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investment management and
fiduciary services insight
- Spring 2003 -
What’s New? An Overview on the Latest Privacy Issues
By William Campbell Ries, Esq.
Recent developments in technology have increased the ability of
financial institutions to gather and retain data. These developments
have enabled banks to take advantage of large reservoirs of customer
information. As a result, financial institutions are better able to
serve their customers and profit from sharing the information. On the
other hand, the proliferation of information has led to privacy concerns
among customers and consumers.
The Gramm-Leach-Bliley Act prohibits financial institutions from
disclosing non-public personal information to unaffiliated third parties
without first providing the customer with the opportunity to decline to
have such information disclosed. Banks are required to develop policies
and procedures to ensure that confidential customer information is
protected. One important requirement is that financial institutions
must disclose, when a customer relationship is established and annually
thereafter, its privacy policies including its policies concerning
sharing information with affiliates and non-affiliated third parties.
States are permitted to enact their own privacy statutes so long as they
provide greater protections than the Act.
The Fair Credit Reporting Act (Act) requires consumer reporting agencies
to adopt reasonable procedures for meeting the needs of commerce for
customer credit, personnel, insurance and other
information which is fair and equitable to consumers with regard to the
confidentiality, accuracy, relevancy, and proper utilization of
information. The Act as amended permits companies to share with their
affiliates information respecting their transactions and experience with
a customer without providing notification to the customers. Other
information such as credit reports and application information may not
be shared with affiliates unless customers are given “clear and
conspicuous” notice and an opportunity to opt out.
The Fair Credit Reporting Act preempts state law until January 1, 2004.
Then states may override the Fair Credit Reporting Act authorization for
inter-affiliate sharing of consumer information by enacting a state law
or provision in the state constitution that explicitly states that it
supplements the Fair Credit Reporting Act and provides greater
protection than the Fair Credit Reporting Act.
Until January 1, 2004, the Act preempts state law and allows for a
national and uniform standard for sharing consumer credit information by
providing notice and an opportunity to opt out. This preemption expires
on January 1, 2004, unless Congress acts to reauthorize the Act.
The United States Senate and House of Representatives have scheduled
hearings on the reauthorization of the Fair Credit Reporting Act which
is considered one of the major issues before Congress this year.
Questions for consideration are:
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Should Gramm-Leach-Bliley require “Opt Out” for information shared by
affiliates as in the Fair Credit Reporting Act?
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What are the costs of compliance?
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Should Gramm-Leach-Bliley require “Opt In” for sharing with
non-affiliated third parties?
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Should Gramm-Leach-Bliley require “Opt In” for sharing “sensitive
information?”
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If so, how do you define “sensitive information?”
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Should the same standards apply to sharing information among
affiliates as to joint ventures and marketing agreements?
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Should Gramm-Leach-Bliley establish a national standard for privacy?
It is important to ensure that your internal policies and procedures
comply with applicable law. We would be pleased to assist you in
reviewing your privacy policies and procedures.
William Campbell Ries is a shareholder in the firm’s Investment
Management & Fiduciary Services Group. For more information on privacy
issues, please contact Bill at 412.594.5646 or via e-mail at
wries@tuckerlaw.com.
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Trustees May Now Be Required to Collect Contributions As
Well As Invest Plan Assets
By William Campbell Ries, Esq.
In recent years many courts have sought to expand the duties of ERISA
fiduciaries to protect the interests of participants and their
beneficiaries. A recent case, Best v. Cyrus, 6th Cir.,
Common Number 01-5799, 11/19/02, decided by the Sixth Circuit, is an
example of this trend. The court held that the trustee of a retirement
plan has a duty to secure contributions owed to the plan irrespective of
language in the governing instrument to the contrary. The court also
held that language in the pension plan that limited a plan trustee’s
duties did not absolve the trustee from its duties under ERISA.
The Court’s decision was based upon the following facts: Ronald R.
Cyrus served as trustee of the Kentucky State AFL/CIO Money Purchase
Pension Plan. He was responsible under the trust agreement for
administering investments, receiving contributions, making distributions
and keeping accurate records. He also served as Executive
Secretary-Treasurer of the plan sponsor. Cyrus was removed as plan
trustee when it was discovered that he failed to make the required
salary-based contributions to the plan and failed to credit repayments
of participants’ loans.
The successor trustees, and the plan participants, brought an action
against Cyrus alleging breach of his fiduciary responsibilities for
failing to ensure that required contributions were made to the plan and
by not securing loan repayments which were owed to the plan. Cyrus
argued that the plan document specifically set forth the trustee’s
duties. Under the plan, the plan administrator, not the trustee, was
responsible for securing contributions and repayments. Therefore,
Cyrus argued, he was protected by the language in the trust.
