Obviously, the union feels that there are other things that it would much rather have money spent for than to provide a vesting benefit. Mr. HAWKINS. Mr. Lackman, I was quite interested in your statement that due to the encouragement the Government has given during this period millions of persons have received benefits which otherwise would not have been available. Isn't it also true that millions have been denied benefits which they were rightfully entitled to?

Mr. LACKMAN. No; well, I think perhaps this may be true in the area of plant shutdowns and sales of plants, but I think it is subject. to question whether this is true where an employee has changed jobs and his plans have not provided for these benefits.

Now, maybe Congress, in its wisdom, will decide there should be such a requirement, but the statement has been made during these hearings many times that only one out of 10 employees will receive a benefit, and while this is true, it is also true that funds have not been accumulating to pay these people benefits.

When the actuary makes his calculations, he assumes a certain number of employees will die or leave the company before they are entitled to a benefit; and while, as we said, we think that vesting should be encouraged, the fact that plans do not now have a vesting provision does not imply that moneys are being withheld from the employees which should have been paid to them.

Mr. HAWKINS. Thank you again, Mr. Lackman, for taking your time to come before us, and we appreciate your testimony before this committee.

Mr. LACKMAN. Thank you for having me.

(The supplemental statement follows:)

SUPPLEMENTAL STATEMENT TO STATEMENT OF WILLIAM F. LACKMAN,
REPRESENTING THE AMERICAN BANKERS ASSOCIATION

PART I-COMMENTS OF THE AMERICAN BANKERS ASSOCIATION ON CERTAIN
PROVISIONS OF H.R. 1046

Section 7. Annual Reports

Section 7(f) (1) (F) requires annual reports to include a detailed list of all loans, except for VA and FHA insured mortgage loans and mortgages on single unit residences purchased on a block basis from banks or similar institutions and except for loans made to plan participants on a nondiscriminatory basis, “including information as to the identity and address of the debtors, dates made and maturity dates, interest rate, face amount of the loans, amount outstanding at the end of the year, type and value of collateral held, and any other terms and conditions."

This requirement would involve an enormous amount of work. Information such as the identity and current address of the debtor, the date made, the face amount of the loan and "any other terms and conditions" is available in the records of the fiduciary or its servicing agents but there is not now any need to be able to reproduce the information periodically. If the fiduciary were required to report the "value of collateral held" current appraisals of each property, not now considered necessary, would have to be made each year. Such appraisals would be expensive and have no value as long as the mortgage is not in default and amortization payments are being made regularly. In some cases thousands of mortgages would be involved resulting in voluminous reports containing information of little or no value. Such a requirement would discourage fiduciaries from purchasing mortgages and would deprive funds of desirable investments.

The benefits to be derived from this new reporting requirement do not justify the resulting substantial increase in administrative burden and ex

pense. As to this point, it should be noted that other provisions of the bills require annual independent audits of all funds.

The American Bankers Association (the "ABA") therefore recommends that no listing of loans be required unless a party in interest is involved; also, that the word "loans," as used in the bill, be specifically defined to mean only mortgage loans and loans to individuals.

Section 9. Enforcement

(1) Section 9(a) provides that any person who willfully violates any provisions of the Act shall be fined not more than $1,000 or imprisoned not more than six months, or both. Section 14 (d) of the bill requires every person who receives, disburses, or exercises any control or authority with respect to any fund to discharge his duties with regard to such fund "with the same degree of care and skill as a man of ordinary prudence would exercise in dealing with his own property."

Thus, under Section 9(a) a trustee might become criminally liable for a "willful" violation of the prudent man rule, which involves the exercise of judgment. The ABA knows of no other statute which holds a person criminally liable for a mistake in judgment, and feels that trustees should not be exposed to possible criminal liability on the basis of what appears to be a new and highly questionable concept. The situation is even more critical since Section 15 of the bill would prohibit a trustee from acting as trustee or custodian of any employe welfare or pension benefit plan during or for five years after conviction or after the end of imprisonment following conviction if the trustee has been convicted of violation of any provision of the Act.

It is therefore recommended that Section 9(a) be amended to add the following proviso to assure that a mistake in judgment would not subject a fund trustee to criminal penalties:

"provided, however, that a mistake of judgment shall not be deemed to be a willful violation of this Act."

(2) Under Sections 9(d) and (e) of the bill, the Secretary of Labor is granted power to make an investigation and to issue subpoenas for witnesses and records in connection with such investigation when he has reasonable cause to believe the investigation may disclose violations of the Act. He may also make periodic examinations of any plan but not oftener than once a year. The foregoing investigatory power granted to the Secretary of Labor duplicates powers already held by Federal banking agencies (Office of Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation) to make examinations of banks and trust companies. Further, the Federal banking agencies are better qualified by experience and existing examining procedures to carry out such examinations. Therefore, as more fully stated in its testimony before the Subcommittee on May 19, 1970, the ABA recommends that in the case of banks and trust companies which are subject to the supervision of a federal banking agency the duty of assuring compliance with the new law be left with the banking agency.

