Thursday, September 5, 2013

The Importance of Creating an Administrative Record in ERISA Claims

ERISA requires employees to exhaust all administrative remedies before pursuing claims in court.  This means that an employee must follow the claims procedures outlined in his or her Summary Plan Description.  Abiding by these requirements and taking this phase of the process seriously is crucial.   

Typically, a claim is filed with the plan administrator in accordance with the plan’s procedures.  The plan administrator then must provide adequate notice to the employee in writing, setting forth the specific reasons for such denial.  ERISA provides that every plan participant must be afforded a full and fair review of the decision denying the claim.  Any documentation, records, or other relevant information submitted by the claimant along with additional evidence, documentation and records used by the plan administrator constitutes the administrative record. 

Developing a sufficient administrative record is imperative because after an administrative appeal and once a claim is filed in court, various circumstances determine whether or not the court’s review of the administrator’s decision is limited to the evidence in the administrative record or if additional discovery is allowed. Certain language in a plan along with an employee’s location can determine his or her rights.    

The first step in determining whether discovery is allowed outside the administrative record is to decide the applicable standard of review.  As discussed in my prior article, the Supreme Court in Firestone Tire and Rubber Co. v. Bruch, decided that a de novo standard (allowing the court to substitute its own judgment) applies when reviewing a claim denial, unless the language of the plan gives the plan administrator discretion to interpret and apply the plan.  If a plan provides such discretion, the reviewing court applies an abuse of discretion standard and gives the benefit denial deferential treatment. 

Since the abuse of discretion standard assesses the reasonableness of the benefit decision based upon the facts known to the plan administrator at the time, consideration of evidence outside the record is extremely rare. 

However, when a de novo standard applies, the circuits have articulated a variety of rules concerning discovery outside the administrative record. 
  • The Fifth and Sixth Circuits do not permit the introduction of extrinsic evidence reasoning that federal courts are not to function as substitute plan administrators.
  • The Seventh and Eleventh Circuits allow the admission of all extrinsic evidence because de novo review requires an independent decision rather than an independent review. 
  • The First and Second Circuits have limited discovery of extrinsic evidence to show procedural irregularities or conflict of interest
  • The Fourth and Tenth Circuits apply a multi-factor approach.  Generally, review is limited to evidence in the administrative record except where the court finds that additional evidence is necessary for resolution of the claim.  These circuits have discussed a number of exceptional circumstances which may warrant a court to exercise its discretion, such as cases with concerns of impartiality or procedure, complex medical issues, or circumstances where the claimant would not have been able to present the evidence during the administrative process. 
  • The Eighth and Ninth Circuits permit extrinsic evidence upon a showing of good cause.  “Good cause” is similar to the exceptional circumstances articulated by the Fourth and Tenth Circuits.  However, if the plan participant had multiple opportunities to submit evidence to the plan administrator but failed to do so, such evidence will be excluded at trial.   
  • The Third Circuit looks to whether the administrative record was sufficiently developed and may allow the admission of additional evidence where there is a lack of an administrative record. 

Savvy employers will likely include language in the plan that gives the plan administrator discretion to interpret and apply the plan, thus limiting review of the benefit denial to the administrative record.  However, even if a plan does not contain discretionary language, de novo review does not guarantee the admission of extrinsic evidence.  In sum, creating an adequate administrative record is crucial for Plaintiffs. 

If you are a claimant needing assistance in handling a claim, contact the attorneys at Cosgrove Law Group, LLC.

Monday, September 2, 2013


By now most brokers and compliance departments should be aware that a broker becomes statutorily disqualified from associating with a FINRA member firm if convicted of a felony. They should also know by now that it doesn't matter if that conviction has nothing to do with moral turpitude or finances, such as a felony driving while intoxicated conviction. But what many may not realize is that, based upon “guidance” from the SEC, FINRA considers a mere plea of guilty—which is not a conviction under state or federal law—to be a conviction for purposes of statutory disqualifications. So, for example, even if you qualify for a prosecutorial diversion program in which you are never convicted if you satisfy certain probating terms, FINRA is still going to conclude you were convicted if you pled guilty in order to qualify for that program.

The genesis of what some might consider an absurdity lies in the fact that the 1934 Exchange Act does not define the term “convicted” in Section 3(a)(39) when setting forth those events which trigger a disqualification. Now, most attorneys understand that each and every word in a statute need not be defined, particularly if amenable to common understanding. Ironically, the FINRA By-laws also use, but fail to define, the term. So back in 1992, the SEC instructed the NASD to look to the definition of “convicted” in the 1940 Advisor's Act (“The Lederer Letter”).

