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What Does It Mean For Your Client?

The DOL’s ERISA Fiduciary Rule:

April 12, 2018Allison Wielobob Christina RisslerCounsel Partner

Eversheds Sutherland

What is it?

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Principles of ERISA:

• ERISA was enacted to protect the interests of employee pension and 401(k) plans.

• Parties controlling and managing assets of these plans are ERISA fiduciaries.

• ERISA imposes high standards of conduct on fiduciaries. • Courts often refer to the standard as “the highest known to the law.”

• Private right of action and DOL enforcement.

• ERISA fiduciaries may be personally liable for losses.

DOL Fiduciary Rule

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DOL Fiduciary Rule

Simple Illustration:

─ 401(k) Plan

─ Employer selects investment adviser.

─ Employer selects investment funds for plan based on adviser’s recommendations.

─ Employees invest salary deferrals in fund options.

─ The investment funds are nearly 100 percent owned by 401(k) plan investors.

─ Fund managers are ERISA fiduciaries because of amount of investment in fund by ERISA plan investors.• If fund performs poorly, 401(k) plan account values decline.• ERISA fiduciaries are personally liable for losses if choices do not

meet ERISA standard of care.

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DOL Fiduciary Rule

─ ERISA was enacted in 1974 and DOL defined “fiduciary” in 1975.

─ The DOL concluded that in the following 40 years, the retirement investing marketplace changed and retirement investors no longer had sufficient protections from conflicts of interest, imprudence, and disloyalty.

─ The Fiduciary Rule significantly expands the definition of who is an ERISA fiduciary.

─ DOL’s primary objective was to protect self-directed 401(k) plan investors and IRA owners.

─ However, many more actors, including large financial institutions, fall under the expanded definition.

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DOL Fiduciary Rule

ERISA Plan Players:

─ Financial Institution (FI) hired to invest the Plan’s assets.

─ FI has discretionary authority over investment selection.

─ FI is an ERISA fiduciary to the Plan.

─ FI determines that a loan is an appropriate investment.

• Investing is a fiduciary act

• If choice/retention of a particular investment does not meet ERISA standard of care, FI is personally liable.

─ Loan Arranger potentially an ERISA fiduciary in the loan, absent an exception.• Independent Fiduciary Exception

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Recent Developments:

• On March 15th, the Fifth Circuit Court of Appeals vacated the Fiduciary Rule.

• The vacatur of an agency rule by a circuit court has a national effect, no later than upon issuance of the court’s mandate (May 7); and

• By vacating the Final Rule in its entirety, the Fifth Circuit appears to have reversed DOL’s replacement of the existing five-part fiduciary definition and modification of existing exemptions, which were embedded in the Rule, thus reinstating prior law.

• Pending clarification from DOL on how it intends to proceed following the Fifth Circuit opinion, the wise course may be to:

− Maintain changes adopted in response to the Final Rule, but

• Inventory the changes to agreements and other documentation, that might merit reconsideration if the vacatur of the Final Rule takes definitive effect.

DOL Fiduciary Rule

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What does this mean for my loan document?

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Survey:

as April 5, 2018 Our Unofficial Market Research

─ Reviewed the 20 most recent, publicly available, syndicated (at least nominally) credit facilities.

─ More than 50% included ERISA representations and covenants from the Lenders (11 of 20).

─ Most closely followed the model Lender ERISA representations and covenants released by the LSTA in a market advisory on September 8, 2017 (10 of 20).

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Survey:

continuedOur Unofficial Market Research

─ Non-conforming Lender ERISA representations and covenants adopted a simplified approach, addressing only the most common exclusion.

─ No apparent corresponding changes to other portions of the document such as: Defaulting Lender, Yank-a-Bank, or Indemnity.

