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Saturday, December 6, 2014

A Contribution from Y2K to the Repository of Classic Christmas Music

Well, it's ChristmaHanuZaa time again, and, as I did once before, I'm again going to go out with a post at the Holidays with no ERISA tie-in. This time, here's a note on Xmas music. (I guess I could try to make some kind of strained connection between the "contribution" reference in the title of this post and a reference to "employer contributions", but I won't do that.)

I've always been a big fan of Christmas songs, with "Feliz Navidad" probably being my favorite from way back, heading into the '90s. But I also look for new standards, too. And when it comes to American pop culture, one so often finds the path to Saturday Night Live. In the case of Holiday music, one iconic example is Adam Sandler's little Hanukhah ditty. I think that, if you watch the interplay between Norm MacDonald and Adam Sandler during the initial roll-out of "The Hanukhah Song", you can see they knew that something special had occurred, even if they didn't realize the extent to which it was truly special. More on SNL in just a moment . . .

For years, my own personal favorite Christmas song has been from Mariah Carey. Back in '94, she released an album with at least two stellar efforts. One is "Christmas (Baby Please Come Home)". The other is "All I Want for Christmas Is You", which, having supplanted "Feliz Navidad" at the top of my list, continues to be my all-time favorite.**

Now we come back to the ubiquitous SNL and the year 2000. The first time I heard/saw Sanz-Fallon-Kattan-Morgan do the grammatically challenged "I Wish It Was Christmas Today", I was blown away.*** I was quite gratified over the years to see it coming back in incarnation after incarnation. I really think we've got a keeper here - particularly with Jimmy Fallon's ascension to the Tonight Show perch, where he'll presumably be for decades. I did a triple-take when just the other day I heard the version by The Strokes' Julian Casablancas for the first time (where have I been since 2009?), playing over an Acura commercial. A terrific chronicle of the history of this unlikely entry on the roster of tier-one Christmas songs, with a whole bunch of great links, is on the Slate website. Check it out. See also the utterly spectacular 2009 rendition of the song performed on Late Night (I won't spoil it for you with any details).

Happy Holidays!
_________________
* As a general matter (and as I've previously indicated ), it often fascinates me when something enters the Collective's consciousness as a long-term (and maybe even very long-term) keeper. I wonder how often those who create new pop-culture fixtures realize in real time that they've captured lightening in a bottle? I once heard the Pink Floyd guys saying that they really did know right away that they'd done something special after wrapping DSotM. Another angle on this is reflected by the Black Eyed Peas, who I think actually tried with forethought to come up with a forever-type piece when they did "I Gotta Feeling" - it must be something to aim that high intentionally and ultimately succeed.

** Could there have possibly been a better song for use in one of my favorite movies, "Love Actually"?

*** I remember being in similar awe when I first saw Andy Kaufman's "Mighty Mouse" thing.

Friday, November 7, 2014

An Un-Affordable Prediction

OK, I'm going to go on the record here - if the Republicans take the presidency in 2016, then the ACA is essentially gone within the six-week period to follow the election. To be clear, this is not advocacy; it's just a prediction. Hey, take it from the one who confidently predicted that Gangster Squad was going to be the next big thing after Argo!* I understand all of the too-hard-to-unwind, too-entrenched, too-good-for-the-insurance-companies, etc., etc., etc., arguments.  But, hey, notwithstanding all of that, I'm just sayin' . . . .

________
* See the arguably quite unfortunate footnote to my Argo post. (Although, just to be fair, I sure did call it right regarding Argo, didn't I?)

Sunday, October 26, 2014

Nomenclature, Part III

Emerging out of a conversation with my friend Peter H. is a realization that the ERISA/compensation practice has given rise to or at least made use of some pretty racy and otherwise interesting nomenclature. (See also my earlier nomenclature posts here and here.) Some examples, in no particular order:

SLOBs - a messy way to deal with trying to address 410(b) issues*

STD - something with which you DO want to get infected while dealing with Section 409A**

SARs - compensatory interests so prevalent that one might say they've gone viral

VCOCs - pronounced "vee cee oh cees" by some (including me), but "vee' cox" by those who must be trying to come up with sexy new devices with which to address "plan assets" issues from both sides***

CoC - is it any wonder that the 409A regs. gravitated to the altervative "CiC" terminology, which seems much less hard to use?

blown grandfather - something that just has to be awful in situations in which one is dealing with trying to satisfy transition rules that may no longer be enjoyed

PU - an acronym for phantom units so odorous that it (really) may help explain the evolution in terminology to "restricted stock units"

rabbi/secular/rabbicular trusts - oy

ERISA - forgive me for resort to the trite old standby of "Every Ridiculous Idea Since Adam"

There must be more, but I figured I'd get these out there.

_______________
* Do they really think that "QSLOB" is a materially better acronym?

** I try to use "S-TD" in order to address this issue, but I'm not sure I'm really accomplishing much.

*** And then, of course, there are "springing VCOCs".

Monday, October 6, 2014

The Trouble with Tibble

 
I got nowhere to (boldly) go with this right now, since all we really have in the Tibble case at the moment is cert. granted on a limited issue, albeit in an extremely high-profile excessive-fees case. But there was no way I was going to pass up the opportunity to do a post entitled, "The Trouble with Tibble". (Thanks to my friend Jeff S. for the idea.) Maybe I should at least say that the issues are . . . ahem . . . clear as (Harcourt Fenton) Mudd?

Saturday, September 13, 2014

401(k) Plans Go Undercover, Brother


I guess I know that, by this point, 401(k) plans are so much in the fabric of everyday life that there frequently are going to be references to them in the movies.  Nevertheless, going all the way back to 2002, I figured I'd share this particular one, which jumped out at me the other day as I watched the Undercover Brother (Eddie Griffin) being prepared for an oh-so-trecherous foray into the world of the Caucasian:

****
It'll be a very dangerous assignment. It'll be your most vigorous training yet. You're gonna have to think and act just like a tight-butt white man with a 401(k) plan and a country club membership. So pay attention.
****

Ha. 

Tuesday, August 5, 2014

Let It "Roll on Down the Highway" - ERISA Glides Smooth-ly Onto Jon Stewart's Radar


Thanks to my friend Bruce C., actuary extraordinaire, here's a link to The Daily Show's take on "pension smoothing" and the use thereof to (ahem) supposedly "fund" the Highway Bill.  ERISA arrives on Comedy Central!!*

 _______
 * There's so many puns and connections I could have used for this post, but I went with BTO's "Roll on Down the Highway," just 'cuz I think it's one of the best songs - and maybe the single best driving song - about which no one seems to care.  The Daily Show went with Shabby Road, steering towards The Beatles, and another example would be Road to Nowhere, courtesy of the Talking Heads.

Tuesday, July 1, 2014

You Don't Know . . . ERISA (courtesy of Jellyvision)

Well, this will be obscure for many, but I may have stumbled upon the ultimate convergence of ERISA and Pop Culture (other than this website?).  I got a cold call from a nice guy at Jellyvision.

"Jellyvision".  It rang a bell.  I asked him where I could have seen that name.  The answer was, of course, that Jellyvision is the maker of that unsurpassed gaming experience known as, "You Don't Know Jack".  The game is a rollercoaster ride down the road of Pop Culture, and, back in the day, was a (the?) centerpiece of entertainment activity in my home, for the entire family. 

So why the heck is Jellyvision calling me?!?  The answer is that Jellyvision is marketing a product with a YDKJ feel that - get this - is intended to help Human Resources departments communicate employee benefits and health-care reform to employees.  (You just can't make this stuff up.)  And they got my name because I've got a connection to HR, even though, as things would have it, I'm only the lawyer. 

