plan.

[IRC401]

See

http://www.benefitslink.com/articles/selfi...ure020107.shtml

[fidu]

for the most part, i think the discretion and management component is the issue.

what if the custodian has recordkeeping and reporting requirements under the custody agreement.?? fiduciary or not?

[jaemmons]

The recordkeeping and reporting services are ministerial functions to the plan. As such, performance of these services would not cause the individual or entity to be considered a fiduciary. A list of what the DOL considers ministerial may be found in DOL Reg 2509.75-8.

[fidu]

THANKS.

an amalgam of the posts provides ample direction (or discretion - take your pick) for me to investigate further.

I REALLY APPRECIATE ALL THE INSIGHT AND GUIDANCE.

ENJOY THE WEEKEND -

(its already happy-hour somewhere)

[MoJo]

I'm going to stick by my original post. A custodian, albeit one who exercises absolutely NO discretion over the plan or its assets still "controls" the assets by having possession of them. I would suggest that trustee that give assets to a custodian who is not charged with holding them as a fiduciary has in fact breached its fiduciary duty to safeguard the assets. Those items listed in the ERISA definition of a fiduciary are not an exclusive list - ERISA just statutorily mandates that these are fiduciaries. Common law also indicates that one who custodies assets of a trust does so as a fiduciary.....

[MoJo]

p.s. I used to be trust counsel at a midwestern based super-regional bank. We made the distinction between a custodian who was a fiduciary, and an escrow account, where the escrow agent wasn't....

[fidu]

admirable MOJO.

I must admit, I still am undecided on the issue of whether a bank, acting only as custodian of plan assets, has fiduciary status. any case law in NY (even though it is erisa) to substantiate your view?

thanks

[MoJo]

I can't say I know of any NY case law, but reason should suffice. It is the "holding" of the asset that in and of itself gives rise to the fiduciary status. It would be a breach of a fiduciary (i.e. trustee) to give over assets to a non-fiduciary to hold. Trusts were developed out of the doctrine of "uses" in old England. One, in order to avoid the laws of descent and distribution which mandated that all property became the sole property of the eldest son, would "give" or "sell" (for nominal consideration) the property to a "trusted" associate for the "use" of another (a surviving spouse, daughter, etc.) and hence the "holding" of the asset became part and parcel of the fiduciary requirements. For a modern day trustee to relinquish control over an asset to one who is not bound as a fiduciary to maintain that asset consistent with the terms granting the custodianship would be unfathomable.

[Guest IWIS]

Under ERISA, a custodian is not a fiduciary unless it has DISCRETIONARY authority or control over plan assets or the administration or operation of the plan. If the custodian is also a trustee, it is automatically a fiduciary. Otherwise, it's a functional test. If it's just performing ministerial functions and acting pursuant to the direction of a duly appointed plan fiduciary, then the custodian, itself, is not a fiduciary. But if the custodian has discretion, or otherwise has responsibility for discretionary functions (whether or not it takes action), then it is a fiduciary, in general.

[KJohnson]

For what it is worth, you might want to look at 403(a)(1) of ERISA which says that a trustee shall have exclusive authority and control to direct the managagement of a plan's assets except to the extent that the plan provides that the trustee "is subject to the direction of a named fiduciary who is not a trustee, in which case the trustees shall be subject to proper directions of such fiduciary which are made in accordance with the terms of the plan and which are not contrary to this Act"

[jaemmons]

MoJo. I still don't understand your thinking that by "holding" the assets of a plan, you automatically become a fiduciary. And how is it that by allowing a non-fiduciary trustee (which does not necessarily mean they are a fiduciary, if they are a directed-trustee) to house the assets of a plan, do you violate any fiduciary standards? This happens all the time. Having worked closely with some major banks and financial institutions on trust/custodial contracts, mostly because of liability reasons, they have been extremely adament about NOT becoming a fiduciary to the plan, and as such have outlined language to the effect that they will act as a "directed-trustee" and do not assume any discretionary authority over the management of the plans assets. Just because they may be a trustee to the plan does not automatically make them a fiduciary. Of course, if they act in an unauthorized manner over the managment/admin of the plan/assets, then I would say that they would become a fiduciary, but that is a facts & circumstances situation.

