Corporate Officers as Fiduciaries
The nature of fiduciary duties is especially relevant in the field of corporate governance. Members of the board of directors or the officers of a corporation may owe fiduciary duties to its shareholders, as defined by the law of the state of incorporation. However, the business judgment rule may limit the ability of shareholders to sue for breaches of fiduciary duty.
CPA Financial Statement Differences
There are a number of financial statements that a CPA may prepare for you, the three generally accepted headings are the following Compiled, Reviewed, and Audited Statements.
The Complied Statement, which is the least expensive, is based on just the information that you give. The CPA does no investigation of the information whatsoever. This CPA prepared statement will have a disclaimer at the beginning of the financial statement that indicates that he did not investigate the information and is not responsible for its content.
A Reviewed Statement is more costly and has a disclaimer that says that they have investigated most of the information and found it to be reliable. This means that they may call banks, suppliers, verify lines of credit and use various other means necessary to verify your information. If there are any questionable items, those items will be mentioned in the disclaimer from the CPA. This statement may have some appendixes that list various assets liabilities along with explanation of methods used to determine value or verify information. This is of course more time consuming and is looked on as more reliable information for a surety underwriter to base a decision on. Most bonds over $500,000.00 require reviewed CPA prepared statements. We also have sureties that require a reviewed statement for $200,000.00 and above bond request. Each surety and or situation will determine what the underwriters comfort level is for a financial statement.
The last financial statement is the Audited Statement, and it means just that, Audited. The CPA does everything that they do in a Reviewed Statement along with physically verifying all assets and liabilities. This means they will visit the assets to physically see them for themselves. To include but not limited to real-estate, equipment, contracts, and bank accounts. Along with making a determination of whom actually owns the assets. Call all your banks and lenders. Call all your suppliers. Determine if the actual value represented is actually there through various different accepted auditing methods. Needless to say this is much more time consuming and costly.
A Reviewed Statement is usually acceptable unless the bond requirements are larger or unusual or the situation warrants the Audited Statement. Contractor’s financial statements should be based on the cost to complete method. Not the mercantile, cash or cost of good methods. If you do not have your CPA use the cost to complete method you may have wasted your money for the statement. Meaning you may have to pay for a second one to proceed. If you are a contractor you need to be very specific with your CPA about using the cost to complete method. Further you need to ask the CPA if they have and will use that method for the Financial Statement. Some will not. Therefore you may need to find a CPA that understands what the surety is requesting and the contracting business.
Note this is discussion is for a contracting risk, if it is another type contract for a risk other than contracting then you need to call our office prior to having your CPA prepare the statement.
Creation and Scope of the Relationship
A fiduciary relationship does not arise simply because someone places their trust in another person, nor does it extend to every possible sphere of action. One court has noted that "[m]ere respect for the judgment of another or trust in his character is not enough to constitute such a relationship. There must be such circumstances as indicate a just foundation for a belief that in giving advice or presenting arguments one is acting not in his own behalf, but in the interests of another party." (Cranwell v. Oglesby, 12 N.E. 2d 81, 299 Mass. 148, 1937). Certain relationships (noted above) have historically been regarded as fiduciary at common law, and others have been created by statute.
Employee Retirement Income Security Act
From Wikipedia, the free encyclopedia.
The Employee Retirement Income Security Act of 1974 (Public Law No. 93-406, 88 Stat. 829, Sept. 2, 1974), commonly known as ERISA, is a United States federal statute enacted to protect interstate commerce and the interests of participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal courts.
While ERISA was passed by the U.S. Congress, the interpretation and enforcement of ERISA is handled by the U.S. Department of Labor and the Internal Revenue Service.
Originally passed in 1974 (amended as of 1/1/2001) to deal with widespread concerns about the fairness and economic soundness of employee benefit plans, the most controversial provision of ERISA is the preemption of many state laws relating to insurance.
In general, ERISA does not apply to benefit plans established or maintained by governmental entities, plans established by churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment, or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans.
ERISA requires pension plans to provide for vesting of employees' pension rights after a specified minimum number of years and to meet certain funding requirements. It also establishes an entity, the Pension Benefit Guaranty Corporation (PBGC), that will provide some minimal benefits coverage in the event that a plan does not, on termination, have sufficient assets to provide all the benefits employees and retirees have earned. Later amendments to the Act require employers who are withdrawing from participation in a multiemployer pension plan that has insufficient assets to pay all of employees' vested benefits to pay their pro rata share of that unfunded vested benefits liability.