What're the odds?*  I'm a YDKJ junkie; the YDKJ people make a foray into employee benefits; I'm an employee-benefits lawyer; I've got some cockamamie website purporting to explore the intersection of ERISA and Pop Culture; and, totally at random, they call . . . ME!  I felt like they had a camera in my house during the halcyon days of YDKJ.

Hilarious, not to mention fun.  Or, as the YDKJ emcee might have said, "Uh, . . . no."

(As an aside, I would note that they also alerted me to a wild-and-crazy video at this link of what might be about as good a corporate presentation as you'll ever see.) 

________________________
*  See also my prior odds-related post

Saturday, April 5, 2014

Dude-nhoeffer Looks Like a Lady . . . With the Moench-ies

The oral argument in the Fifth Third v. Dudenhoeffer case was pretty interesting.  It's like they forgot to talk about the case before them.  Maybe they were looking at the Sixth Fourth First Ninth Tenth case?

I guess the Supreme Court sometimes gets sidetracked with these "numbingly technical cases involving applications of pension or benefits law".  See my earlier post 
on Justice Souter's retirement.  In Kennedy, they realized they granted cert. on the wrong issue and had to re-up the grant to cover the issue that was ultimately dispositive in the case.  Regarding Amara, they decided an issue that wasn't decided below or briefed to the Court at all, leaving one to wonder whether they ever got over not granting cert. in  the Amschwand case.  And now, in Dudenhoeffer, they seem to have the DOL's Enron brief on their mind as they focus on an issue - the intersection of ERISA and the securities laws - that is quite far from the heart of the Dudenhoeffer case.  Wheeee . . .

Returning to what's really at issue in Dudenhoeffer, if I may, I'm somewhat surprised that commentators and the Court aren't generally focusing more on the apparent requirement in the plan there that it be invested in employer stock, viewed through the prism of the "plan documents" rule (as the Kennedy case refers to it) of 404(a)(1)(D)
.  Rather, the approach has been to frame the question in terms of whether there is a presumption in favor of investment in stock - a la Moensch.*

Framing the question in terms of whether there's a presumption leads to potential hostility at the Supreme Court level towards an asserted presumption that isn't expressly in the statutory language.  The oral argument, to the extent it briefly addresses the presumption issue, seems to reveal such hostility.  
To me, at least for plans that mandate stock investment (as the plan in Dudenhoeffer arguably did), the question may well better be framed as whether the statute itself validates an investment in employer stock, not whether there is an implied rule of presumption that emanates from the statutory penumbra.
 
My thinking is as follows:
 
1.  ERISA, in Section 404(a)(1)(D), says that you have to follow plan documents insofar as they are consistent with ERISA (providing specifically that a fiduciary shall discharge the fiduciary's duties "in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with" a wide range of ERISA provisions).  This is a command - it's mandatory.  If the plan tells you to do something, you must do it, unless to do so is illegal.  The DOL has recognized this directive in the context of the employer-securities question going all the way back at least to its seminal brief in the Texas Air case.

2. A.  The DOL has with some success interpreted the "insofar" language in 404(a)(1)(D) as sweeping in, among other things, ERISA's prudence requirements.  While that's not necessarily a completely obvious connecting of the dots, the approach has been broadly accepted, and at this point seems almost axiomatic.

B.  The range of prudence is generally broad, so it would seem to me that there wouldn't be a prudence violation for following governing plan documents unless the action (or inaction) in question could be shown as falling altogether outside the range of prudent (i.e, permissible) behavior.  I would argue that merely showing some some murkiness surrounding the appropriateness of a given decision isn't enough to establish the imprudence (i.e., illegality)
 of the decision.  I would think that you'd have to show that the decision is outside of the bounds of the range of prudence.

3. A.  Now take a plan provision that says that a plan, or a particular investment fund under a plan, must be invested 100% in employer stock.  What one is left with, then, if the provision requires specified fiduciary conduct by dictating a particular investment (more on that later), is a requirement that the plan be and stay invested in the stock unless . . . it is affirmatively outside the range of prudence. That's an important point, I think: it's not that you CAN invest or stay invested; it's that you must.

B.  The point is arguably strengthened in the context of statutory provisions that provide relief for investment in employer stock.  The point, for me, is not that the provisions in the aggregate form some kind of ethereal presumption, but rather that an analysis allowing a fiduciary to follow a plan provision requiring investment in employer stock unless the decision can be shown to be imprudent flows from the statutory langague of 404(a)(1)(D) and (!) is consistent with the overall statutory scheme.  It may be a subtle difference in some ways, but the crucial distinction, I think, is that the analysis I'm suggesting does not involve the identification of an extra-statutory presumption.

4.  So, then, my argument goes, once the fiduciary determines that a given course of conduct is within the range of prudence (or, at least, is not imprudent), the fiduciary must (as opposed to can) follow the plan documents and, at least where the plan requires investment in employer stock, and must (as opposed to can) invest and stay invested in the stock.  This result starts very much to resemble a presumption in effect, but not as a matter of analytical structure.

Thus, this analysis is not really a Moench analysis, as it doesn't derive a free-standing presumption in favor of investing in employer stock from the penumbra of the network of ERISA provisions that facilitate and arguably encourage the holding of employer stock.  I think the approach I’m suggesting is more of a strict application of the plan-documents rule of 404(a)(1)(D), in the context of the inapplicability of the diversification rule to eligible individual account plans investing in employer securities.  The Moench approach may well effectively get you to the same place, but I think the two approaches are not at all structurally identical.

I would further suggest that the Supreme Court has laid the groundwork for this line of reasoning. MetLife, Kennedy, McCutchen and Himeshoff all emphasize the primacy of the plan document. To quote McCutchen, "The plan, in short, is at the center of ERISA."**

So maybe the Moench-ies have it right, from a result-oriented perspective?  I just think the approach that focuses on finding a presumption, rather than an approach that flows more naturally out of the statute as I've outlined above, may grate with the Court.  I’m only suggesting that the Moench presumption, with its arguably somewhat dissatisfying technical underpinnings, may not be the only way to get to a result that many of us think is the right one under ERISA.***

Having said all that, I take the point that the analysis I'm suggesting has not been a real focus of the discourse.  Rather, the focus has been on the identification of an implied presemption.  Indeed, Section 404(a)(1)(D) is not even cited in the Dudenhoeffer oral argument, and there's only a fleeting reference to the requirement in the plan at issue in Dudenhoeffer that the plan be invested in employer stock.

But I remain undaunted.  As Steven Tyler's said, referring back to an old saw while on his American Idol perch (and, thankfully, allowing me to loop all the way back to this post's title): "If I agreed with you, we'd both be wrong."

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* I’ll resist the inclination to say something like, “‘Moench’ a bunch of Fritos . . . .”


** I also think the DOL's FAB on a directed trustee's responsibilities (Field Assistance Bulletin 2004-03) is instructive here, even if not entirely apposite. The DOL essentially asks, at least as to pricing, how it's possible for anyone to be smarter than the market. Buy high sell low, anyone? If people are buying and selling at any given price on any given day, on what basis am I to conclude that they're necessarily wrong (indeed, irrational or at least imprudent)? The outside-the-range-of-prudence threshold seems like a pretty high bar, I would think.

*** The approach I’m suggesting could theoretically support dismissal at extremely early stages of the litigation (albeit maybe not necessarily with the extreme totally-out-of-court approach that has been pursued by the district court for the Southern District of New York in a number of recent stock-drop cases).

Wednesday, February 12, 2014

One for Alanis myRA-sette - Isn't It Ironic?

There's some scuttlebutt out there that the various "ironies" in Alanis Morisette's "Ironic" aren't ironies at all. Well, I think the Administration has given us a facially nice but truly ironic new proposal. The myRA proposal would allow people to set up starter accounts invested in Savings Bonds.

