May 7, 1990
TO: INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 17-90
INVESTMENT ADVISER MEMBERS NO. 18-90
PENSION MEMBERS NO. 21-90
RE: INVESTMENT ADVISER BREACHED FIDUCIARY DUTY UNDER ERISA
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The United States Court of Appeals for the Eleventh Circuit
held that an investment adviser breached its fiduciary duty
under ERISA by failing to diversify a fund's assets adequately
to meet the cash-flow needs of the fund. A copy of the court's
decision is attached.
The adviser was retained to manage Fund A, one of several
funds in an employer's profit-sharing plan. The adviser was
delegated sole authority to manage the Fund's assets. The
Fund's portfolio was primarily invested in long-term government
bonds. Less than a year after it began managing the Fund, the
adviser received a letter from the employer stating that it
needed a cash disbursal of approximately 20 percent of the
value of the Fund as payments for retiring employees. To
satisfy the employer's needs, the adviser had to sell a number
of the long-term bonds at substantial discounts. Shortly
thereafter, the employer terminated its contract with the
adviser and filed a complaint against the adviser alleging that
the adviser breached its fiduciary duty under ERTS.
The appeals court agreed with the lower court's finding
that the adviser breached its fiduciary duty under ERISA since
it acted imprudently and failed to diversify the investments
"so as minimize the risk of losses, unless under the
circumstances it is clearly prudent not to do so."
Specifically, the court found that the adviser failed to
investigate the particular cash flow requirements of Fund A and
therefore did not adequately diversify the investment of Fund
A's assets. The court noted that even though the adviser's
investment strategy to invest in long-term bonds may have been
a sound strategy, the adviser still breached his duty under
ERISA since its decision failed to take into account the
interests of the participants in the Fund, i.e., their
particular cash flow requirements. Thus, a sound investment
strategy for one plan's participants may not be in the best
interest of another plan's participants.
The court found that the adviser was liable for damages of
$537,000, which was the difference between the value of the
Fund at the time the contract was terminated and the amount it
would have been worth had it been invested according to a model
introduced by plaintiff's expert.
Amy B. Rosenblum
Assistant General Counsel
Attachment