LAS VEGAS CONFERENCENovember 8-9, 2012

Las Vegas, NV

Daniel M. ReserFiduciary Services, Inc.

Patrick De CraeneGreatBanc Trust Company

Michael R. HolzmanDickinson Wright PLLC

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The objectives of this session are:

Overview of the duties and responsibilities as an

ESOP Fiduciary/Trustee

Discuss practical situations and “best practices”

Share experiences

Anyone who has discretion or control over Plan Assets:

Plan Sponsor/Board of Directors: appoint/remove other fiduciaries;

oversight

Trustee (directed or discretionary): Record owner of shares held by

ESOP; must act for the “exclusive benefit” of participants; votes shares

(but may be directed as to voting)

ESOP Committee (if any): interprets plan; reviews claim appeals; may

direct trustee as to how to vote shares; may be Plan Administrator also

Plan Administrator/Plan Committee

Valuation Firm: annually appraises ESOP shares; may perform

valuation of, or financial advisory service for, specific transactions? (Are

they a “fiduciary” and are they “independent”)3

Individual Internal Trustees Frequently officers/employees of the Company Pros and Cons

Independent Trustees Could be an independent individual, however, Institutions usually fill

this role (banks, trust companies, etc.) Limited transactional vs. ongoing Pros and Cons

Directed Trustees Receives direction from insider fiduciaries or independent fiduciaries

Similarities and Differences Responsibilities Risks Judicial deference

Duties and responsibilities of the “Fiduciary” are defined in Plan and Trust documents

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A Fiduciary must: Discharge duties solely in the interests of the Plan

Participants Discharge duties with care, skill, prudence and diligence

Under the circumstances then prevailing That a prudent person 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

Act in accordance with plan documents Insofar as such documents are consistent with ERISA and other

applicable law

Steer clear of prohibited transactions Related-party sales Loans

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Plan Sponsor/Administrator Trustee

Purchases and Sales of Company Stock

Invest trust assets

Determine value of company stock

Repurchase liability

Executive Compensation

Actions of Prior Fiduciary

Vote Shares held within ESOP

Process Distributions

Non-routine Events

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Prudence and the exclusive benefit rule Is the purchase a prohibited transaction? Conduct Due-Diligence Investigation

Financial matters (Adequate Consideration) Legal matters

Consider impact on existing shares held by the ESOP

Negotiate Price – Adequate Consideration Fairness Documentation Role of Conflicts Highly Scrutinized Plaintiffs’ Bar DOL

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Prudence and the exclusive benefit rule

Investment Policy Statement

Review of risk and return Characteristics

Duty of Diversification

Trustee

Plan Administrator (if the Trustee is Directed)

Investment Advisor

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Determining Value/Stock Price – The Trustee is responsible.

What should the Trustee do with the valuation report?

Process for accepting the report from valuation firm

Is appraiser independent?

Review the report

Ask questions

Review the approaches

Unique circumstances

Have questions been answered and documented?

Need to understand the valuation

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Overall solvency of the Company

Necessity of the Trustee to discuss issues with

management

Repurchase Liability

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Plan Sponsor must meet the obligation

Internal versus External studies

Sustainability

Effect on Valuation

Cash Flow

Balance Sheet

What happens when you fail to plan?

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Board of Directors

Fair and Reasonable

Trustee Duty to monitor Board actions

Dilutive effects of equity compensation

409(p)

Effect on valuation - Delta Star, Inc. vs. Patton 76 F. Supp.

2d 617 (W.D. Pa. 1999); Johnson vs. Couturier 2009 WL

2216805 (9th Cir. July 27, 2009)

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Duty to Investigate Barker v. American Mobile Power Corp. (9th Cir.)

Department of Labor view, DOL 1976 Advisory Opinion

In Fernandez v. K-M Indus. Holding Co. (9th Cir.), the Court relied upon a Department of Labor opinion and the common law of trusts and held that while the Successor Trustee could not be held vicariously liable for the breaches of fiduciary duty by Moore, it was potentially liable under §1005 for its failure to remedy the alleged breaches of fiduciary duty that took place before it was appointed trustee if it failed to act despite its knowledge of the breaches

Co-fiduciary liability Silverman v. Mutual Benefit Life Insurance Co. (2nd Cir.)

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Trustee Votes Is the Trustee directed? Investigation and documentation

Pass-Through Vote to Participants Merger, consolidation, liquidation, sale of substantially all

company assets, “organic changes” Voluntary Participant Voting for Board of Directors Adequacy of information provided to participants

Ensure Voting Safeguards, confidentiality Potential for Conflicts

Voting for yourself Should you abstain?

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Recordkeeping Trust/Accounting

Payment of the ESOP loan

Notify the Company of pending loan payments due

Collect the loan payments from the company and make

the necessary payments to the bank or back to the company

(DOL)

All loan payments need to be run through the trust even

if the loan is from the company (IRS and DOL)

Working with TPA, calculate the release of the shares as

per the loan documents and make sure that all

covenants have not been violated (DOL)

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Allocations/5500/Annual Audit:

Who should check the Allocation Reports to insure that they are

correct?

Verify the release of shares

Spot check the allocations

Verify the number of shares on the reports to the Trust

Statements for both the allocated and unallocated shares

Look at the results of the 409(p) test for Sub S ESOPS. Is there a

non-allocation year?

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Distributions:

The Trustee makes the distributions to the plan

participants as directed by the Plan Administrator.

The distributions should be verified to the allocation

reports before checks are issued.

Prepare the check or stock certificates (if shares are to

be paid out).

Compute income tax withholding. Prepare the

appropriate tax reporting forms and send withholding

timely to the IRS.

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If the Company purchases distributed ESOP shares, is it a

Fiduciary decision?

If the ESOP purchases distributed ESOP shares, is it a

Fiduciary decision?

What if Company offers to repurchase ESOP shares from

the ESOP so that the ESOP can distribute cash in lieu of

shares?

If stock is sold by the ESOP to the Company, the sale is a

party-in-interest transaction and must be done at or below fair

market value as determined at time of the sale, not as of last

annual valuation date.

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Sale of Company

Asset sale or merger

Stock sale

Acquisitions of other companies

Refinancing of ESOP loan balance(s)

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Liability for Breach of Duty

ERISA Section 409(b)

Penalties for Violation of Prohibited Transaction Rules

Indemnification

Liability for Breach of a Co-Fiduciary

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Review indemnification agreements

Review level of ERISA fiduciary liability coverage for

adequacy; take defense costs into account

Board of Directors – annual review of actions of ESOP

Trustee (including stock valuations); seek independent,

competent advice of executive compensation and board fees

Daniel M. ReserFIDUCIARY SERVICES, INC.369-B Third Street, #543San Rafael, CA 94901-3581Tel: 415-482-9513Fax: 415-276-1736dreser@fiservinc.com

Patrick J. De CraeneGREATBANC TRUST COMPANY801 Warrenville Road Suite 500Lisle, Illinois 60532Tel: 630-810-4500Fax: 630-810-4501pdecraene@greatbanctrust.com

Michael R. HolzmanDICKINSON WRIGHT PLLC1875 Eye Street NW,Washington, DC 20006Tel: 202-659-6931mholzman@dickinsonwright.com