The U.S. District Court for the Eastern District of Kentucky dismissed
the suit, finding as a matter of law that Cyrus had no duty to act
regarding the contributions, repayments or filing of the annual report
forms because the language in the governing instrument said that he had
no duty to collect contributions. The plaintiffs appealed to the Sixth
Circuit Court of Appeals.
The parties agreed that Cyrus was a fiduciary with respect to the plan.
The Court of Appeals held that the plan document must be construed to
require the trustee to act in the best interests of the plan’s
beneficiaries. As such, Cyrus could not be excused from his
fiduciary duties under ERISA. The language of the plan document
could not absolve him of a duty to secure the contributions and
repayments. He had a specific duty to secure contributions and
repayments because “ERISA clearly assumes that trustees will act to
ensure that a plan receives all funds to which it is entitled. . .”
Therefore, the court found that the duty to act regarding contributions
and repayment arises from the duty to administer and manage the plan’s
assets and is rooted in ERISA. As such, the duty cannot be
avoided. The opinion went on to state “we conclude that a trustee
has a duty to act in the interest of the plan’s beneficiaries, even
though he is not specifically directed to act under the plan document,
because ERISA imposes additional duties on trustees through its
incorporation of the common law of trusts.”
Generally, courts hold that a trustee’s duties are limited to those set
forth in the governing instrument. Although only applicable in the
Sixth Circuit, the court found that exculpatory language in the
governing instrument is insufficient to protect the trustee from
liability if the court finds that ERISA imposes a broader range of
responsibility.
Trustees should be aware of this trend to broaden the scope of a
trustee’s duties and not rely exclusively upon exculpatory provisions in
the governing instrument to protect them from liability. The Court’s
holding makes it difficult for a trustee to know the scope of its duties
and responsibilities without further guidance. Perhaps liability could
have been avoided had Cyrus brought the failure to make contributions to
the attention of the plan administrator or the Department of Labor.
Although not addressed by the court, it might have held differently if
Cyrus was not also an officer of the plan sponsor.
A trustee should review its duties and responsibilities under the
documents under which it operates to determine the scope of its
responsibilities. If there is doubt, you should consult with counsel to
determine whether exculpatory language will protect you. If the duties
are required under ERISA, the trustee may be responsible for performing
them irrespective of the provisions in the governing instrument.
William Campbell Ries is a shareholder in the firm’s Investment
Management & Fiduciary Services Group. For more information on privacy,
please contact Bill at 412.594.5646 or via e-mail at
wries@tuckerlaw.com.
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Pennsylvania’s Decoupling of Its Estate Tax From the Federal
“State Death Tax Credit” Amount
William Campbell Ries,
Esq.
The federal Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”)
made significant changes to the federal estate tax. Most notably,
EGTRRA gradually increases the applicable credit amount between 2002 and
2009, first raising it from $675,000 in 2001 to $1,000,000 in 2002 and
culminating with a credit amount of $3,500,000 in 2009. The Act then
eliminates the federal estate tax for those dying in 2010. Finally, the
Act expires with the end of 2010, causing the estate tax to reappear and
the credit amount to return to $1,000,000. The applicable credit amount
is the amount, after taking into account allowable deductions and
credits, that a person may pass to his or her heirs and beneficiaries
free from federal estate tax.
In addition to increasing the applicable credit amount, EGTRRA also
gradually phases out the “state death tax credit” between 2002 and 2005
(by 25% per year), with the complete elimination of the credit for
decedents dying in 2005 and thereafter (until 2011 when EGTRRA
expires). Generally speaking, this state death tax credit reduces the
federal estate tax by the amount of death taxes paid to any state, up to
a maximum rate of 16% based on a graduated scale.
Most states collect death taxes based at least in part on the amount of
the state death tax credit. When the state death tax credit is
gradually reduced and finally eliminated, the same will happen to those
states’ revenue from death taxes, unless preventative measures are
taken. Many states are taking actions to “decouple” their death taxes
from the federal law so that their revenue streams are protected from
adverse consequences from changes in the federal law.
Pennsylvania has both an inheritance tax and an estate tax. The
inheritance tax is not based on the federal estate tax but instead is a
percentage of value of the estate subject to the tax, with the
percentage determined by the relationship between the decedent and the
person receiving the assets. Pennsylvania’s estate tax, however, is
directly based on the federal estate tax in that the amount of estate
tax is equal to the amount by which the state death tax credit exceeds
the inheritance tax actually paid by the estate. Reducing and
eliminating the state death tax credit, therefore, would eventually
eliminate the estate tax as a source of revenue.
The dichotomy of Pennsylvania’s death tax system places Pennsylvania in
a better position than the many states that have their entire systems
tied to the federal estate tax system, but the loss of estate tax would
be a significant blow to the state’s revenue.