[Guest IWIS]

Jaemmons, do custodians with no discretionary authority allow themselves to be designated a "trustee" in the contracts? It was my understanding that trustees are always fiduciaries, but that the question of whether they might be liable for any losses resulting from a breach of fiduciary duty would depend on the extent of their authority.

That said, I haven't much experience with that particular situation. But for what it's worth, see DOL Interpretive Bulletin 2509.75-8, Q&A3:

Q: Does a person automatically become a fiduciary with respect to a plan by reason of holding certain positions in the administration of such plan?

A: Some offices or positions of an employee benefit plan by their very nature require persons who hold them to perform one or more of the functions described in section 3(21)(A) of the Act. For example, a plan administrator or a trustee of a plan must, be the very nature of his position, have "discretionary authority or discretionary responsibility in the administration'' of the plan within the meaning of section 3(21)(A)(iii) of the Act. Persons who hold such positions will therefore be fiduciaries.

The full IB can be viewed here:

http://www.dol.gov/dol/allcfr/Title_29/Par...FR2509.75-8.htm

[MoJo]

I think the confusion is that some are interpreting the language of ERISA to require "discretion" as a condition to becoming a fiduciary. As I read ERISA 3(21), there are three conditions causing one to be a fiduciary - only one of them requiring discretion - that of administration of the plan. "Authority or control" over assets - EVEN WITHOUT discretion, I believe will cause you to be a fiduciary - hence, a "non-discretionary directed" trustee is in fact a fiduciary, as would be a custodian (which, is functionally the same as that non-discretionary directed trustee). The third, of course, being the investment advice for a fee provision.

One cannot not be a fiduciary simply because they believe themselves not to be (or contract in such a way as to eliminate or reduce what is percieved to be a fiducairy obligation). I worked for KeyCorp which did everything possible to limit exposure (which I believe is appropriate), but the bottom line is that Key was a fiduciary in all cases where it was trustee (even if non-discretionary directed), and where it was a custodian for qualified plan assets, having derived its position as custodian via authority granted to the trustee in the trust agreement.... The DOL and the OCC (thinking itself to be the body charged with insuring the bank fulfilled all of its obligations, even those the DOL thought it had authority over!) concurred on numerous occassions. Consider as well that the DOL believes that even a ministerial functionary can be charged with responsibility under a "constructive trust" doctrine if that person holds assets any longer than is practically necessary to transfer them into the trust. Remember that the DOL's positon with respect to the handling and timing of participant deferrals relates only to the "segregation" of those assets from those of the employer (and only as a matter of inference to the requirement that the assets been invested in the trust) and that it has used the constructive trust concept (aka fiduciary custodian!) in order to nail offenders. I'm trying to do some research on this (remotely - greetings from the Mid-sized Pension Conference in rainy Orlando!) and hope to provides some cites later....

[Guest IWIS]

Mojo, I have to disagree. The DOL doesn't view the mere custody of assets as giving rise to fiduciary status. Custody doesn't confer control for purposes of ERISA. Custodians are generally not fiduciaries unless they have discretionary authority or exercise discretion over plan assets.

[MoJo]

IWIS - I disagree. ERISA specifically makes a distinction between the types of fiduciaries. ERISA Section 3(21)(A)(i) specifically defines a fiduciary as anyone to the extent: "he exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets." If what you say is true, why is the term "discretionary" attached to the first clause (exercises any discretionary authority or discretionary control respecting management of such plan) but NOT with respect to the second (OR exercises ANY authority or control respecting management or disposition of its assets). The absence of the word "discretionary" when it comes to management or disposition of assets, but its inclusion with respect to management of the plan is sisgnificant. One "controls" assets when one has possession of them whether or not they may exercise any discretion with respect to those assets. Under the clear definition of a fiduciary in ERISA, I would respectfully submit that one who touches assets in anything other than a short duration nominal way is going to be a fiduciary with respect to that plan.

If there is another explanation for the statutory distinction, please, let me know. In the meantime, I'll continue to advise my clients that a custodian of plan assets is, under ERISA definition, a fiduciary.

[KJohnson]

I think the courts have had some diverse views on this. For example, compare 125 F.3d 715 and 137 F.3d 12 with 16 F.3d 907.

