Tag: duties

  • Unclear legal duties can leave university trustees exposed when things go wrong

    Unclear legal duties can leave university trustees exposed when things go wrong

    Not many university trustees or senior management teams have three hours spare at the moment. If they did, however, they would be well advised to watch last month’s Education Committee meeting of the Scottish Parliament regarding the University of Dundee.

    Regardless of your views on select committees, it’s a timely reminder of how trustee boards and senior management teams need to communicate clearly and work with each other, especially, in circumstances where university finances and governance are also occupying Westminster select committee time, and making guest appearances on Radio 4’s Today programme.

    I have written previously about the merits of a special administration for the higher education sector. I will not repeat those views, save in respect of trustee duties.

    As outlined in the above, where a higher education provider is not incorporated as a company, the legal position on trustee duties and where the higher education provider is in financial difficulty is unclear.

    In circumstances of financial distress, trustees could be facing potential personal liability, so a lack of clarity on legal duties is clearly wholly unsatisfactory in that situation.

    Managing insolvency with special administration

    One way to attempt to mitigate this situation is through a special administration regime. This could be along the lines of the further education process, would assist trustees of a provider in financial distress by making it clear that the Companies and Insolvency legislation would apply to all higher education providers, regardless of whether they are companies or not.

    The trustees, like company directors, would then be aware of the rules of engagement, who should be given priority and how to mitigate the risks.

    In addition, the position of students is not specifically protected in a financially distressed situation, above and beyond their status as creditors, in respect of any claims they might have, particularly if there is a market exit of a provider.

    Special administration, again along the lines of the regime in the FE sector, would assist, by providing for a predominant duty to act in the best interest of students and would enable the trustees to put students at the forefront of their minds in a time of financial distress.

    This supports trustees to focus on the interest of students in a financially distressed situation, and make it clear that acting in the best interests of creditors is secondary to avoiding or minimising disruption to the studies of existing students.

    Protection as a charity

    In a solvent situation, again, the companies legislation will not apply to a non-company, but, assuming that the HE provider is a charity, the charity legislation provides that the charity trustees have ultimate responsibility for the affairs of the charity.

    They must also ensure that the charity is solvent and able to deliver its charitable purposes for the benefit of the public, which is where protection for students tends to come in, assuming that some or all of the charitable objects relate to students.

    The duties of trustees come from the fiduciary nature of being a charity trustee, the legal and regulatory framework as well as the governing documents of the charity.

    The Charity Commission sets out 6 key duties for charity trustees:

    • Ensuring the charity carries out its purposes for the public benefit
    • Comply with the charity’s governing document and the law
    • Act in the best interest of the charity
    • Manage the charity’s resources responsibly
    • Act with reasonable care and skill
    • Ensure the charity is accountable

    The position is clearer where a charity HE provider is solvent, rather than in financial distress.

    But whilst the lack of legal clarity for trustees is legally challenging, what the University of Dundee situation has demonstrated is the practical challenge of the management structures in higher education providers and charities.

    Company vs charity

    The structures of a charity are normally inverse to what you would have in a company. In a company, the board of directors would be both legally and practically responsible for the operations of the company, whether it was solvent or insolvent.

    The board of directors would normally carve up management roles between them, or they may delegate some of those roles outside the board to employees, but they should, and generally do, ensure that non-directors report back to the board, with the directors making the final decisions.

    With most higher education providers, the director equivalents are the trustees, who have ultimate responsibility for the actions of the HE providers, but are normally unpaid volunteers who see themselves more as non-executive directors. The trustees will usually delegate management responsibilities to a management team.

    The fiduciary duty issue with that structure, is that the management team runs the risk of being the equivalent of de facto or shadow directors, to the extent that they are making the ultimate management decisions, with no substantive involvement from the trustees.

    Under the Companies and Insolvency legislation, de facto and shadow directors can be equally liable, in both solvent and insolvent situations, as actual directors.

    The management team members therefore need, to protect themselves from liability, to ensure that the executive decisions in respect of the higher education provider, are made by the trustees.