But does anyone recall that the Department of Labor is so adverse to undiversified fixed-income investments that the DOL folks quite specifically refused to allow money-market and stable-value alternatives as QDIAs? Why? Because of a concern that participants defaulted into such alternatives would be on the wrong end of the continuum of potential long-term returns, that's why.

And so what does the administration do? In the name of retirement savings and the encouragement thereof, a program is proposed pursuant to which the only possible investment is a . . . Savings Bond. Now I'm not saying that's necessarily a bad idea. Nor am I saying that I think the QDIA regs. are a particularly good idea in this regard. In fact, I personally don't think that the QDIA regs. should've shut down MM/SV as an alternative. (The timing of the adoption of that approach turned out to have a deleterious and in some cases possibly tragic effect on a number of participants' retirement savings. The DOL was not moved to change the approach in any meaningful way, notwithstanding that Series of Unfortunate Events.)

But, c'mon - regardless of where one comes out on QDIAs, on the one hand, and myRAs, on the other, the same government really shouldn't be pursuing two diametrically opposed policies simultaneously. Indeed, aren't the 401(k) participants who don't make investment elections - people for whom the QDIA rules are there - pretty much members of the same target audience as the one to which the myRA proposal is directed? At the least, if only for the sake of consistency, let's massage the QDIA rules so that MM/SV is a valid alternative for the first $X that goes into the QDIA. Or, conversely, let's change the direction of the myRA proposal to provide for some amount of diversification.

In any event, it seems to me that there should at least be some kind of high-level review before the myRA thing goes too far down the road, so as to try to ensure that the various retirement policies that are being encouraged by our federal government are sufficiently (*shudder*) coordinated. To have a non-MM/SV bent be so harshly entrenched in the QDIA regs., and then to launch a key (State of the Union, even!) initiative that provides exclusively for Savings Bond investment, strikes me as irreconcilable or, at least, just a little bit . . . ironic.

Friday, November 15, 2013

Breaking Bad with Obamacare? - A Comparison and Contrast

Every now and then I'm struck by the care and effort that goes into the construction of a song, a show, a movie, etc., etc. Sometimes things come easy, and sometimes they don't. If you watch the extras on the Sixth Sense DVD, you may be struck by the attention paid to so many details and interrelationships. How much effort went into making sure that Memento "worked"? Breaking Bad was nothing short of incredible in terms of the way that characters and storylines were interwoven into a unified whole. Do we think that the elegant conclusion of The Mary Tyler Moore Show happened by accident? Songs like Stairway to Heaven and albums like The Wall are, I would submit, nothing short of musical tapestries. Sure, some things just roll right out of the minds of their creators. But sometimes the process itself is magical, and leads to magic.

Which brings me (somehow) to current events involving health-care reform. I think that there is a point being missed in the raging debate over Obamacare. In particular, many seem to have forgotten the process by which the legislation initially became law. When Scott Brown won his Massachusetts senatorial election, the only way - creative as it was - for the President to cause the proposal to become law was for the bill that had passed the Senate to be presented to the House. In that way, and in that way only, could the President avoid having the bill sent back for a vote in the Senate, a vote which, it seems clear, he could not possibly have won. Indeed, the Senate bill was in many ways a response to the House bill, and, before the Brown election, there was the clear expectation that material negotiation was about to ensue. The results of this process leading to the enactment of the Affordable Care Act thus included (i) the skipping of a conference, which I submit quite undoubtedly would have resulted in substantial, substantive and fundamental give-and-take between staffers, technical experts and, ultimately, the two houses of Congress, and (ii) the resulting passage by both houses and eventual enactment of what essentially was draft legislation - not-ready-for-prime-time legislation - that did not have the benefit of the conferencing process. I am not trying here to advocate for whether Obamacare is a good or a bad idea; I am simply trying to make the smaller point that it should not be surprising that a landmark law of this reach and complexity is not working out so well, given that the enacted legislation was not the bill that anyone thought would be the final, considered work of Congress.

Tuesday, November 12, 2013

Obamacare and Other Colloquialisms - Obamadvice?

I see that:

- on the heels of the passage of the House bill* that would effectively put a hold on the DOL's reproposal of the fiduciary (investment advice) regulations pending certain SEC action,

- which itself was on the heels of the 10-Senator letter - from Democratic senators, no less - to the OMB suggesting that the DOL "should not issue final regulations in the area until the SEC has completed its work" and stating further "that any regulation the DOL ultimately may propose should be carefully crafted so that it does not upend the SEC's work", . . .

. . . there have been reports and other indications that the DOL will not be reproposing the regulation until Spring 2014, at the very earliest.

Well, THIS is sure going smoothly, huh?  In honor of other recent initiatives that have gone so smoothly, dare I try to coin the phrase, "Obamadvice"?  That's all, for now . . .

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*  The Retail Investor Protection Act, or R.I.P. Act?!?!?  Really?  Seriously?  Are they trying to handicap the likelihood of the regulation's ultimately having any life?  I wonder if I should start watching The Walking Dead for references to these regulations.

Monday, September 30, 2013

From Grand Theft Auto V and 401(k) Plans, to the Obligatory Reference to Walter White

Well, you know we've made the big time, when we get front-and-center exposure in the official GTA V trailer. From the trailer:

****
Michael - We're all professionals. We all know the score.

Lamar - This is legit business.

Franklin - 401(k)s, tax returns and all.
****

401(k)s!! For years, I've been telling people coming into the practice that our efforts are no longer confined to hyper-technical impenetrable back-room issues.  You can even talk about our stuff over the dinner table, with your kids no less. If there was any doubt before, we have, with a role in promoting the utterly iconic GTA V, undoubtedly arrived.

And, by the way, moving from the various and random drugs of the GTA world to, quite specifically, crystal meth of the distinctly blue variety, but staying with the utterly iconic, I have a wistful question. Now that it's over, was Breaking Bad the . . . Best Television Ever? Indeed, maybe so.

Onwards. . . .

Saturday, August 17, 2013

With Apologies to Elton John, Don't Let the Sun Capital Partners Go Down on Me

Don't even get me started regarding the First Circuit's decision in Sun Capital Partners.  This case is the one in which the First Circuit holds that a particular investment fund is a "trade or business" ("ToB"), and therefore, depending on its level of ownership of a certain portfolio company, is potentially aggregated with the portfolio company for purposes of the ERISA rules governing multiemployer-plan withdrawal liability.  I previously had been heartened by the analysis of the district court in the Sun Capital Partners case regarding ERISA's approach to the ToB question, which analysis squarely rejected the PBGC's 2007 Appeals Board letter on the issue.  Prior to the district court's decision, I had been frustrated by the willingness of any number of regulators and judges to play in the tax sandbox without getting input from the IRS (which is the organization that, last I looked, knows just a little something about tax matters), and by decisions which essentially held that, even if under the tax rules there might not be aggregation in a particular case, the ERISA rules aren't required to sync up with the tax rules.  And so now I am returned by the First Circuit to what I regard as the Land of Confusion* by a decision that nullifies the decision of the district court that I liked so much, and effectively replaces it with the thinking with which I disagree that spawns the aggravating aggregation. An important silver lining for me, though, is that I think that the First Circuit actually did a much better job on the 4212(c) issue than the district court (actually, I'm not sure I even followed the district court's thinking on that particular point), and, indeed, the ultimate result on remand may well be that no aggregation is ultimately required in the Sun Capital Partners case.**

But the point of this post is not to argue about Sun Capital Partners.  Rather, the point here is to address an ancillary point that seems to be creeping into the discourse, at least in part because of the light being shined on aggregation issues by the Sun*** case.  In particular, I am starting to hear people express concern that, even if a parent fund is not a ToB, the downstream portfolio companies could be aggregated with each other, if the fund's level of ownership is sufficiently high.  I've previously heard this concern from time to time, but Sun seems to be generating renewed heat**** on the point by virtue of raising the aggregation issue generally.
 
