Retirement plan lawyers, both in house and outside counsel, may well want to take note of Bank of New York Mellon’s recently reported troubles related to potentially widespread and fraudulent use of unfair currency exchange rates in their dealings with unsuspecting state and local pension plans. If there is a basis for these charges, and f they were as widespread and as sustained as alleged to be, we may have our first prime example of how SOX Section 307 and SEC’s "Part 205" Rules (which implement Section 307) can implicate employee benefit lawyers. This is because it would be hard to believe that there wasn’t a lawyer somewhere in the organization that shouldn’t have been aware of the practice (as these rules apply not only to corporate law staffs, but to lawyers in the business lines as well).
Much of the Sarbanes Oxley Act n 2002 ("SOX") was designed to address many of the corporate abuses arising from the Enron, Tyco and Worldcom fiascoes, and it included enhanced protections for corporate whistleblowers. Buried within this statute was Section 307, an obscure section which imposed duties upon lawyers who deal with publicly traded companies the duty to "report up" certain corporate malfeasance of which they became aware in their practice. The challenge with these rules is they seem to clash, in many respects, with the state law rules governing the attorney client privilege. In house counsel have challenging enough circumstances, where their client is the corporation and not the officers who seek their counsel. This awkward pressure merely increased with the passage of SOX. The stakes became higher, as well: failure to report properly would effectively result in a ban from ever representing a publicly traded client, whether in house or as outside counsel.
I wrote an analysis describing the impact of Part 205 on employee benefit lawyers for ALI-ABA in 2005. In that article, I struggled to describe sensible circumstances where benefit lawyers would be impacted, and where the reporting up obligation would be imposed. This is because the only corporate malfeasance required to be reported under SOX are those which would result in a material impact on the company’s financials, and it seemed at the time that it would be one heckuva stretch to reach the materiality standard in our line of work.
BNYMellon really is an eye opener. For manufacturing companies, there really is rare opportunity for the employee benefit lawyer to trip Part 205 obligations, other than issues related to underfunded pension plans and executive stock programs. BNYMellon, however, demonstrates that this is a very real possibility for attorneys representing financial service companies which do retirement business. Considering the fact the value of retirement plan holdings are some 85% of the value of publicly traded securities in the U.S., and where many companies’ financial stake in the retirement business continues to grow, it occurs to me that the potential circumstances where SOX may be implicated will only become greater.
Part 205 requires the establishment of written procedures to insure compliance. Though pure corporate, tax and M&A lawyers have always been well versed in such matters, financial service companies may want to check these procedures to make sure that retirement law staffs (including those in the business lines) are well within the loop.
For those curious on the nuts and bolts of the operations of Part 205 in the employee benefit practice (and there are quite a few), I invite you to read the ALI-ABA paper.