WHEN advising plan sponsors about their fiduciary responsibilities, we often discuss their ongoing duty to prudently
select and consistently monitor outside service providers—
viz., by attending to their fees and performance. This
discussion typically occurs with respect to external service
providers, such as retirement plan advisers, recordkeepers,
investment advisers, third-party administrators (TPAs),
investment managers, etc.
However, the same principle is equally applicable internally, that is, with respect to employees of the plan sponsor
whose duties pertain to the plan. For example, if a board
of directors appoints the members of a plan’s oversight
committee, not only does the board have the responsibility
to prudently select the committee members, but must also
monitor each member’s ongoing performance.
Similarly, if a financial institution is required to satisfy
the conditions of the best interest contract exemption (BICE)
in order to receive variable compensation and avoid a prohibited transaction (P T), the “BICE officer”—i.e., the individual(s)
designated by the financial institution to ensure that the
exemption’s requirements are met—is responsible to take
care that members of the work force adhere to all elements
of the prohibited transaction class exemption (PTCE).
However, consider the result when a work force member
turns “rogue” and breaches his fiduciary responsibility. Is
the fiduciary who appointed, hired or oversees the employee
responsible for his actions—i.e., vicariously liable—under
the Employee Retirement Income Security Act (ERISA)? Or,
as a court of law might phrase the issue, is respondeat superior
part of ERISA’s definition of “fiduciary”?
The doctrine of respondeat superior is from the Latin,
literally meaning “let the master answer” and is defined
as follows: “The employer is subject to liability for torts
committed by employees while acting within the scope of
their employment.” In other words, federal case law and
judicial precedent where one person, an agent, is authorized
by another, a principle, to act on that person’s behalf with
respect to a third party produces the principles by which
vicarious liability is applied. Therefore, it stands to reason
that the imposition of vicarious liability should be part of
the federal common law of ERISA.
Federal court rulings have been inconsistent, however,
in applying vicarious liability in the ERISA context. Here is
the dilemma: ERISA is a comprehensive federal statute that
spells out exactly who should be responsible for what; to
layer atop that system common law remedies is a step that
concerns some courts. The Supreme Court has cautioned,
in cases such as Great-West Life & Annuity Insurance, that
Marcia Wagner is an expert in a variety of employee benefits and
executive compensation areas, including qualified and nonqualified
retirement plans, and welfare benefit arrangements. She is a summa
cum laude graduate of Cornell University and Harvard Law School and
has practiced law for 30 years. Wagner is a frequent lecturer and has
authored numerous books and articles.
engrafting common law remedies is not a step that should
be taken lightly.
Courts have also stated that, while the common law may
be a starting point for analyzing ERISA, it is not the stopping point, and the common law must yield and defer to
ERISA if it is inconsistent with the act’s language, structure
or purpose. There are court actions such as AOL Time Warner,
Inc. Securities and ERISA Litigation, a 2005 case from the
Southern District of New York, in which the court refused
to find respondeat superior liability because ERISA limits
liability to named and de facto fiduciaries and expresses no
intent to hold a nonfiduciary liable for a fiduciary’s breach.
Courts’ Inconsistent Approach
Not surprisingly, the courts have failed to take a consistent
approach on whether a nonfiduciary is liable either. The
Court of Appeals for the 7th Circuit has implicitly recognized respondeat superior liability in ERISA cases, but has
not decided how far this doctrine should reach. The Court
of Appeals for the 5th Circuit has held, without applying
respondeat superior principles, that a company might be
liable under ERISA Section 409 for “breach of fiduciary duty,”
but only when the principal actively and knowingly participated in the fiduciary’s breach.
In contrast, the Court of Appeals for the 6th Circuit
permits vicarious liability claims under ERISA, even
without their showing that the principal played an active
and knowing part in the breach. Other circuits have simply
assumed vicarious liability is applicable to ERISA but with
little analysis. Investment advisers in particular should
be aware of cases such as Stanton v. Shearson Lehman/Amer-ican Express, a 1986 case in which a district court held a
brokerage firm liable for the fiduciary acts of its broker’s
employees because making brand-name brokerage firms
responsible for their employees’ violations of fiduciary duty
served ERISA’s protective purposes.
Because courts are divided, if a vicarious liability claim
is made against a financial institution and the individual
investment adviser, it will be necessary to review the
current state of the law in that circuit.
The Courts Differ
On Vicarious Liability
Still, fiduciaries should monitor internal workers on the plan