On June 28, 2002, Pennsylvania’s House of Representatives and Senate
both passed House Bill 1848 and put it into the hands of the Governor,
who signed it into law on June 29, 2002 as Act 89 of 2002 (“Act 89”).
It applies to decedents dying after June 30, 2002. Act 89 specifically
provides that
except where the context clearly indicates a different meaning, and,
unless specifically provided otherwise, any reference in this article to
the Internal Revenue Code of 1986 shall mean the Internal Revenue Code
of 1986 (Public Law 99-514, 26 U.S.C. §1 et seq.) as amended to June 1,
2001 (Section 28 of Act 89, amending Section 2102 of the Pennsylvania
Inheritance and Estate Tax Act (the “Tax Act”).)
Sections 29 and 30 of Act 89 amend Section 2117 and 2145 of the Tax Act
to clarify that the amount of the Pennsylvania estate tax is the amount
that would be owed under the federal estate tax system as it
existed on June 1, 2001 and that the state may require another tax form
to be filed reflecting the tax results under that prior system, even if
the estate is not required to file an actual federal estate tax return.
Under Act 89, the Pennsylvania estate tax is, therefore, determined
based on the amount of state death tax credit that would have been
allowed to the estate prior to EGTRRA. Additionally, the state death
tax credit is based on the applicable credit amount indicated by the
prior federal estate tax law, which for 2002 was $700,000, not
$1,000,000 as provided for by EGTRRA.
Some commentators question the constitutionality of the new estate tax
scheme. Pennsylvania’s constitution requires that all taxes be
“uniform,” which has been interpreted to prohibit any type of dollar
exemption or graduated tax. Because the state death tax credit
incorporates both a dollar exemption and a graduated tax rate,
Pennsylvania’s estate tax based on the state death tax credit may not be
constitutional. In the past the estate tax was determined to be
constitutional because it did not result in a net increase in death
taxes paid by an estate because each dollar of estate tax that was paid
equally reduced the federal estate tax to be paid, so only the payee of
the tax changed, not the amount of the tax. Under Act 89 the estate
would not receive a corresponding credit against federal estate tax for
the amount of Pennsylvania estate tax, so the estate tax would increase
the total death taxes paid by an estate subject to the Pennsylvania
estate tax.
Act 89 is likely to be only a temporary solution because (1) EGTRRA is
scheduled to expire at the end of 2010 and (2) its constitutionality is
likely to be successfully challenged (at least in the opinions of many
commentators). Because Act 89 only became effective fordecedents dying
after June 30, 2002, no challenges have been made so far. The death tax
returns and the corresponding tax payments for decedents dying on or
after July 1, 2002 (after the effective date of Act 89) will be due in
the next few months, and the legal wrangling is likely to begin soon
thereafter.
All of these changes to the tax laws can have effects on the living as
well as the estates of the dead. To ensure that your estate plan is
revised to address these changes in the federal and state deathtax
schemes and those to come, keep in touch with your estate planning
attorney and be certain that you review your estate plan more frequently
than was necessary in the past. We suggest that everyone consult your
attorney at least every two years and whenever a significant change
occurs in your family or assets until the tax systems are stabilized.
William Campbell Ries is an attorney in the
firm’s Business and Estates Department. For more information on this
topic, please contact Bill at 412.594.5646,
wries@tuckerlaw.com.
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Compliance Issue: The Uniform Principal & Income
Act
By William Campbell Ries, Esq.
Last year, the Pennsylvania legislature enacted the Uniform Principal
and Income Act (the “Act”) which substantially changes the
administration of trusts in Pennsylvania. Not only does the Act
redefine what constitutes principal and income, it also mandates how
receipts and disbursements should be allocated. The Act is a
substantial change and improvement over the prior Principal and Income
Act because it provides extensive guidance to trustees.
The Act introduces two novel concepts: the power to adjust and the
power to convert to a total return trust. The power to adjust is
mandatory and must be reviewed each year in connection with the annual
account review of all existing trusts.
It enables the trustee to move principal to income or income to
principal in order to provide fair and equitable treatment to
beneficiaries.
The power to switch to a total return trust is optional but should also
be considered in situations in which the income beneficiary is seeking
consistency of income. It enables the trustee to invest for total
return while meeting the income beneficiaries’ needs.
We understand that bank examiners are now reviewing banks’ compliance
with this new Act. Banks should ensure that new policies and procedures
are adopted and effective to ensure compliance with the Act.
Banks which do not comply may face potential litigation from account
beneficiaries or regulatory sanctions. We would be pleased to assist
you in establishing or reviewing your procedures to ensure compliance
with the Act.
William Campbell Ries is a shareholder in the firm’s Investment
Management & Fiduciary Services Group. Bill served as Chairman of the
Joint State Commission Subcommittee which drafted the new Act. For more
information on privacy, please contact Bill at 412.594.5646 or via
e-mail at wries@tuckerlaw.com.
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