To get to the punch line at the very outset, I think that any concern that downstream companies owned by a non-ToB should be aggregated under 414(c) is borne of a flat-out misreading of the applicable regulations.  (The gauntlet is thrown down!)  My analysis is as follows -

1. Let's start with the regulatory text itself.

A.  The confusion centers in the following passage in the 414(c) regs.:

******
The term "parent-subsidiary group of trades or businesses under common control" means one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest with a common parent organization if . . . .
******

B. The red herring here is that "common parent organization" as used at the end of the above passage isn’t expressly modified by a ToB qualifier.  The concern as I understand it is that the use of the phrase "common parent organization" is not expressly modified by the ToB concept, so that the sentence could supposedly be read to reach "common parent organizations" that are not ToBs.  But is there really any legal significance to the lack of such an express qualifier?  My answer, as explained below, is a resounding "no".  As I will hopefully show, the concern being expressed ignores the derivation of the 414(c) rules, as well as the language that appears earlier in the very sentence under consideration, and is also fundamentally inconsistent the underlying nature and structure of the rules.

2.  Let's now examine the derivation of the rules. 

A.  The 414(c) regulations bring over the language of the 1563 regs.  This approach makes sense, of course, in that 414(c) refers to 414(b), which in turn operates by cross-reference to 1563.  The gist, or at least a key aspect, of 414(c) is to cause the 1563 aggregation rules to be effective as to entities "whether or not incorporated", so the regs. needed to expand the 1563 rules so as to cover the non-corporate setting.

B. And from where does the language in the 414(c) regulations come?  The answer, as one would expect, is that it comes from the 1563 regs.  Those regs., at Section 1.1563-1(a)(2)(i), state:

******
The term "parent-subsidiary controlled group" means one or more chains of corporations connected through stock ownership with a common parent corporation if . . . .
******

Look familiar?  It should.  The 414(c) rules parrot the 1563 rules, often in a word-for-word fashion, with modification as relevant here only as needed to adjust for the coverage of non-corporate, as well as corporate, entities.

C. Staying with 1563 for the moment, there is no doubt that, in order to be a 1563 parent-subsidiary group, all of the entities in the putative group need to be entities to which 1563 applies.  Thus, the language from the 1563 regs. quoted in "2(B)" above refers to a "common parent corporation".  Then, retaining the fundamental structure of the underlying 1563 rules, the drafters of the 414(c) regs. did a cut-and-paste job on the 1563 rules, and gave us the 414(c) rule quoted in "1(A)" above.

3. Let’s go through the transformation step by step, parsing the 414(c) regulatory language and the way it is derived from its 1563 foundation.

A. First, they replaced "parent-subsidiary controlled group" with "parent-subsidiary group of trades or businesses under common control".  So far so good.

B. Then they replaced "one or more chains of corporations connected through stock ownership" with "one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest".  Everything still foots.  Identical concepts have been brought over, adjusting merely to expand the potential form of relevant ownership from corporate-only (under 1563) to corporate or non-corporate (under 414(c)).  No squishiness in the language, yet, and all is still well.

C. Then we come to the next part of the cut-and-paste exercise.  They replaced the phrase "with a common parent corporation" with the phrase "with a common parent organization".  Ahhh, therein lies the rub.  While the use by the 1563 regs. of "common parent corporation" here definitively lays to rest any concern under 1563 that subsidiaries might have to be aggregated even though the common parent is not a 1563-covered entity, the 414(c) regs. were not quite so specifically crafted.  In particular, the 414(c) regs. do not expressly append another ToB modifier to the "common parent organization" phrase.  But that’s just an accident of the syntax.  All of the other linguistic substitutions that were used in porting the 1563 language over to 414(c) neatly self-execute the inclusion of the ToB concept.  It’s just that the replacement of "corporation" with "organization" at the final substitution point didn’t happen expressly to subsume the ToB concept.  Because of the way the grammar works, additional definitive clarification for the "corporation"/"organization" substitution would have required the further addition of extra words - for example, the addition of "that engages in trade or business activities" after the word "organization".  The addition of those seven words would, of course, have even more obviously maintained the parallelism between the two sets of regulatory language; but the fact that the drafter of the 414(c) regulations didn't think to reemphasize the point by including those (or similar) as an additional modifier is not a valid reason to misinterpret the words that were in fact used.

4.  So, with that background, let's go back and look at the term that is itself being defined earlier in the very same sentence: "parent-subsidiary group of trades or businesses under common control".  Geez, if that’s not a pretty clear indication that the common parent and the subsidiaries both need to be ToBs in order for their to be aggregation, I don’t know what is.

5.  At this point, I'd like to consider how the rules work – and should work - as a big-picture matter.  Before we all do that thing we so often do and identify words here and there that, when taken out of context, could raise some imagined interpretive issue, can we please made sure that we don't miss the forest for the trees (or, as a mentor used to say, with nary the slightest hint of irony, miss the forest for the bushes)?

A. What I’m saying above regarding the 414(c) rules isn't some tricky linguistic game.  To the contrary, the result I'm reaching is completely consistent with and even compelled by the basic structure of both the 414(c) and the 1563 rules.  Having subsidiaries aggregated under 414(c) where the parent is not a 414(c)-covered entity (i.e., not a ToB) would result in a fundamental structural difference between 1563, which, as noted, clearly and indisputably aggregates subsidiaries of a common parent only when the common parent is also a 1563-covered entity, and 414(c).

B.   I think it's important to note that it's not like the rules specifically INclude a non-ToB common parent as a parent that would activate 414(c) parent-subsidiary aggregation.  Rather, we've got a 414(c) rule that on its face aggregates parent/subsidiary ToBs, but which doesn't happen expressly to reconfirm a second time that the common parent, like the subsidiary, needs to be a ToB.   (Cf. the Verizon case, where an errant cut-and-paste actually did result in a document that on its face provided for the "wrong" result, and my post thereon.)  Obviously, if the 414(c) regs. had specifically said that downstream subs. do indeed need to be aggregated even where the common parent is a ToB, this story would quite be a different one.  But that's not at all what happened.  Here, it's simply that the latter part of the introductory portion of the sentence in question was not as amenable to a straight "trade or business" substitution as was the earlier part, so, unfortunately, the additional ToB language from earlier in the sentence (in the defined term itself) didn’t resurface again at the end of the introductory portion of the sentence.  But to take that lack of repetition and use it to turn the whole 414(c) parent-subsidiary rule on its head from the ground up is, to me, a clear over-reading of a simply substituted word - "organization" for "corporation" - especially where, as here, as noted in "4" above, the defined term in question is "parent-subsidiary group of trades or businesses under common control".

C. Indeed, to aggregate the downstream entities under 414(c) notwithstanding that the common parent is not 414(c)-covered would be flatly inconsistent with the remaining structure of the other rules under 414(c).  Like the 1563 rules, the 414(c) rules have separate regimes for parent-subsidiary groups and for brother-sister groups.  It's in the case of brother-sister groups, and only in the case of brother-sister groups, that 1563 aggregates subsidiaries where the parent is not itself covered by 1563, and the 414(c) rules maintain that fundamental dichotomy.  Thus, under the brother-sister rules of 1563 and of 414(c), you get aggregation of downstream companies which are owned by individuals, estates or trusts, where the owners are not themselves subject to 1563 and 414(c), respectively.  (The individuals, estates and trusts that are the owners would not themselves be part of the applicable "brother-sister controlled group" under 1563 or the "brother-sister group of trades or businesses under common control" under 414(c).)  So now we're going to make the parent-subsidiary rules under the 414(c) regs. act like the brother-sister rules on this key point merely because the word "organization" was used in replacement of the word "corporation" when the 1563 rules were exported to 414(c)?  I sure hope not.  If that kind of a sea change (staying with the Mother Nature theme of this post) to the basic underpinnings of the structure of the aggregation rules were intended, then presumably there would have been some kind of explanatory statement or at least indication to that effect.  I find none, which, to me, is not surprising, given that I think it’s quite obvious that no such sea change was at all intended.  And to those who might ask, "Well, why NOT aggregate downstream portfolio companies of a non-ToB common parent?" - I would say that there are innumerable reasons for crafting the aggregation rules in any particular way, and, in this case, the detailed and extensively developed parent-subsidiary rules just do not effect such an extended aggregation.