And herein lies the problem for the unwitting broker or criminal defense attorney that thinks one is only “convicted” when one is sentenced and a judgment of conviction is entered: The 1940 Act includes “a plea of guilty” in the definition of “convicted.” There are, however, situations in which it is arguably unclear as to whether a conviction exists under even this expansive definition because the court might refrain from making a finding of guilt pending a probationary period. The SEC concluded that in such situations a person is convicted until the probationary period is completed. That's right folks—you can actually become “un-convicted!”

The SEC addressed this critical semantic issue again in 2000 in a letter to the NYSE (“The Germino Letter”). In that situation, the SEC looked to California law regarding a first-time drug offender program. In that instance, the SEC concluded that the defendant was not convicted because, although he pled guilty, the court did not “make a finding of guilt or accept the plea of guilty.” Confused yet?

For the most recent review of the nuances and history at issue here, take a look at the National Adjudicatory Council's Opinion in SD Decision No. 04017. In that case the Council looked at the CWOF (convicted without a finding) procedure under Massachusetts law and concluded that the MC-400 application subject in that matter had not in fact been convicted, so the broker should not have been disqualified in the first place! Belated good news for her for sure.

In Puello v. Bureau of Citizenship and Immigration Services, 511 F.3d 324 (2nd. Cir. 2007), the United States Court of Appeals for the Second Circuit evaluated the meaning of the term “conviction” in the Immigration and Nationality Act (“INS”). In doing so, it noted that “well-established principles of (statutory) construction dictate that statutory analysis necessarily begins with the 'plain meaning' of a law's text and, absent ambiguity, will generally end there.” Id. At 327. In 1996, Congress amended the INS to include a definition of conviction that included, in addition to a formal judgment of guilt, “a plea of guilty...or [admission] of sufficient facts to warrant a finding of guilt.” Id. At 328. The court went on to explain that a conviction occurs when the court adjudicates guilt and imposes a sentence. Id. At 329. “The statutory definition of “conviction” speaks of a judgment 'entered by a court' the common understanding of which involves the entry on the docket of the documents envisioned in Rule 32(K)(1) and not a guilty plea alone. Id. The critical point here is that, unlike the INS, the Exchange Act does not involve any ambiguity as to “conviction” and it does not include a definition of conviction that includes anything less than a formal adjudication of guilt. Moreover, the SEC's suggestion that one looks to the 1940 Act to gain insight as to what a different Congress intended by the term “conviction” to mean when it passed the Exchange Act six years earlier is simply absurd. And the Second Circuit certainly agrees with this author's opinion on FINRA's current interpretation of “conviction” for a statutory disqualification: “ Construing a guilty plea alone as a 'formal judgment of guilt' makes little sense in the context of the definition of 'conviction' as a whole.” Id. “Construing a guilty plea alone to constitute a 'conviction' would be a significant departure from normal criminal procedure.” Id. At 330. And best of all: “ the statutory definition appears to lead to the bizarre result that a withdrawn guilty plea would still be a conviction.” Id. And there is no ambiguity in the Exchange Act that justifies a statutory interpretation by the SEC that directs FINRA to give a “bizarre” interpretation to what a “conviction” is for the purposes of statutory disqualifications. To borrow the words of Judge Katzmann: “a statute should be interpreted in a way that avoids absurd results.” Id. In sum, if Congress wanted a mere guilty plea to somehow be a “conviction” for purposes of the Exchange Act, it demonstrated its ability to do so when it so amended the INS.

The problem this author has confronted recently is that FINRA may send your Member firm a notice requiring them to file a MC-400 application or U-5 you without fully analyzing the state law at issue or exactly whether or not the court made the requisite finding of guilt (as opposed to the defendant merely admitting facts sufficient to allow the entry of a finding of guilt). Moreover, a defendant might plead guilty to the underlying offense without pleading guilty and the court finding sufficient facts as to a separate statute that enhances the misdemeanor to a disqualifying felony.

So what is the lesson here? Consult with a securities attorney and make sure you are both aware of and have a very clear record of the procedure before the court when pleading guilty as part of a diversion program lest your effort to avoid a conviction and save your career prove futile in the eyes of FINRA. Food for thought.