From 2012 to 2014, GreatBanc Trust Company and the Department of Labor (DOL) negotiated an "Agreement Concerning Fiduciary Engagements and Process Requirements" that provides guidance for future ESOP transactions. Although the agreement formally applies only to GreatBanc, the DOL has stated that others would "do well to take notice of" the agreement's provisions. The agreement can be viewed as a "playbook" that, if followed, could serve as evidence that the trustee fulfilled its fiduciary duty by engaging in a prudent process in connection with an ESOP transaction.
This issue brief, coauthored by attorneys involved in negotiating the agreement, assists readers in interpreting the agreement by putting its provisions in context. For each section of the agreement, the authors quote the agreement's language; point, where appropriate, to preexisting guidance containing policies and procedures embodied in the agreement; and provide commentary, based on their involvement in negotiating the agreement with the DOL, on how its provisions are intended to operate. Appendices provide a convenient checklist for implementing the agreement as well as the full text of the agreement itself.
Table of Contents
The Fiduciary Process Agreement
Fiduciary Process Agreement: Preamble
Section A: Selection and Use of Valuation Advisor—General
Section B: Selection of Valuation Advisor—Conflicts of Interest
Section C: Selection of Valuation Advisor—Process
Section D: Oversight of Valuation Advisor—Required Analysis
Section E: Financial Statements
Section F: Fiduciary Review Process—General
Section G: Fiduciary Review Process—Documentation of Valuation Analysis
Section H: Fiduciary Review Process—Reliance on Valuation Report
Section I: Preservation of Documents
Section J: Fair Market Value
Section K: Consideration of Claw-Back
Section L: Other Professionals
Section M (Untitled)
Appendix 1: Fiduciary Process Checklist
Appendix 2: Text of the Fiduciary Process Agreement
About the Authors
About the NCEO
Section F: Fiduciary Review Process—General (footnotes omitted)
In connection with any transaction involving the purchase or sale of employer securities that are not publicly traded, the Trustee agrees to do the following:
- Take reasonable steps necessary to determine the prudence of relying on the ESOP sponsor's financial statements provided to the valuation advisor, as set out more fully in paragraph E above;
- Critically assess the reasonableness of any projections (particularly management projections), and if the valuation report does not document in writing the reasonableness of such projections to the Trustee's satisfaction, the Trustee will prepare supplemental documentation explaining why and to what extent the projections are or are not reasonable;
- Document in writing its bases for concluding that the information supplied to the valuation advisor, whether directly from the ESOP sponsor or otherwise, was current, complete, and accurate.
Although an independent assessment of value is not a complete defense to a charge of imprudence, it is "evidence of a thorough investigation" and also is evidence of good faith.
A trustee may prudently rely on its experts' analysis and opinions, where the trustee (1) "investigate[d] the expert's qualifications," (2) "provide[d] the expert with complete and accurate information" and (3) "ma[de] certain that reliance on the expert's advice is reasonably justified under the circumstances."
Section F of the Fiduciary Process Agreement sets forth the general requirements for the Fiduciary Review Process, while Sections G and H provide requirements for documentation. Such documentation will provide a solid record of the prudent process that the trustee undertook in approving a transaction. Documentation of the process may be contained within the valuation report, fiduciary committee meeting minutes, due diligence memoranda, or a transaction memorandum.
It is not enough for the trustee to rely solely on the opinion of its valuation advisor in assessing whether projections are reasonable. If the valuation advisor does not document the reasonableness of management projections, then the trustee should do so. The trustee should also document its basis or evidence for concluding that information supplied to the valuation advisor was current, complete, and accurate.