    The trustees, on the other hand, need to ensure that they have proper oversight of the senior management team and, whilst enabling them to fulfil their roles, that they are aware of the executive decisions that the management team are proposing. Ultimately they are taking responsibility for those decisions so they can be accountable for them.

    The problems arise, as was played out for all to see in glorious technicolour last month, when there is a breakdown of communication between the trustees and management team on the decisions being made and the consequences of those decisions.

    Now, more than ever, trustees need to be completely up to speed on the decisions made so, in the very unlikely event that they appear in front of a select committee, they can fully explain and take responsibility for the decisions made and actions taken.

    Source link

  • Supreme Court Issues Decision Regarding Retirement Plan Fiduciary Duties in Hughes v. Northwestern – CUPA-HR

    Supreme Court Issues Decision Regarding Retirement Plan Fiduciary Duties in Hughes v. Northwestern – CUPA-HR

    by CUPA-HR | March 18, 2022

    On January 24, the Supreme Court issued its unanimous decision in Hughes v. Northwestern University, a case dealing with 403(b) retirement plan fiduciary duties under the Employee Retirement Income Security Act (ERISA). The court criticized the standard applied by the lower courts and sent the case back to the 7th Circuit to reevaluate the plaintiffs’ allegations.

    In the case, the three plaintiffs, all current or former employees of the university, alleged the plan fiduciaries violated the duty of prudence standard under ERISA by “(1) failing to monitor and control recordkeeping fees, resulting in unreasonably high costs to plan participants; (2) offering mutual funds and annuities in the form of ‘retail’ share classes that carried higher fees than those charged for otherwise identical share classes (institutional share class) of the same investments; and (3) offering investment options that were likely to confuse investors.”

    In their decision, which was written by Justice Sotomayor, the court explained that, when determining if a plan fiduciary violated the duty of prudence standard under ERISA, courts must engage in “a context-specific inquiry of the fiduciaries’ continuing duty to monitor investments and to remove imprudent ones” as articulated in Supreme Court precedent, Tibble. The court said the 7th Circuit was wrong in concluding that by providing a choice of investment options, plan fiduciaries insulated themselves from liability claims. It is important to note that the court chose not to weigh in on the plausibility of the plaintiffs’ claims, only on the standard applied by the lower courts.

    CUPA-HR, along with 17 other higher education associations, participated in an amicus brief filed in the case. In the brief, we supported the 7th Circuit’s decision in favor of Northwestern University. We explained, “The question in this case is whether petitioners have pleaded sufficient facts to state a plausible claim for breach of fiduciary duty in administering a retirement plan” under ERISA, but the complaints in this case “overlook important features of the university retirement system and ignore the discretion ERISA affords to plan fiduciaries.” We also clarified that universities and plan fiduciaries “must have the flexibility o administer the plans based upon the particular needs and preferences of the plan participants, without constant second-guessing.”

    The 7th Circuit now has the opportunity to revisit the case. It may choose to dismiss much of the case or review the record again.

    Following the decision, our amicus briefing counsel was quoted saying, “Despite some of the early headlines that have already been written suggesting this case is a really big deal, in fact, I view this as a limited ruling… [T]he Supreme Court did not reach any specific or detailed conclusions that any of the investments offered by the defendants in this case are actually inappropriate, nor did the justices come down and say a fiduciary can never offer retail shares of funds within their institutional retirement plans. Instead, what they said, in a nutshell, is that the 7th Circuit simply did not give enough consideration of the duty-to-monitor precedents set by Tibble.”

    Importantly, the final sentence of the Supreme Court’s decision provided a silver lining; “At times, the circumstances facing an ERISA fiduciary will implicate difficult tradeoffs, and courts must give due regard to the range of reasonable judgments a fiduciary may make based on her experience and expertise.” The court here is clarifying that fiduciaries must be given due deference when making tough decisions.

    That being said, the decision could pave the way for more cases on fiduciary duties to be filed, as plaintiffs’ attorneys may take advantage of the potential opening in order to force settlements.



    Source link