Would it have been great if they had said "organization that engages in trade or business activities" instead of just "organization"?  Sure.  Is that what they meant?  Well, sure it is.  If someone had pointed this particular drafting issue out as they were crafting the rule, would they have added words like that?  I suspect so.  Does it matter that the words aren't in there a second time?   Again, I sure hope not.  So if you're moved to wondering why "organization" is used at the tail-end of the 414(c) lead-in without a ToB qualifier, I hope I've provided an explanation.   As I've tried to show, what we've got here are some extra confirmatory words that happened not to have been repeated in the drafting process, not some effort by the drafters to expand the scope of the rule so as to recast the basic regulatory structure from the ground up.

In conclusion, while some seem to have become concerned that the 414(c) rules governing a "parent-subsidiary group of trades or businesses under common control" might somehow aggregate subsidiaries of a non-ToB parent, it seems evident to me that the 414(c) rules were not intended to provide, and do not provide, for that result.  Thus, just like there cannot be a 1563 "parent-subsidiary controlled group" with a non-corporate common parent, there cannot be a 414(c) "parent-subsidiary group of trades or businesses under common control" with a non-ToB common parent.  A contrary interpretation (i) ignores the derivation of the 1563/414 rules, (ii) is inconsistent with the very words used to form the defined term ("parent-subsidiary group of trades or businesses under common control") here in question, and (iii) would conflict with the fundamental regulatory structure under 1563 and 414, even blurring and maybe trivializing the clear dichotomy between the set of rules governing parent-subsidiary groups and the set of rules governing brother-sister groups.

So, how do I really feel about this?  I'll bet my views on this are sneaking through.  Hey, after all, it is Saturday as I complete this post, and, as we all know - Saturday night's alright for fighting!

Cheers! . . .

__________________
* Please forgive the Genesis reference haphazardly thrown in here, notwithstanding the nod to Elton John in the title.   As to Sir Elton, and with no disrespect to Michael Jackson or Billy Joel, when it's all said and done, I think that the body of work produced by the piano man named Reggie Dwight may well rank with anyone's in the pop/rock genre.   (And, just for the "record", I mean to include Bernie Taupin here. It amazes me that Elton John is not the writer of the lyrics that he so effortlessly sings, and that so much of what he has sung through the years are Bernie Taupin's words.)

** Sorta reminds me of Donovan v. Bierwirth, an oft-cited case making extremely important law, which resulted in no recovery whatsoever to the plaintiffs.

*** One would think that I'd get tired of all the "Sun" puns, but I guess that hasn't happened yet.

**** See the immediately preceding footnote.
 

Saturday, August 10, 2013

Making a "Trading Places" Bet on ERISA's Firestone Analysis

Here's a connection between ERISA and pop culture uncovered by someone else.  "Did the Supreme Court Flunk Constitutional Law When It Permitted Discretionary Review of Insured ERISA Benefits Cases" by Feigenbaum and Riemer, from the Summer 2013 issue of Committee News for the Health & Disability and Life Insurance Committees of the ABA, contains the following introductory passage:

****
In the 1983 comedy Trading Places the amoral Duke brothers conduct an experiment in social Darwinism debating whether genetics or nurturing is the source of success. They make a wager, and then put their theories to the test. They manipulate the life of Louis Winthorp III (Dan Akroyd), a successful commodities trader, by “trading places” with Billy Ray Valentine (Eddie Murphy), a street con artist. We’ll bet the same amount wagered by the Duke brothers with our readers – identify any litigation in the federal courts between private litigants, other than discussed in this paper, where the Article III Judge must defer to the decision of the defendant without conducting a full trial on the merits. We bet you can’t.
****

Ha!  Great movie.  Great connection!

For the record, I don't agree with the thesis of the article, and rather believe that the combination of the right to contract, the voluntariness of the US benefits system, the prism of Firestone's trust-law analysis, concerns about runaway plan-related costs,* and ERISA's comprehensive disclosure rules tends in the aggregate to validate the Firestone/MetLife/Conkright approach.

But whatever my view of the substance, the article is still a thoughtfully considered, incredibly well-researched and pretty all-around awesome article (in the interests of full disclosure,** one of the authors is a friend), and, moreover, it connects Eddie Murphy to ERISA so it's an automatic winner in the xtremErisa world.

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*  See, e.g., the Kennedy case.

**  . . . albeit not disclosure required by ERISA . . .

Tuesday, February 26, 2013

From Argo and Zero Dark Thirty to Anti-Terrorism Divestment Under ERISA

With all the anti-terrorism themes that have somehow made it into these posts, see the Argo and Zero Dark Thirty entries,* I wanted to note a couple of provisions in certain anti-terrorism legislation that, to me, have interesting ERISA connections.**  The interesting issue here is whether ERISA fiduciaries, in a manner that is consistent with their fiduciary duties, can divest holdings that may be supportive of terrorist activities. 

The initial reaction might be that they can't just simply divest given ERISA's single-minded focus on investment returns.  But, hey, sure they can - and, it turns out, even the statutes themselves give one quite a push.  In this regard, it is interesting to see the ways in which Congress has ported over the principles embodied in Interpretive Bulletin 2008-1 (previously Interpretive Bulletin 94-1), in dealing with these matters. 

So, in section 5 of the Sudan Accountability and Divestment Act of 2007, Pub. L. No. 110–174, we have the following:

****
Sense of Congress Regarding Certain ERISA Plan Investments.

It is the sense of Congress that a fiduciary of an employee benefit plan, as defined in section 3(3) of [ERISA], may divest plan assets from, or avoid investing plan assets in, any person the fiduciary determines is conducting or has direct investments in business operations in Sudan described in section 3(d) of this Act, without breaching the responsibilities, obligations, or duties imposed upon the fiduciary by section 404 of [ERISA], if—

(1) the fiduciary makes such determination using credible information that is available to the public; and

(2) such divestment or avoidance of investment is conducted in accordance with section 2509.94–1 of title 29, Code of Federal Regulations (as in effect on the day before the date of the enactment of this Act).
****

See also § 3 thereof (relating to divestment by state and local governments), § 4 thereof (relating to policies of investment managers).

Then, later, in section 204 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, Pub. L. No. 111-195, comes the following provision:

****
Sense of Congress Regarding Certain ERISA Plan Investments.

It is the sense of Congress that a fiduciary of an employee benefit plan, as defined in section 3(3) of [ERISA], may divest plan assets from, or avoid investing plan assets in, any person the fiduciary determines engages in investment activities in Iran described in section 202(c) of this Act, without breaching the responsibilities, obligations, or duties imposed upon the fiduciary by subparagraph (A) or (B) of section 404(a)(1) of [ERISA], if--

(1) the fiduciary makes such determination using credible information that is available to the public; and

(2) the fiduciary prudently determines that the result of such divestment or avoidance of investment would not be expected to provide the employee benefit plan with--

(A) a lower rate of return than alternative investments with commensurate degrees of risk; or

(B) a higher degree of risk than alternative investments with commensurate rates of return.
****

See also § 202 thereof (relating to divestment by state and local governments), § 203 thereof (relating to policies of investment managers).