(3) The ABA also feels that the enforcement of civil liabilities against fiduciaries should not be open-ended. It therefore recommends that a provision be added to Section 9 limiting the time within which any civil action to enforce the aforesaid liabilities may be brought against a fiduciary, so that nosuch action may be maintained unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued. This proposed statute of limitation follows the pattern of limitation of civil actions contained in the Trust Indenture Act of 1939 for making false or misleading statements, omitting to state a material fact, etc.

Section 14. Fiduciary Responsibility

(1) Section 14 (b) provides that Section 14, including the provisions of subsection 14(d) imposing standards of fiduciary responsibility, shall not apply to "moneys deposited with an insurance carrier, the repayment of which, including interest thereon, is guaranteed," as well as in certain other cases. The quoted language is ambiguous and might exclude from the provisions of Sec

tion 14 a fund held by an insurance company which is invested in securities in a so-called "separate account".

Since in the case of a "separate account" the amount available to provide pension benefits is dependent on the investment results, the insurance company which has authority with respect to any such account should be deemed a fiduciary, subject to the prudent man rule and all other provisions of Section 14, in the same way that the proposed legislation is applicable to a bank which manages a fund pursuant to a trust agreement. In other words, the same rules should apply to both types of fund.

The ABA therefore recommends that Section 14 (b) (3) be amended to read as follows:

“(3) Moneys deposited with an insurance carrier except in connection with a separate account;"

and that a new definition be added to Section 3 of H.R. 1046 reading as follows:

"(15) The term 'separate account' means an account established and maintained by an insurance company pursuant to the laws of any state or territory of the United States, or of Canada or any province thereof, under which income, gains and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains, or losses of the insurance company."

(2) For the reasons stated more fully in its testimony before the Subcommittee on May 19, 1970, the ABA is concerned that the prudent man rule as phrased in Section 14 (d) of H.R. 1046 may not meet the requirements of employee benefit funds and might not give trustees sufficient latitude to invest such funds to the best advantage in markets which now change much more rapidly than they did in the early Nineteenth Century when the rule as reflected in the bill was originally formulated. We therefore suggest substitution of the following language:

"(d) Every person who handles any moneys or other property of an employee benefit fund or who exercises any power of control, management or disposition with respect to such fund is a fiduciary with relation to such fund and to the participants and their beneficiaries for whose benefit the fund was established or is maintained. Every fiduciary who exercises any duties of control, management or disposition with respect to the moneys or other property of such a fund shall discharge his duties with the care under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."

(3) The ABA also notes that the language of Section 14(d) of H.R. 1046 contains what appears to be a superfluous provision that no requirement of diversification shall preclude or limit investments in the case of a profit-sharing plan, stock bonus, thrift and savings, or other similar plan in stock or securities of the employer, to the extent that the plan involved requires that a part or all of the plan funds be invested in such stock or securities. This language appears to be unnecessary in view of the provisions of Section 14(f) (4) (A) of the bill (see below).

(4) Section 14 (e) forbids any loans "to an employer who contributes to the fund on account of his employees or any official of such employer." Depending on the definition of loans as noted above in connection with Section 7, this flat prohibition may be inconsistent with the provisions of Section 14(f) (4) (A) which permits investment in any securities, including debt securities, of the employer up to 20 percent of the fund assets or without limitation in profit sharing plans, stock bonus, thrift and savings, or other similar plans, if the plan involved requires investment of some or all of the plan funds in securities of the employer.

The above prohibition against loans to the employer should therefore be made subject to the provisions of Sections 14(f) (4) (A).

(5) Section 14(f) (4) (A) limits a fiduciary in investing in securities of a related employer or of a corporation owned or controlled by such employer to 20 percent of the fair market value of the assets of the fund and adds the words "regardless of the ability of such an investment to meet a fiduciary test." (The above percentage limitation does not apply to profit sharing plans, stock bonus, thrift and savings or other similar plans if the plan involved

requires that some or all of the assets of the fund be invested in such securities.) The ABA believes the quoted words could be interpreted as permitting purchases of the employer's stock or other securities up to the stated percentages in the discretion of the fiduciary even if they do not meet the test of the prudent man rule.

Since any investment in securities of the employer made in the discretion of the fiduciary should meet the test of the prudent man rule, the ABA recommends that the quoted words be deleted. It is further recommended that a provision be included in the bill to make it clear that a fiduciary can follow a provision in a profit sharing, stock bonus, thrift and savings or other similar plan which requires that some or all of the assets of the fund be invested in securities of the employer.

(6) Section 14(j) provides that "any exculpatory provisions in the agreement establishing an employee benefit fund or any resolution or agreement by the parties thereto which purports to relieve any fiduciary with relation to any such fund from liability for breach of the responsibilities, obligations, or duties declared by this section shall be void as against public policy." This prohibition against exculpatory provisions appears much too stringent; for example, it might be construed to impose liability on an individual for the acts of others over which he has no control or for acting pursuant to directions that he is required to follow by the terms of the trust agreement.

