Introductory Statement of Warren E. Nowlin
Partner, Williams Mullen

June 17, 2003

Mr. Chairman and Members of the Committee:

My name is Warren Nowlin. I am a partner in the Washington office of the law firm of Williams Mullen. For twenty years I have practiced corporate law, with a focus on investment management and fiduciary duties of officers, directors and pension fund managers. I have represented pension funds, state retirement systems, endowments and foundations and their investment managers on their formulation and implementation of investment programs, and on compliance with laws governing fiduciaries.

I appreciate the opportunity to testify today, and to help the Committee as it investigates the matters involving ULLICO. I have not examined all the facts and indeed have not been privy to any non-public information in this matter. Accordingly, I do not profess to opine on the propriety of ULLICO's actions, but I agree that there are certainly areas where the allegations made, if true, could potentially impact federal labor and pensions laws. In particular, the facts under consideration highlight a number of policy issues that Congress may wish to consider. In particular, the divergence of disclosure laws applicable to pension funds and their fiduciaries from the evolving laws governing disclosure and interested party transactions in the public company arena, including Sarbanes-Oxley.

ERISA, for example, contains numerous restrictions and regulations on pension plan trustees by imposing a fiduciary duty of loyalty and care. Under ERISA, a fiduciary must execute his duties solely in the interest of plan participants and beneficiaries, holding the plan assets in trust and ensuring that such assets do not inure to the benefit of the employer. This duty of loyalty requirement imposes an obligation upon fiduciaries to act with complete and undivided loyalty with an eye single to the interests of the participants and beneficiaries. Moreover, ERISA requires that a fiduciary must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiarity with such matters would use. If there is a breach of any of these duties, a fiduciary can be held personally liable, even to the extent of having to restore lost profits to the plan. The penalties include a requirement to disgorge profits made in any related party transaction that violates the so-called prohibited transaction rules of ERISA.

The scope of the fiduciary responsibility to plan participants is much wider than generally recognized because the ERISA definition of fiduciary is so broad. To be considered a fiduciary, one must only have an element of authority or control over the plan, including plan management, administration or disposition of assets. To the extent that plan sponsors influence or maintain discretionary authority over plan management or its investments, they are also considered to be fiduciaries. Thus, corporate officers, directors and in some cases, shareholders, that often exert enough control over such a plan may be deemed fiduciaries and could be held liable for a breach. In addition, fiduciaries may be personally liable if they knew or should have known of a breach by another fiduciary.

Although ERISA has no provision for punitive damages, it does provide for the assessment of a penalty against a fiduciary for a breach of duty. Under ERISA, any fiduciary who breaches any of the responsibilities, obligations, or duties shall be personally liable to make good to such plan any profits which have been made through use of assets of the plan by the fiduciary, and can subject to other equitable or remedial relief as a court deems appropriate, including the removal of such fiduciary.

Additionally, a fiduciary’s duty of loyalty and care can be breached by certain prohibited transactions, including conflict and self-dealing transactions. ERISA contains broad prohibitions against dealing with plan assets in his own interest or for his own account or receive any personal consideration from any person dealing with the plan in a transaction involving plan assets. Moreover, a fiduciary is also prohibited from acting, whether or not for personal consideration, in a transaction involving the plan on behalf of a person whose interests are adverse to the plan or its participants or beneficiaries. If a fiduciary participates in any prohibited transaction, he may be held personally liable for this breach of fiduciary responsibility. Furthermore, these rules require the fiduciary to disgorge any profits personally made by him or her.

As this committee considers imposing additional financial disclosures, Congress has already required stricter levels of financial reporting of public companies under Sarbanes-Oxley. In an effort to improve public disclosure, Sarbanes-Oxley requires greater disclosure of financial records, internal control reports, company codes of ethics and audit committee financial experts as well as imposing financial certification by CEO’s and CFO’s.

The SEC has also adopted Ethics Code Rules as part of the Sarbanes-Oxley Act. These new rules require a company to disclose, whether or not it has adopted a code of ethics for its senior financial officers, and if not, why. Sarbanes-Oxley sets forth three general principles including the maintenance of honest and ethical conduct with regard to actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure in SEC filings, and compliance with applicable governmental rules and regulations.

While the increased disclosure requirements that are imposed on publicly traded companies under Sarbanes-Oxley may or may not have prevented what happened at ULLICO, this Committee should examine them and the divergence between disclosures required to made to pension beneficiaries. Congress should consider aligning these disclosure schemes to protect pension beneficiaries the way it has acted to protect shareholders of public corporations.

In my practice, I've had extensive experience in corporate governance issues, counseling boards, companies and pension fiduciaries how to comply with laws and regulations, and in corporate codes of ethics and practices. While some or all of these laws may or may not apply to ULLICO, I am pleased to be able to answer questions of the Committee as it examines ways to improve the legal and regulatory structure, possibly in an effort to align the protections afforded pension beneficiaries with those increasingly provided to shareholders in public companies.