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See Handout:

The Survey WinnerOur Unofficial Market Research

─ $2.25 Billion Second Amended and Restated Credit Agreement, dated 3/21/18, among American Water Capital Corp., the Lenders party thereto from time to time, and Wells Fargo Bank, National Association

─ Section 7.16

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Section 7.16

American Water Capital Corp. Our Unofficial Survey

Alternate approaches to potential ERISA application:

(a)(i) No ERISA plan assets – no ERISA

(a)(ii)/(iii) ERISA plan assets, but Prohibited Transaction Exemption relief available (requires (b)/(c) as well)

(a)(iv) Bespoke language

(b)/(c) Independent fiduciary exception

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$1.5 Billion 364 Day Credit Agreement, dated 1/8/18

The Simplified Option: The Hershey CompanyOur Unofficial Market Research

Each Lender represents and warrants as of the date such Lender shallbecome a party hereto to the Agent and each Arranger and theirrespective Affiliates that such Lender is not and will not be (i) anemployee benefit plan subject to Title I of ERISA, (ii) a plan oraccount subject to Section 4975 of the Internal Revenue Code; (iii)an entity deemed to hold “plan assets” of any such plans or accountsfor purposes of ERISA or the Internal Revenue Code that is using“plan assets” of any such plans or accounts to fund or hold RevolvingCredit Advances or Competitive Bid Advances or perform itsobligations under this Agreement; or (iv) a “governmental plan”within the meaning of ERISA.

Roughly equates to Section 7.16(a)(i) of American Water CapitalCorp.

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Variations among the ERISA Lender provisions:

Variations Our Unofficial Market Research

• deletion of the language stating that the representations and covenants were for the benefit of the Administrative Agent and Arranger (1 of 11).

• deletion of “avoidance of doubt” language regarding not being for the benefit of the Borrower or any other Loan Party (3 of 11).

• added language extended benefit to all designated agents and other titles: documentation agents, syndication agents, managing agents, book managers, etc. (1 of 11).

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Variations on the Survey Winner:

VariationsOur Unofficial Market Research

• insertion of text clarifying that exemption is applicable and “the conditions for the exemption have been satisfied” (1 of 10).

• deletion of representation to the best of Lender’s knowledge that subsection (a) of Part 1 of PTE 84-14 are satisfied with respect to such Lender’s entrance into, participation in and administration of and performance of the Loan, the Commitment and this Agreement (1 of 10).

• deletion of bespoke language (1 of 10).

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Does it matter?

ConclusionOur Unofficial Market Research

─ Independent Fiduciary Exception may be available if, among other requirements, you know or reasonably believe that an “independent fiduciary” is capable of evaluating investment decisions of the type involved in the transaction.

─ Inventory documentation in place – representations of ERISA fiduciary status under the DOL Fiduciary Rule?

• Independent fiduciary (IFE) letter? • Written confirmation of fiduciary status?

─ Diligence

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Worst Case:The Rule survives, the Rule applies and the Rule is violated.

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Possible Solutions:

Administrative AgentWorst Case

─ Estoppel argument if Lender ERISA representations were untrue and/or covenants were violated

─ Indemnification from the Borrower

─ Indemnification from the other Lenders

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Administrative Agent: Possible SolutionsWorst Case

Estoppel:

• Operates to place the person in the same position as if the representations been true

• Must prove detrimental reliance – that is, that the misrepresentation influenced the conduct of the counterparty and caused injury

• Extraordinary circumstances in order to prevail

• Historically, has not played well

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Indemnification from Borrower: Section 7.03(b)