Notice the way in which, in section 204(2), they replaced the cross-reference to old Interpretive Bulletin 94-2 that was in section 5(2) of the Sudan legislation with actual substantive language grounded in the thinking of Interpretive Bulletin 2008-1.  (Gee, do you think that DOL personnel might have had a hand in the crafting of some of this stuff?).  As our Vulcan brethren might say, "Fascinating."

Anyway, while no real new ground is broken here, it seems worthy of note that the DOL's ETI-type thinking has crept its way into express statutory provisions of this type.

And, of course, congrats to Argo (and its producer/director/star, Ben(jamin) Affleck), one of the great movies of our time!!***

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* Hmm.  From Argo to Zero Dark Thirty.  From A to Z.  I hadn't noticed that.  Fun.

** Thanks to some terrific discussion from John Nixon in "Public Plans and Social Investing: When Doing the Right Thing Is Not Enough," Bloomberg BNA Pension & Benefits Daily (Feb. 26, 2013), for alerting me to these provisions.

*** Hey - give me some credit here.  I called this one right off the bat.  See the post first cited above.  (Although I guess I wasn't right about Gangster Squad.) 

Friday, February 8, 2013

Rollovers as a Laughing Matter in "Identity Thief"

Look for the reference to qualified-plan rollovers from Jason Bateman's character towards the beginning of Identity Thief.  His character is in the financial-services industry and deals with individual investors.  The rollover reference seemed like a strained one, but someone must have thought that it would make the job seem more real.  It's true, after all, that so much capital available for investment, whether from individuals or institutions, is in some type of retirement vehicle.  Regardless, I'll take retirement-plan references in movies any way I can get 'em.

And, by the way, what a surprisingly terrific movie!  (I guess I'm going to break with a whole bunch of critics on this one.)  Instead of building a rational foundation at the outset and falling apart towards the end, like all too many comedies do, this movie early on relies on a fair amount of absurd situations and then continues the silliness consistently and hilariously as it progresses, ultimately straightening out, rather than collapsing, as it winds down.  So now, in light of Bridesmaids, two of my favorite comedies in recent memory have Melissa McCarthy in them.  I guess I must think she's pretty funny.

Stay warm . . .

Sunday, January 6, 2013

Executive-Level Decision-Making in Zero Dark Thirty

At the risk of WAY over-aggrandizing the practice of an ERISA/compensation lawyer, I wanted to try to connect the subject matter of Zero Dark Thirty to a certain aspect of the compensation practice.  No, we ERISA lawyers don't save the world - believe me, I get that.  But I do think that, on the executive-compensation side, there is a relevant perspective that emerges from the process by which we got UBL (as the movie calls him).

Representing executives and companies seeking to hire and retain executives, one can, I think, gain an appreciation for the special nature of those who steer the ship with the force of their decisions.  People shape institutions, and I think sometimes many forget how critical the human factor at the decision-making point can be to how institutions ultimately act.  Look at the Apples and Disneys and Microsofts, etc., etc., of the world, and tell me, honestly, that you think they'd be the same in the absence of those who built and shaped them.

So how the heck does all of this tie to Zero Dark Thirty, and why did that movie lead me to proselytize about the role of the executive?  I've been fascinated by the role of President Obama in pulling the trigger on the mission that resulted in our finally getting UBL, particularly given the apparently lack of unanimity among his advisors.  Without trying to be political,* I think that Obama's stewardship regarding the UBL operation, and regarding later strikes against those who would seek to destroy the world as we know it, have been nothing short of spectacular.  Do people really think that executive-level decisions don't matter?!?  Maybe the decisions of others would also have led to the impossibly** successful UBL mission, but I'm not sure I'd bet on it.

Now don't get me wrong.  I'm not suggesting that corporate executives generally have decisions before them that are anywhere near as weighty as those the President has to make.  But I think my basic premise is nevertheless valid - executive decisions, and executive decision-making, are crucial to the shape and substance of an institution. To me, a lesson here is that we should not underestimate the importance of the people we place in key positions.  There's a reason good executives are compensated at high levels.  Look at the business operations of businesses (private and public alike) that try to skimp on the compensation of their leaders, and maybe it's not surprising when they struggle under failed leadership.  You get what you pay for, so to speak.

Now, with Zero Dark Thirty, we learn of the significance of other CIA players who may not have been at the very top of the executive decision-making heirarchy.  The movie portrays the efforts of Maya (who represents the real-life Jen, although "Jen" isn't her real name either) as being efforts without which we might still and forever have been chasing UBL.  The importance of her own belief in her analysis, and her dogged pursuit of a course of action informed by that analysis, is striking.  Indeed, without this one woman, an entire reality - a reality in which the United States finally rid the world of UBL - might never have come to pass.  It's an epic reminder that we should be careful not to underestimate the importance of individual people who have the ability to shape institutional conduct at various levels in the chain of command.

Anyway, if you want to be "proud to be an American,"*** and, if you're looking for a dramatic cinematic portrayal of a person who, through her ability, dedication and tenacity, made a Difference of utterly historic proportions, see Zero Dark Thirty.  Please.

__________
 * Indeed, I think it's possible that you could be surprised about my overall politics based on what I'm writing here.

** To quote or at least paraphrase Mark Twain, the only difference between truth and fiction is that fiction has to be credible.

*** Dwayne "The Rock" Thompson's tweet, sent just a wee bit before (!!) our President gave the rest of us the news (oh boy).

Monday, December 24, 2012

Train Keep A Rollin' - Pre-Wiring a Plan Under 409A to Avoid the Five-Year Limitation on Track-ing Underlying Equity Payouts

Around Holiday time, one might think of traveling.  And that might lead to thoughts of transportation.  And then onto such things as railroads.  So here are some things that may come to mind that mention the train:

Train Kept A Rollin' (by Aerosmith)
Rock N Roll Train (by AC/DC)
Train in Vain (by The Clash)
Runaway Train (by Soul Asylum (not the Denzel movie))
Train (‎Patrick Monahan's band)
(I'd also include the original The Taking of Pelham One Two Three, but it doesn't specifically include the word, "train," and I'm afraid this is already getting out of hand)

So this got me thinking about railroad tracks.  Which brings me to a certain track-ing rule in the 409A regs. that I believe is widely misinterpreted.  (I'm lying, of course, about the progression that got me to thinking about the 409A rule in question.  The truth is that I wanted to find some kind of pop-culture tie-in for this piece, and the foregoing, sadly, is the best I could do.)  Enough of this, and onto 409A.  

--------------------------------------------------------------------------------------------

On occasion, we all, or at least some of us, allow assumptions to be embedded in our heads as to what a particular rule means or how it must work.  Every now and then, though, it may make sense to take a step back and look at what the underlying rule really says, before we proceed in accordance with our working assumptions.

The issue I want to raise involves what to do with equity-based deferred compensation that is to be pushed out in connection with the consummation of a change in control, so as to track payments made in respect of the underlying equity.  The working assumption is that the payments can't be pushed out to more than five years after the CiC. 

But is that always right?  I don't think so, where the deferred-comp. documents are pre-wired so as to provide for the additional deferral.  (Pre-wiring could be of particular relevance and utility in the case of a plan (e.g., a so-called "carve-out" plan for management of a private-equity portfolio company) being established in the context of a possible impending transaction.)  I think you can draft a plan that, from the outset, has equity-related distributions track payments made in respect of underlying equity, no matter how long the payments are extended.

Heresy, you say?  (Or maybe, if you're less excitable than I, you more calmly suggest that I simply don't get it.)  Well, I think that that's the result you get on a completely straightforward reading of the rule and, to be frank, I'm not sure how you get to the adverse result, in the pre-wired case.
The rule in question is the tracking rule found at Section 1.409A-3(i)(5)(iv)(A) of the Treasury Regulations (the "Tracking Rule"), which states:

"Payments of compensation related to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets), that occur because a service recipient purchases its stock held by the service provider or because the service recipient or a third party purchases a stock right held by a service provider, or that are calculated by reference to the value of stock of the service recipient (collectively, transaction-based compensation), may be treated as paid at a designated date or pursuant to a payment schedule that complies with the requirements of section 409A if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or as apply to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets), and to the extent that the transaction-based compensation is paid not later than five years after the change in control event, the payment of such compensation will not violate the initial or subsequent deferral election rules set out in §1.409A-2(a) and (b) solely as a result of such transaction-based compensation being paid pursuant to such schedule and terms and conditions."

