Is this a new class-action opportunity? – Carosa

How much responsibility do you have for those you associate with? Will you be held accountable for the mistakes they make?

If it’s your job to hire them or direct them, then the answers to both these questions are “yes!” Just ask any pro sports coach, manager, or team executive. If you can’t get your players to perform, you can probably get away with lopping off a few of their heads. But, beyond a certain point, it’s your head on the platter.

The same holds true for business, especially the investment adviser business. If you’ve got discretion, what happens to the underlying companies in your portfolio can count against you. And what happens if those underlying companies go on the record saying they no longer place shareholder interests as their primary duty (see “Did Business Roundtable Just Break a Fiduciary Oath?” FiduciaryNews.com, August 29, 2019)?

Before considering this, let’s review a little of the past history of 401(k) lawsuits.

The first wave of these lawsuits involved service providers who placed employee retirement assets in high fee shares when low fee shares were available for the same fund. For the most part, this was the result of a clear conflict of interest. Those providers benefited from recommending plan sponsors pick the higher fee share classes. The employees received no comparable benefit.

What happened when these early cases were decided?

Again, for the most part, the service vendors got off the hook. Since they were, in effect, merely selling, not advising, they couldn’t be held to any fiduciary standard.

But, as Harvey Keitel’s character told Nicolas Cage’s character in National Treasure, “Someone’s got to go to jail, Ben.”

Indeed, so egregious was the conflict of interest in these cases, someone had to be held accountable for the damage done to the employees.

Who was that someone?

It was none other than the not-so-innocent, albeit very naïve, plan sponsor.

Yep, the folks who were busy running the company, knew they needed help, and trusted the folks they hired to help them.

Trouble was, 401(k) plan sponsors apparently weren’t in tune with the concept of their fiduciary liability at that point. Those court cases, therefore, were certainly handy in exposing that liability. Because they didn’t directly benefit from the conflict of interest that benefited their service providers, we’ll call this “secondhand” liability. It’s just as lethal as “firsthand” liability, it just means you weren’t malicious in the act.

Fast-forward to today. There may be a different of secondhand liability brewing. And future tort lawyers may harken back to Business Roundtable’s latest decision to de-prioritize shareholder interest as its beginning.

Let’s be clear on one thing: There’s a reason why CEOs decided they aren’t working solely in the best interests of the shareholders anymore. Quite simply, the markets they’re selling to demand it (N.B., we are not referring to investment markets, but, rather, consumer and political markets).

Savvy marketers know the importance of giving the customer what the customer wants. (Or at least showing the appearance of giving the customer what the customer wants.)

It’s only natural, then, that CEOs seek to appeal to the popularity of socially responsible activities. This is why even fossil fuel companies (like BP and Exxon) are making strides to establish and emphasize their “green” cred.

And there’s very little that prevents CEOs from using company assets to promote this public policy position. Experts feel this classic corporate governance conflict has never been fully resolved; thus, it acts as a bit of a legal shield that protects corporate executives.

It’s the same kind of technicality that protected non-fiduciary 401(k) service providers during those early court trials.

So, public company CEOs might be off the hook, but, alas, someone’s got to go to jail, Ben.

Let’s say you’re a fiduciary and knowingly place employee retirement assets into investments whose executives publicly state they no longer have to work solely in the shareholders’ best interests. What happens when that investment significantly underperforms alternative investments, ones whose company executives continue to place the shareholders’ best interests first? Who’s left holding the bag when the inevitable class-action lawsuit arrives?

It won’t be the CEOs. They gave investors fair warning with their disclosure.

That leaves the professional fiduciary who bought those investments.

That could be you.

Scared yet?

READ MORE:

A 3-word fiduciary rule — Carosa

The ‘Fiduciary Rule’ versus the ‘Rule of Fiduciary’ — Carosa

Do you have the ‘knows’ to be a fiduciary? — Carosa