Compliance January 12, 2018

PBGC Increases Penalties for Failing to Provide Reports, Disclosures

However, the agency says it is uncommon for it to assess information penalties.

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The Pension Benefit Guaranty Corporation (PBGC) is required to amend its regulations annually to adjust for inflation the maximum civil penalty for failure to provide certain notices or other material information and for failure to provide certain multiemployer plan notices.

As such, the agency has issued a final rule adjusting the maximum civil penalties that PBGC may assess under sections 4071 and 4302 of the Employee Retirement Income Security Act (ERISA).  Section 4302, added to ERISA by the Multiemployer Pension Plan Amendments Act of 1980, authorizes PBGC to assess a civil penalty of up to $100 a day for failure to provide a notice under subtitle E of title IV of ERISA (dealing with multiemployer plans). Section 4071, added to ERISA by the Omnibus Budget Reconciliation Act of 1987, authorizes PBGC to assess a civil penalty of up to $1,000 a day for failure to provide a notice or other material information under subtitles A, B, and C of title IV and sections 303(k)(4) and 306(g)(4) of title I of ERISA.

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The new maximum amounts are $2,140 for section 4071 penalties and $285 for section 4302 penalties. These are up from $2,097 and $279 in 2017, respectively. The adjusted amounts are effective January 12, 2018.

Text of the final rule is here. Important to note, the agency says it is uncommon for it to assess information penalties. The agency’s goal is to encourage compliance, not to penalize plans that inadvertently forget to file information. In most cases, when PBGC does assess an information penalty, it is for an amount significantly less than the maximum permitted. Find out more by signing up for the PBGC’s What’s New emails for practitioners.

Compliance January 12, 2018

Court Finds Participants Failed to Meet Pleading Standards in HP Suit

The 9th Circuit ruled that a prudent fiduciary in the same circumstances as the defendants could view the proposed alternative course of action regarding company stock in Hewlett-Packard's 401(k) plan as likely to cause more harm than good without first conducting a proper investigation.

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A federal appellate court has affirmed a lower court’s decision for Hewlett-Packard (HP) regarding company stock investments in its 401(k) plan.

The plaintiffs initiated the class action on behalf of current and former HP employees who participated in HP’s 401(k) Savings Plan and whose accounts purchased or held shares of the HP Common Stock Fund at any time between October 3, 2011, and November 21, 2012. They alleged the plan’s fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by permitting the plan and plan participants to purchase and hold HP common stock when the stock was artificially inflated and was an imprudent investment for the plan.

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The allegations arose out of HP’s acquisition of Autonomy Corporation Plc, a British software company. The complaint maintains that HP acquired Autonomy without doing almost any due diligence, and shortly after the acquisition, HP learned about Autonomy’s accounting practices which inflated the company’s revenues; realized that it overpaid for Autonomy; and covered up this information. The 9th U.S. Circuit Court of Appeals found this theory to be inconsistent with the overall complaint.

“The SAC [second amended complaint] alleges that Defendants-Appellees hid knowledge about Autonomy’s inflated value until a whistleblower forced Defendants-Appellees to investigate and disclose it.  But the information the whistleblower divulged is not the same information Defendants-Appellees supposedly concealed.  The whistleblower informed HP that Autonomy committed fraud by inflating its revenue through bundled hardware sales and phony sales to resellers—not that the different accounting standards would impair Autonomy’s value once HP adjusted Autonomy’s revenue to conform to the Generally Accepted Accounting Principles (GAAP) standard,” the 9th Circuit opinion notes.

The court found the fact that HP launched a full investigation after the whistleblower emerged further renders any claim that HP attempted to conceal problems at Autonomy implausible, as HP acted diligently when it gained actual knowledge of fraud.

The appellate court next turned to pleading standards set forth in the Supreme Court’s decision in Fifth Third v. Dudenhoeffer. The plaintiffs contended that pursuant to the defendants’ duty of prudence, they should have at least prevented the plan from making new investments in the HP Common Stock Fund and/or made public disclosures about HP stock’s risks following the whistleblower’s allegations. But, the 9th Circuit ruled that a prudent fiduciary in the same circumstances as the defendants could view the proposed alternative course of action as likely to cause more harm than good without first conducting a proper investigation. The court said the proposed alternative faults the defendants for first investigating the whistleblower’s allegations before taking action, but a prudent fiduciary must first investigate problems before acting.

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