On its face, what does the Tracking Rule say?  Well, first, it says that, in the case of a covered CiC, you don't have a bad payment date or schedule merely because equity-based payments are made on the same basis as that which is applicable to payments made in respect of the underlying equity.  And then, additionally and separately, the Tracking Rule provides that, where there's a covered CiC, you don't have a bad deferral election merely because the equity-based payments are made on such basis, if the compensation doesn't continue to be paid more than five years after the CiC.* 

The Tracking Rule is comprised of these two completely distinct rules, and the five-year limitation plainly applies only to the latter one.  It has to be the case that there is meaning in that obviously intentional structure.  I submit that the evident meaning is that the five-year rule applies only to changes in the plan or elections under the plan - which are the things that can implicate the election rules identified in the second (but not the first) part of the Tracking Rule.

Thus, I'm suggesting, if you have an equity-based plan and it provides when implemented at the outset that distributions in respect of equity units will track third-party post-CiC payments for underlying equity, then the provision doesn't have to limit tracking to third-party payments made within five years.  In that case, I believe, you can simply say that the payments will track the third-party payments, whenever made.  For example, in the case of a unit payable at the time of the CiC, the provision could say something like: "The Unit Value will be paid no later than 30 days after consummation of the Covered Transaction; provided that, if holders of Shares receive payment for their Shares in connection with the Covered Transaction pursuant to a different schedule and subject to other terms and conditions, then Participants shall receive payment of the Unit Value of their Units pursuant to such schedule and subject to such other terms and conditions."

Is this abusive drafting based on a too-clever deconstruction of the regulatory language that reads out the five-year limitation in certain cases?  Am I playing interpretive games mired in linguistic Sophistry?  At the risk of "protest[ing] too much,"** I think the answer to those questions is a resounding "no."  I'm saying that the bifurcated structure of the Tracking Rule really could only mean that the first part of the rule, the part to which the five-year rule does not apply, just must have, and indeed does have, independent application - else it simply wouldn't have been drafted that way.  I believe that's what you get when you just read the words on the page and apply their plain meaning. 

Importantly, it seems entirely reasonable to surmise that the regulations purposefully take a more flexible view of a plan that from the get-go provides for a particular type of permissible payment, and seek to add constraints and limitations where, after the arrangement is in place, efforts are made later to add provisions for additional deferral.  Under this view, the rule says what it says, and there simply is no five-year limitation applicable where the plan is not later amended (and there otherwise are no later elections) to provide for a new time or form of distribution.  At the risk of saying it too many times, it is suggested here that this is precisely how the regulations clearly and straightforwardly read. 

The preamble to the proposed regulations all but confirms that the regulations say what I'm arguing clearly emerges on the face of the regulatory language.  The proposed preamble not only reiterates the bifurcated approach taken by the regulatory language, but it goes on to use grammar that further disconnects the two separate rules that comprise the Tracking Rule.  Section VI(E) of the preamble to the proposed regulations states:

"These regulations . . . provid[e] that compensation payable pursuant to the purchase by the service recipient of service recipient stock or a stock right held by a service provider, or payment of amounts of deferred compensation calculated by reference to the value of service recipient stock, may be treated as paid at a specified time or pursuant to a fixed schedule in conformity with the requirements of section 409A if paid on the same schedule and under the same terms and conditions as payments to shareholders generally pursuant to a change in the ownership of a corporation that qualifies as a change in control event or as payments to the service recipient pursuant to a change in the ownership of a substantial portion of a corporation’s assets that qualifies as a change in control event, and any amounts paid pursuant to such a schedule and such terms and conditions will not be treated as violating the initial or subsequent deferral election rules, to the extent that such amounts are paid not later than five years after the change in control event."***

One possible response to what I'm suggesting above is that the five-year rule applies in all cases, even where the tracking is build into the plan initially, because the later CiC transaction will effectively act as a putative election to defer, thereby (i) activating the 409A election regime and (ii) therefore rendering the election late and noncompliant, unless the second piece of the Tracking Rule, which requires compliance with the five-year rule, is satisfied.

Well, first, to me, that's just wrong.  Assuming that the transaction in question isn't some sham attempt to effect a compensation deferral is intended to evade the 409A rules, there's no way, I submit, that the effectuation of a transaction with independent business significance is tantamount to a distribution election.  If there's no distribution election, then, ipso facto, there's no late, non-compliant deferral election. 

Maybe more to the point, riddle me this, Batman - even if we're to believe that the intent really may have been to apply the five-year rule across the board, including to tracking provisions included in a plan from the outset, then why isn't the Tracking Rule more simply structured (if "simply structured" is the right turn of phrase for anything under 409A) along the following lines: "For purposes of the permissible-payment rule and the election rule, you're deemed OK if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to equityholders generally, but only to the extent payments under the plan are not made over more than five years"?****  

If you don't believe me, I would ask you to read the words of the Tracking Rule again, with a fresh, unjaundiced eye.  If they really thought that the five-year rule is so all-fangled important, then why is it relegated to the second (election/amendment-related) piece of the rule, instead of being set forth in both halves?  And, moreover, there has to be SOME point to the carefully bifurcated approach that the regulations take.*****  Stated another way, if in writing the regulations they were trying to say to say that all uses of the Tracking rule require satisfaction of the five-year limitation, well, then, fine - just draft a rule that says that you can't use this rule unless you satisfy the five-year requirement.  That's just not what the rule says.****** 

What may well be happening here is that the second part of the Tracking Rule is acting as an unfortunate distraction to the interpretation of the first.  There's almost misdirection.  What do I mean?  Let's imagine for the moment that there was no second part of the Tracking Rule.  Let's say that the entire rule said:

"Payments of compensation related to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets), that occur because a service recipient purchases its stock held by the service provider or because the service recipient or a third party purchases a stock right held by a service provider, or that are calculated by reference to the value of stock of the service recipient (collectively, transaction-based compensation), may be treated as paid at a designated date or pursuant to a payment schedule that complies with the requirements of section 409A if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or as apply to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets)."

If that's all you had, would you then construct the concern that the rule is effectively unusable because the later effectuation of a transaction is somehow an impermissible noncompliant late election?  C'mon - no way.  So then why does the addition of the second piece of the Tracking Rule, which says that the use of the Tracking Rule won't result in a violation of the election rules to the extent that the five-year limitation is satisfied, somehow diminish the force of the first part of the rule, which says that there's a permissible time or schedule of payment if the stock-based deferred-comp. payments track the underlying equity?  The answer?  The second piece of the Tracking Rule does not diminish the independent force of the first, and the first part of the rule applies in accordance with its terms, which do not include a five-year requirement.  You don't have an election problem about which to worry if, well, there's no election. 

I'm not saying that Treasury and the IRS couldn't have reasonably promulgated a rule that says that in order to use the Tracking Rule you can't ever have the tracked payments go out beyond five years. I'm saying that, where the plan provides from the get-go that the manner in which post-CIC payments are made will track the manner in which payments are made in respect of underlying equity, that's simply not the rule they wrote.

Happy New Year!