Administrative Agent: Possible SolutionsWorst Case

The Borrower shall indemnify the Administrative Agent, each Joint Lead Arranger, each Lender,… and eachRelated Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and holdeach Indemnitee harmless from, any and all losses, claims, damages, liabilities and related reasonable anddocumented out of pocket costs and expenses …, incurred by any Indemnitee or asserted against any Indemniteeby any Person (including the Borrower or the Parent) other than such Indemnitee and its Related Parties arisingout of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other LoanDocument or any agreement or instrument contemplated hereby or thereby, the performance by the partieshereto of their respective obligations hereunder or thereunder or the consummation of the transactionscontemplated hereby or thereby, (ii) any Advance or Letter of Credit or the use or proposed use of the proceedstherefrom …, (iii) …, (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any ofthe foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by theBorrower, the Parent or any of its Subsidiaries, and regardless of whether any Indemnitee is a party thereto, or(v) any claim …, investigation, litigation or other proceeding (whether or any Indemnitee is a party thereto) andthe prosecution and defense thereof, arising out of or in any way connected with the Advances, this Agreement,any other Loan Document, or any documents contemplated by or referred to herein or therein or the transactionscontemplated hereby or thereby,…; provided that such indemnity shall (x) not, as to any Indemnitee, be availableto the extent that such losses, claims, damages, liabilities or related costs and expenses are determined by acourt of competent jurisdiction by final and nonappealable judgment (1) to have resulted from the grossnegligence or willful misconduct of such Indemnitee or (2) to have resulted from a claim brought by the Borroweror the Parent against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or underany other Loan Document, (y) not be available for any claim, litigation, loss or proceeding that is brought by anIndemnified Person against another Indemnified Person not arising from or in connection with any action oromission of the Borrower, the Parent or any of their respective Subsidiaries or Affiliates (other than against any ofthe Joint Lead Arrangers, the Administrative Agent or the Co-Documentation Agents in their capacities as such) …

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Indemnification from Lenders: Section 7.03(c)

Administrative Agent: Possible SolutionsWorst Case

To the extent that the Borrower for any reason fails to indefeasiblypay any amount required under paragraph (a) or (b) of this Sectionto be paid by it to the Administrative Agent (or any sub-agentthereof), … or any Related Party of any of the foregoing, each Lenderseverally agrees to pay to the Administrative Agent (or any such sub-agent), … or such Related Party, as the case may be, such Lender’sPro Rata Share (…) of such unpaid amount (including any such unpaidamount in respect of a claim asserted by such Lender); …; andprovided, further, that the unreimbursed expense or indemnified loss,claim, damage, liability or related expense, as the case may be, wasincurred by or asserted against the Administrative Agent (or any suchsub-agent), … in its capacity as such, or against any Related Party ofany of the foregoing acting for the Administrative Agent (or any suchsub-agent), … in connection with such capacity. …

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Possible Solutions:

LendersWorst Case

─ Estoppel/ Breach of Contract• Note Lender ERISA representations and covenants are to the

Administrative Agent, the Arrangers and Affiliates or Related Parties

─ Indemnification from Borrower• Note (y) of the provision to Section 7.03(b)“not be available for any claim, litigation, loss or proceeding that is brought by an Indemnified Person against another Indemnified Person not arising from or in connection with any action or omission of the Borrower, the Parent or any of their respective Subsidiaries or Affiliates (other than against any of the Joint Lead Arrangers, the Administrative Agent or the Co-Documentation Agents in their capacities as such)”

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Possible Solutions:

BorrowerWorst Case

─ Estoppel/ Breach of Contract

─ Exceptions to Indemnification of Administrative Agent

─ Exceptions to Indemnification of Lenders

─ Defaulting Lender

─ Yank-a-Bank

─ Diligence

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Conclusion:

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In conclusion:

DOL’s ERISA Fiduciary RuleConclusion

─ The future of the Rule is unclear.

─ The current scope of the Rule is surprisingly wide.

─ Drafting in Lender ERISA representations and covenants is important but may not be enough to protect your client.

─ All parties to the credit facility have a stake in complying with the Rule.

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+1.404.853.8041

christinarissler@eversheds-sutherland.com

Christina B. Rissler

Today’s speakers

Partner

+1.202.383.0901

allisonwielobob@eversheds-sutherland.com

Allison E. Wielobob

Counsel

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