ERISA does not, on the other hand, require employers to establish pension plans; instead it only applies to those plans that an employer has established. ERISA likewise does not, as a general rule, require employers that have established pension plans to provide any minimum level of benefits; instead it regulates the manner in which an employee can obtain vested rights to a pension and the manner in which pension benefits can be reduced because of events such as early retirement or return to work in the industry after retirement. ERISA does, on the other hand, require employers to provide some forms of benefits, such as joint and survivor annuities that allow married couples who have opted for such coverage to provide for continuing benefits to a surviving spouse, that plans might not have offered previously.
ERISA likewise does not require employers to provide any health insurance, but regulates the manner in which such health benefits plans operate. There have been a number of amendments to ERISA expanding the protections available to health benefit plan participants and beneficiaries. One important amendment, the Consolidated Omnibus Budget Reconciliation Act of 1985, better known as COBRA, provides some workers and their families with the right to continue their health coverage for a limited time after certain events, such as the loss of a job. Another amendment to ERISA is the Health Insurance Portability and Accountability Act, or HIPAA, which allows employees to obtain continued coverage for preexisting medical conditions in some circumstances when they move from one plan to another, prohibits some forms of discrimination in health coverage based on factors that relate to an individual's health, and requires stringent privacy protections for certain types of health information. Other important amendments include the Newborns' and Mothers' Health Protection Act, the Mental Health Parity Act, and the Women's Health and Cancer Rights Act.
Many employers that promised "lifetime" health benefits coverage to retirees have attempted to avoid those promises in recent years. ERISA does not provide for vesting of the right to future health care benefits coverage in the way that employees can obtain vested rights to future pension benefits. Employees and retirees who have been promised "lifetime" health benefits coverage may, on the other hand, be able to enforce such promises by suing the employer for breach of contract or by challenging the health benefits plan's right to change its plan documents to eliminate such benefits.
ERISA also requires plans to provide participants with information about plan features and funding and their own right to benefits. It requires those who manage and control plan assets to act as fiduciaries. It requires plans to establish a grievance and appeals process for participants to get benefits from their plans and gives participants the right to sue for benefits and, with a number of judicially-created limitations, to seek relief for breaches of fiduciary duty. Participants and beneficiaries are, in many cases, required to exhaust a plan's internal appeals procedure before suing the plan for benefits.
ERISA preempts all state tort and consumer protection laws. An enrollee may sue an employee benefit plan, or a health maintenance organization (HMO) with which it contracts, only for benefits denied or for reimbursement for plan benefits. No other monetary damages may be awarded. See Aetna v. Davila, 542 U.S. 200 (2004) [1]
A number of bills have been introduced in Congress that would limit the circumstances in which ERISA prevents employees and dependents covered by an ERISA group health plan from suing health maintenance organizations over health care decisions made by the HMO. Those efforts have, to date, failed to make any significant changes in this area.
Portions of ERISA are codified in various places including Chapter 18 of Title 29 of the United States Code and Internal Revenue Code sections 219 and 408 (relating to the Individual Retirement Account and sections 410 through 415, and 4971, 4974 and 4975.
Fiduciary
From Wikipedia, the free encyclopedia.
In many common law jurisdictions, fiduciary is a legal term used to describe a relationship between a person who occupies a particular position of trust, power or responsibility with respect to the rights, property or interests of another. Common relationships with this character are those of a guardian and a ward, an attorney and a client, and a trustee and a beneficiary.
In general, a fiduciary must act for the benefit of the person to whom he or she owes fiduciary duties, to the exclusion of any contrary interest. In business or law, a fiduciary relationship generally arises as a result of the specific duties that attend a particular profession or role (for example, an investment adviser, trustee or lawyer), or by virtue of a particular business relationship (for example, partners in a partnership). A fiduciary relationship can have a dramatic difference in power, knowledge or expertise between the two parties, especially where the fiduciary is hired with the expectation that he or she will exercise independent professional judgment on behalf of another. A fiduciary will often be entrusted with broad power over the property of another.