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* And then there's the question of whether this whole issue arises to any extent whatsoever when it comes to extinguishing options for fair consideration.  Many will not proceed with option cash-outs that track payments of underlying equity unless the cash-out payments will not extend to beyond more than five years after the CiC.  Arguably, however, such transactions don't implicate 409A issues at all.  In this regard, the Tracking Rule on its face only has significance for deferred comp., as opposed to non-409A options, in that the relief provided by the rule by its terms only (i) helps with whether you've got a permissible time or schedule for payment and (ii) allows you not to run afoul of the 409A election rules.  See also Treas. Reg. § 1.83-7(a) (fifth sentence) (providing generally that, if an option (although, unfortunately, not necessarily an SAR) is disposed of in an arm's length transaction (which presumably would be the case if the terms of the disposition track the terms applicable to transaction-related payments for underlying equity generally), "sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option").  Indeed, if there really is a problem with options in this context, the problem would seem to arise under the rule proscribing the additional to an option of an additional deferral feature.  See generally Treas. Reg. § 1.409A-1(b)(5)(i)(A)(3), (B)(3), (D).  But, oddly, satisfying the Tracking Rule wouldn't address the separate question of whether one has added an additional deferral feature to an option, given that the option, by hypothesis, isn't subject to 409A, leaving one with the analytical conundrum that, if you really believe that stretching out payments received in connection with the cashing out of an option is an issue, then there's no way out of the box ("What's in the box?!?" asked Brad Pitt), even if you're willing to satisfy the five-year limitation.  It's a bit of a mess, no?  See also 39 TMCPJ 79 (possibly indicating that Treasury and the IRS are aware that the rules may be glitchy as to these matters, to the point of maybe justifying a technical correction to the regulations).

** W. Shakespeare, Hamlet, Act III, Scene II.

*** You may reasonably ask, but what about the preamble to the final regulations?  Well, unfortunately, it appears by the time of the final regulations Treasury and the IRS themselves remembered only that there's a five-year limitation out there, without focusing on the particular purpose (the election rules) for which the five-year rule applies.  Thus, unfortunately, Section VII(F) of the preamble to the final regs. states:

"The final regulations continue to provide that in the case of a payment on account of certain change in control events (a change in ownership of a corporation or a change in the ownership of a substantial portion of a corporation’s assets), compensation payable pursuant to the service recipient’s purchase of service recipient stock or a service recipient stock right held by a service provider, or payment of amounts of deferred compensation calculated by reference to the value of service recipient stock, generally may be treated as complying with the requirements of section 409A if paid under the terms and conditions that govern the payments to shareholders or the service recipient in connection with the change in control event.  The final regulations continue to require that such amounts be paid no later than five years after the change in control event."

Arguably, the last sentence of the passage quoted immediately above is not persuasive as to the interpretive question I'm addressing here.  First, the proposed preamble, discussed in text, gets it right, reciting what may well be an even more clear bifurcation than the words of the actual regulation.  Second, the reference quoted above in the final preamble to the five-year limitation is almost flippant, and I submit that, to the extent there's an implication in the final preamble that the five-year rule is a rule that applies broadly to the entire Tracking Rule, the drafter thereof may have lost track of the details regarding the manner in which the two-pronged Tracking Rule is actually structured.

Finally, no matter how much the drafter of the final preamble may have purposefully intended to be saying that the five-year limitation applies for all purposes of the Tracking Rule, there's that pesky little nettlesome point that the structure of the Tracking Rule is what it is and the words thereof say what they say.  In this regard, I would point to the old witticism that may be paraphrased as decrying an inclination to look to the statute only when the legislative history is unclear.  See Greenwood v. United States, 350 U.S. 366, 374 (1956) (Justice Frankfurter quipping, ‘‘This is a case for applying the canon of construction of the wag who said, when the legislative history is doubtful, go to the statute’’); see also Easterbrook, ‘‘Challenges in Reading Statutes,’’ (Sept. 26, 2007) (presented at a dinner talk for the Lawyers Club of Chi.) (‘‘The canonical way to [look for legislative intent] was to look at what legislators said - at legislative history.  One wag - who happened to serve on the Supreme Court - quipped that the judge would turn to the statute only when the legislative history was unclear’’); Scalia, A Matter of Interpretation: Federal Courts and the Law 31 (Princeton Univ. Press 1997) (joking that ‘‘one should consult the text of the statute only when the legislative history is ambiguous’’).

**** A provision under which satisfaction of the five-year limitation rule would be necessary as a gateway matter in order generally to avail oneself of the Tracking Rule might have read in full as follows:

"Payments of compensation related to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets), that occur because a service recipient purchases its stock held by the service provider or because the service recipient or a third party purchases a stock right held by a service provider, or that are calculated by reference to the value of stock of the service recipient (collectively, transaction-based compensation), if the transaction-based compensation is paid on the same schedule and under the same terms and conditions as apply to payments to shareholders generally with respect to stock of the service recipient pursuant to a change in control event described in paragraph (i)(5)(v) of this section (change in the ownership of a corporation) or as apply to payments to the service recipient pursuant to a change in control event described in paragraph (i)(5)(vii) of this section (change in the ownership of a substantial portion of a corporation’s assets), to the extent that the transaction-based compensation is paid not later than five years after the change in control event, may be treated as paid at a designated date or pursuant to a payment schedule that complies with the requirements of section 409A, and the payment of such compensation will not violate the initial or subsequent deferral election rules set out in §1.409A-2(a) and (b) solely as a result of such transaction-based compensation being paid pursuant to such schedule and terms and conditions."

***** I would also note that they knew darn well how to have a special rule apply for purposes of multiple concepts, when the rule applies in a unitary fashion across the board.  For example, in Section 1.409A-3(j)(4)(i), relating to certain permitted accelerations, the regulations state that, "provided all other requirements of this section are met, the making of such a payment or the addition of a plan term permitting the making of such a payment will not constitute the acceleration of a payment, AND [(emphasis added)] the failure to make such a payment or the deletion or modification of a plan term permitting the making of such a payment will not be subject to the rules regarding a change in the time and form of payment under §1.409A-2(b)."  Simple and to the point - there's a rule and, in stark contrast to the five-year limitation under the Tracking Rule, the rule applies for purposes of both the permitted-payment rules and the election rules.

Similarly, in subclause (B) of Section 1.409A-3(i)(5)(iv), right after subclause (A) (which contains the Tracking Rule), they showed that they knew how to extend the scope of a provision to both permissible-payment provisions and election provisions when they wanted to do so.  There, in the provision permitting the extension of a SRoF in limited circumstances, the regulations say that "the continued application of a fixed schedule of payments based upon the lapse of the substantial risk of forfeiture, so that payments commence upon the lapse of the modified or extended condition on payment, will not be treated as a change in the fixed schedule of payments for purposes of §1.409A-2(b) (subsequent deferral elections) or paragraph (j) of this section (prohibition on the acceleration of payments)."  Again, the first part of the Tracking Rule does not contain a five-year limitation; only the second, election-related portion of the Tracking Rule does so.  See also Treas. Reg. § 1.409A-2(b)(2)(iii) (relating to installment payments) ("[A] schedule of payments does not fail to be an installment payment solely because such plan provides for an immediate payment of all remaining installments if the present value of the deferred amount to be paid in the remaining installment payments falls below a predetermined amount, and the immediate payment of such amount does not constitute an accelerated payment for purposes of §1.409A-3(j), provided that such feature including the predetermined amount is established by no later than the time and form of payment is otherwise required to be established, and provided further that any change in such feature including the predetermined amount is a change in the time and form of payment.").

****** I recognize that the existence of a potentially more streamlined way of drafting the Tracking Rule so as to apply the five-year limitation for purposes of the entire rule doesn't in and of itself prove that the five-year limitation must somehow be limited in its scope.  I take the point that there frequently are other, and arguably better, ways to draft any given provision. In this case, though, it is not just the existence of another potential drafting alternative that shows that the five-year limitation is limited in application only to amendment/election situations; rather, it's the structure and substance of the Tracking Rule itself, as drafted.