EBSA Press Release: Labor Department Cautions Financial Firms To Stop Using Employee Benefit Plans In Negotiating Corporate Sales [03/07/1997]

Archived News Release — Caution: Information may be out of date.

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Financial institutions may not use employee benefit plans as bargaining chips in negotiations to sell their subsidiaries or divisions, warned the U.S. Department of Labor's Pension and Welfare Benefits Administration (PWBA).

PWBA Deputy Assistant Secretary Alan D. Lebowitz said, "The department is concerned that other financial institutions may be using their plans to barter for higher purchase price. There is no gray area under the law employers cannot promise prospective buyers that they will get plan business, especially if they stand to profit by reaping a higher price on the sale of an affiliate."

The department has learned that some financial institutions may be misusing their authority to hire investment managers and service providers for plans when engaging in such sales. One recent settlement with the Labor Department involved such an arrangement regarding the sale of a subsidiary by a nationally prominent bank. As part of the sale, the bank had agreed to continue to retain the subsidiary being sold as investment manager of the bank's employee benefit plans in exchange for a higher sale price for the subsidiary.

Under the settlement, the bank agreed to pay $1.8 million to one of its pension plans. It also agreed to refrain from using its authority over plans under its control to obtain services from any subsidiary it may sell in the future, if the sales proceeds paid to the bank would be affected by the bank's use of its authority over the plans. 

A financial institution may not misuse its discretionary authority to select an investment manager or service provider on behalf of a plan for its own benefit. Federal pension law requires that these financial institutions act solely in the interest of plans, and their participants and beneficiaries in using their discretionary authority.

According to the department, the law the Employee Retirement Income Security Act of 1974 applies to such transactions, not only in cases where the plan pays the fees, but also where the fees for investment management or other services for the plan are paid out of the general corporate assets of the employer sponsoring the plan.

The department cautions that financial institutions who include in the sale price of a related subsidiary or division the business of managing plans under their control could be placing their interests ahead of the plans, and participants and beneficiaries, in violation of the fiduciary standards of federal pension law.

Archived News Release — Caution: Information may be out of date.