[Guest IWIS]

MoJo -

I believe that "discretion" is necessary in both instances. Here are some cases and DOL Advisory Opinions which may be of interest. If I'm missing something, I'm sure you'll let me know!

------------------------------------------------------------------------

Only a bank's exercise of discretionary duties, rather than purely ministerial functions, may make it a fiduciary. When a bank is a directed trustee, following the instruction of another fiduciary, or is a custodian of plan assets, it is not necessarily a fiduciary.

Robbins v. First American Bank, (1981, DC IL)

514 F Supp 1183 , 2 EBC 1576 .

Even as a bank becomes a fiduciary by providing investment advice for a fee, its fiduciary status exists only to the extent that it provides advice.

Brandt v. Grounds, (1982, CA7) 687 F2d 895,

3 EBC 1780

A bank that has no authority to manage or invest plan assets, but merely has possession of plan assets in the context of a borrower-lender relationship, is not an ERISA fiduciary, nor does it become one by exercising its contractual and statutory rights with respect to a plan borrower in a commercial lending relationship.

Useden v. Acker, (1991, CA11) 947 F2d 1563,

14 EBC 2407 , cert den (1993, S Ct) 124 L Ed

2d 678 , 508 US 959 .

A bank does not exercise any of the authority, control, or responsibility that would make it a fiduciary when it provides “sweep services” to a plan with respect to which it is a custodian or trustee, where it has no investment discretion with respect to the plans provided the service....

ERISA Op Letter No. 88-02 .

Financial institutions have also been held not to be fiduciaries where:

... the agreement between the plan and the bank provided that the bank would (1) receive employer remittances, forms, and payments to the plan, (2) deposit such payments in a daily interest savings account, (3) process all information on the remittance forms and supply the plan with daily accounting, (4) pay applicable insurance premiums and administrative fees upon the direction of plan personnel, (5) from time to time make transfers from the plan's savings account to its commercial account upon the direction of plan personnel, and (6) from time to time provide detailed statements of the plan's trust account.

Hibernia Bank v. International Brothehood of Teamsters

etc, (1976, DC CA) 411 F Supp 478 , 1 EBC 1527

... the custodial agreement expressly limited a bank to ministerial duties including regular reports of trust fund transactions. The bank did not assume a fiduciary duty....

Arizona State Carpenters Pension Trust

Fund v. Citibank, (1997, CA9) 21 EBC 1657

... the bank profited from a float created by the weekly delay between its receipt of employer contributions and the transfer of these funds to the annuity provider.

Associates in Adolescent Psychiatry S.C. v. Home

Life Insurance Co, (1991, CA7) 941 F2d 561 , 14

EBC 2670 , reh den (1991, CA7) 1991 US App LEXIS

23027

... there were no indications that the bank exercised any discretionary control over the investment and reinvestment of fund assets or the administration of the fund.

Bradshaw v. Jenkins, (1984, DC WA) 5 EBC 2754

[Guest halka]

Seems to me the definition of a custodian is something like "an agent appointed by a property owner to safeguard and/or deal w/ the property at the direction of the owner." Custody does not imply ownership or discretionary management of the property. I concur w/ those stating the "control" that ERISA is talking about is authority to affect changes to the plan assets -- not mere physical control. If physical control is the test, would Depository Trust Company and State Street Bank be a plan fiduciary because they are ultimately the custodian of so many securities? Recordkeeping is also a ministerial task performed at the direction of the plan fiduciary, so the requisite "control" is not there. It is possible for a custodian or recordkeeper to exceed those 'ministerial' duties and become a fiduciary. Similarly, a directed trustee is a plan fiduciary, but not with respect to plan investments because it has no control over investment decisions.

[MoJo]

Thanks IWIS. I would look these up when I get back to my office. However, the only one that looks to be on point would be the Robbins case. Even so, the imposition of a "discretionary" requirement with respect to control of plan assets, IMHO, would be a clearly erroneous reading of the statute, and fly in the face of basic statutory construction (every word has a unique meaning, and the use of a word in one context but not in another means that Congress intended different meanings....).

I'll still play it safe with my clients. If you toucb plan assets in anything but the most nominal way, you will be held to a standard of a fiduciary (albeit one with limited authority).