Different jurisdictions may define the duties of a fiduciary differently, and may also adopt different views as to when a fiduciary relationship arises, and the scope of that relationship. Because of the degree of trust reposed in a fiduciary, a fiduciary is generally held to a very high standard of honesty and integrity within the scope of the relationship. Among the legal duties commonly imposed on fiduciaries are duties of good faith and candor (a duty to voluntarily disclose all material information). For example, a fiduciary may not personally profit from a business opportunity the fiduciary should have disclosed. A breach of these duties can give rise to a lawsuit in which the fiduciary can be required to account for improperly-gained profits and disgorge them.
The Miller Act
In the United States, the law requiring contract surety bonds on federal construction projects is known as the Miller Act (40 U.S.C. Section 3131 to 3134). This law requires a contractor on a federal project to post two bonds: a performance bond and a labor and material payment bond. A corporate surety company issuing these bonds must be listed as a qualified surety on the Treasury List, which the U.S. Department of the Treasury issues each year.
The Miller Act provides that, before a contract that exceeds $100,000 in amount for the construction, alteration, or repair of any building or public work of the United States is awarded to any person, that person shall furnish the federal government with the following:
- Performance bond in an amount that the contracting officer regards as adequate for the protection of the federal government.
- A separate payment bond for the protection of suppliers of labor and materials. The amount of the payment bond shall be equal to the total amount payable by the terms of the contract unless the contracting officer awarding the contract makes a written determination supported by specific findings that a payment bond in that amount is impractical, in which case the amount of the payment bond shall be set by the contracting officer. The amount of the payment bond shall not be less than the amount of the performance bond.
The Miller Act payment bond covers subcontractors and suppliers of material who have direct contracts with the prime contractor. These are called first-tier claimants. Subcontractors and material suppliers who have contracts with a subcontractor, but not those who have contracts with a supplier, are also covered and are called second-tier claimants. Anyone further down the contract chain is considered too remote and cannot assert a claim against a Miller Act payment bond posted by the contractor.
Many states in the U.S. have adapted the Miller Act for use at the state level. These state statutes may be referred to as, "Little Miller Acts."
Miller Act Statute TITLE 40. PUBLIC BUILDINGS, PROPERTY, AND WORKS
§ 3131. Bonds of contractors of public buildings or works
(a) Definition.--In this subchapter, the term "contractor" means a person awarded a contract described in subsection (b).
(b) Type of bonds required.--Before any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government the following bonds, which become binding when the contract is awarded:
(1) Performance bond.--A performance bond with a surety satisfactory to the officer awarding the contract, and in an amount the officer considers adequate, for the protection of the Government.
(2) Payment bond.--A payment bond with a surety satisfactory to the officer for the protection of all persons supplying labor and material in carrying out the work provided for in the contract for the use of each person. The amount of the payment bond shall equal the total amount payable by the terms of the contract unless the officer awarding the contract determines, in a writing supported by specific findings, that a payment bond in that amount is impractical, in which case the contracting officer shall set the amount of the payment bond. The amount of the payment bond shall not be less than the amount of the performance bond.
(c) Coverage for taxes in performance bond.--
(1) In general.--Every performance bond required under this section specifically shall provide coverage for taxes the Government imposes which are collected, deducted, or withheld from wages the contractor pays in carrying out the contract with respect to which the bond is furnished.
(2) Notice.--The Government shall give the surety on the bond written notice, with respect to any unpaid taxes attributable to any period, within 90 days after the date when the contractor files a return for the period, except that notice must be given no later than 180 days from the date when a return for the period was required to be filed under the Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.).
(3) Civil action.--The Government may not bring a civil action on the bond for the taxes--
(A) unless notice is given as provided in this subsection; and
(B) more than one year after the day on which notice is given.
(d) Waiver of bonds for contracts performed in foreign countries.-- A contracting officer may waive the requirement of a performance bond and payment bond for work under a contract that is to be performed in a foreign country if the officer finds that it is impracticable for the contractor to furnish the bonds.
(e) Authority to require additional bonds.--This section does not limit the authority of a contracting officer to require a performance bond or other security in addition to those, or in cases other than the cases, specified in subsection (b).
§ 3132. Alternatives to payment bonds provided by Federal Acquisition Regulation
(a) In general.--The Federal Acquisition Regulation shall provide alternatives to payment bonds as payment protections for suppliers of labor and materials under contracts referred to in section 3131(a) of this title that are more than $25,000 and not more than $100,000.