The ABA recommends that the following proviso (based in part on the provisions of the Trust Indenture Act of 1939) be added at the end of the language of Section 14 (j) quoted above:

"provided, however, that a fiduciary shall not be liable except for the proper performance of such duties as are specifically assigned to him under such resolution or agreement and provided further that he shall not be liable for any action taken by him or omitted to be taken by him in good faith pursuant to the direction, instruction, or approval of others if he is required to do so by the terms of such resolution or agreement."

Section 15. Prohibition Against Certain Persons Holding Office

Section 15 prohibits any "person" (defined to include corporations) from serving as a fiduciary of or consultant to any employee benefit plan for 5 years after conviction of certain specified crimes. The intent appears to be to exclude untrustworthy individuals from serving in a fiduciary or consulting capacity (See Report of House Education Committee, H. Rep. 1867, 90th Congress, 2nd Session at p. 9) and not a bank, financial institution or insurance company which is subject to Federal or state supervision.

The ABA recommends that a new subparagraph (e) be added to the Section to read:

"(e) For the purposes of this section, the term 'person' shall not include any bank, trust company or insurance carrier which is subject to Federal or state regulation."

Section 20. Effective Date

Section 20 provides in part that amendments made by the Act shall take effect when the Act becomes effective.

The ABA recommends that the following language be added to make certain that the provisions of the Act are not applicable to prior transactions or agreements, nor to any renewals, modifications or extensions thereof which may subsequently be made with the approval of the Secretary of Labor:

"The amendments made by this Act shall take effect upon enactment of this Act, provided that the amendments made by this Act which modify the reporting requirements of section 7 shall take effect upon the beginning of the fiscal year of the plan with respect to which the report is rendered which commences after the end of the first full fiscal year of such plan following the publication of implementing regulations in the Federal Register, and provided further that the provisions of this Act shall not be applicable to any transaction or agreement entered into prior to the effective date of this Act, nor to any renewals, modifications or extensions thereof subsequently made with the approval of the Secretary of Labor."

PART II-COMMENTS OF THE AMERICAN BANKERS ASSOCIATION ON CERTAIN PROVISIONS OF H.R. 16462

Section 3. Definitions

(1) The definition of "party in interest" in subsection (m) is so broad that a trustee may unwittingly enter into a transaction involving a party in interest. There should be some protection to a trustee who does not knowingly deal with a party in interest, particularly if the trustee does not deal directly with the party in interest. In any event, it would seem that a “fiduciary" should be included in the definition.

(2) The term "adequate consideration" in subsection (5) should include the fair market value determined by the fiduciary if the security is not listed on a registered national securities exchange and is not quoted by persons independent of the issuer.

Section 5. Duty of Disclosure and Reporting

The form and detail of the annual financial reports should be prescribed by the Secretary by regulations as currently provided in the Act.

Section 7. Annual Reports

(1) The requirement for detailed reporting of investments and investment transactions exceeding $100,000 or 3% of the value of the fund contained in subsections (b)(2), (b)(4) and (b)(5) is obviously intended to give relief to administrators, but the $100,000 figure does not do so in the case of large funds. It is suggested that the 3% provision would accomplish what the draftsman of the bill had in mind, and we suggest that the $100,000 figure be eliminated.

(2) In subsection (b) (4) the expenses should not be required to be shown separately and the identity of the purchaser or seller should not be required except in the case of a party in interest transaction.

(3) It would appear that "loans" under subsection (b)(5) are viewed as something other than securities or investment assets referred to in subsections (b)(3) and (b) (4), and we suggest that the term be specifically defined in order to make it clear to administrators what shall be reported under this subsection.

(4) The information concerning common or collective trusts maintained by a bank required to be filed by subsection (b)(8) should be for the last fiscal year of the common or collective trust, In addition, inasmuch as a large number of funds invest through these common or collective trusts, the bill should permit the trustees of those trusts to file a limited number of copies of their annual audited reports with the Secretary and permit the administrators of funds holding units in these trusts to refer in their annual financial reports to such filings.

Section 9. Enforcement

(1) Subsection (c) should give the Secretary the power to make investigations only when he has reasonable cause to believe the Act has been violated or is about to be violated. This would discourage "fishing expeditions".

(2) Any investigation involving a bank should be made through the appropriate bank supervisory agency as contemplated by subsection (k). Reference is made to our main statement which recommends that the duty of assuring compliance with the new law by banks be left with the appropriate banking agency.

(3) As indicated in our statement to the Subcommittee on May 19, 1970 we recommend (a) that subsection (f) (2) be amended to delete the authority to bring an action in a Federal court in a district "where the Plan is administered", and (b) that section 9(h) (1) be modified to authorize payment of the counsel fees only of successful parties.

Section 13. Bonding

Inasmuch as the term "fiduciary" is defined to mean any person who exercises any power of control, management or disposition with respect to any moneys or other property of a benefit fund or has authority or responsibility to do so, all fiduciaries should be required to be bonded.