(b) Responsibilities of contracting officer.--The contracting officer for a contract shall--
(1) select, from among the payment protections provided for in the Federal Acquisition Regulation pursuant to subsection (a), one or more payment protections which the offer or awarded the contract is to submit to the Federal Government for the protection of suppliers of labor and materials for the contract; and
(2) specify in the solicitation of offers for the contract the payment protections selected.
§ 3133. Rights of persons furnishing labor or material
(a) Right of person furnishing labor or material to copy of bond.--The department secretary or agency head of the contracting agency shall furnish a certified copy of a payment bond and the contract for which it was given to any person applying for a copy who submits an affidavit that the person has supplied labor or material for work described in the contract and payment for the work has not been made or that the person is being sued on the bond. The copy is prima facie evidence of the contents, execution, and delivery of the original. Applicants shall pay any fees the department secretary or agency head of the contracting agency fixes to cover the cost of preparing the certified copy.
(b) Right to bring a civil action.--
(1) In general.--Every person that has furnished labor or material in carrying out work provided for in a contract for which a payment bond is furnished under section 3131 of this title and that has not been paid in full within 90 days after the day on which the person did or performed the last of the labor or furnished or supplied the material for which the claim is made may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due.
(2) Person having direct contractual relationship with a subcontractor.--A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served--
(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor's residence; or
(B) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons.
(3) Venue.--A civil action brought under this subsection must be brought--
(A) in the name of the United States for the use of the person bringing the action; and
(B) in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.
(4) Period in which action must be brought.--An action brought under this subsection must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.
(5) Liability of Federal Government.--The Government is not liable for the payment of any costs or expenses of any civil action brought under this subsection.
(c) A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is--
(1) in writing;
(2) signed by the person whose right is waived; and
(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.
§ 3134. Waivers for certain contracts
(a) Military.--The Secretary of the Army, the Secretary of the Navy, the Secretary of the Air Force, or the Secretary of Transportation may waive this subchapter with respect to cost plus a fixed fee and other cost type contracts for the construction, alteration, or repair of any public building or public work of the Federal Government and with respect to contracts for manufacturing, producing, furnishing, constructing, altering, repairing, processing, or assembling vessels, aircraft, munitions, materiel, or supplies for the Army, Navy, Air Force, or Coast Guard, respectively, regardless of the terms of the contracts as to payment or title.
(b) Transportation.--The Secretary of Transportation may waive this subchapter with respect to contracts for the construction, alteration, or repair of vessels when the contract is made under sections 1535 and 1536 of title 31, the Merchant Marine Act, 1936 (46 App. U.S.C. 1101 et seq.), or the Merchant Ship Sales Act of 1946 (50 App. U.S.C. 1735 et seq.), regardless.
Professionals as Fiduciaries
Members of various professions such as physicians, architects and lawyers, have highly specialized training and possess credentials and expertise in a particular field. In many cases (including these) they may have a license to practice a profession from which laypersons are barred. These professionals are often placed in positions of trust with respect to those who avail themselves of their services, and are often deemed to owe fiduciary duties to their clients within the scope of their engagement. Most professions are subject to specific codes of conduct prescribed by law or independent credentialing authorities such as bar associations, and may be subject to additional penalties (such as a lawyer being disbarred)
Specific Duties of a Fiduciary
Benjamin Cardozo, while sitting on the Court of Appeals of New York offered an influential description of fiduciary duties in Meinhard v. Salmon, 249 N.Y. 458, 464 (1928), which has been widely used in the United States:
Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
Different jurisdictions define fiduciary duties differently, but four duties are very common:
Duty of Loyalty, i.e. a fiduciary must disregard his own self-interest and act for the benefit of the beneficiary;
Duty to Act Prudently, i.e. the Prudent Man Rule.
Duty of Care, i.e. a fiduciary must exercise the highest standard of care in managing the beneficiary's interests; and
Duty of Candor or Disclosure, i.e. a fiduciary must disclose all information material to the relationship to the beneficiary.
Fiduciary law is particularly relevant to the law of trusts, partnerships, agency, and corporate officers and directors (corporate governance). Fiduciary duties are always particular to the context in which they arise, and can often be created, modified, or even waived by private agreement.
Surety bond
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