Court Opinion

ID: 17236
Source: CourtListenerOpinion
Date Created: 2010-04-25 07:02:19+00
Date Added: 2024-06-11T15:04:36.381836
License: Public Domain

UNITED STATES COURT OF APPEALS
                      For the Fifth Circuit

                          No. 97-11023

                 LABORERS NATIONAL PENSION FUND,
            an employee pension benefit plan, et al,

                                                       Plaintiffs,

    BILL L HARBERT, Board of Trustee; ARTHUR A COIA, Board of
 Trustee; BRUCE HUGHES, Board of Trustee; R P VINALL, Board of
Trustee; ROBERT D SHEEHAN, Board of Trustee; MASON M WARREN,
     Board of Trustee; BILLY L HARBERT, JR, Board of Trustee;
                 CARL E BOOKER, Board of Trustee;

                                           Plaintiffs-Appellees,

                             VERSUS

   NORTHERN TRUST QUANTITATIVE ADVISORS, INC., a corporation;
  THE FIRST NATIONAL BANK OF CHICAGO, a corporation; AMERICAN
   NATIONAL BANK AND TRUST COMPANY OF CHICAGO, a corporation;

                                                       Defendants,

   NORTHERN TRUST QUANTITATIVE ADVISORS, INC., a corporation;
      AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO,
                         a corporation;

                                          Defendants-Appellants.

                               1
            Appeal from the United States District Court
                 for the Northern District of Texas

                                April 16, 1999

Before EMILIO M. GARZA, BENAVIDES and DENNIS, Circuit Judges.

DENNIS, Circuit Judge:

      The Laborers National Pension Fund (Fund) filed suit against

American National Bank and Trust Company of Chicago (ANB) for

damages because       of    breach     of   fiduciary   duties   as    the   Fund’s

investment manager under the Employment Retirement Income Security

Act of 1974 (ERISA), 29 U.S.C. §§ 1001 et seq.                    After a bench

trial,    the   district     court     determined    that   ANB’s     purchase   of

interest-only mortgage-backed securities (IOs) was not a prudent

investment and rendered a money judgment for the Fund against ANB.

We reverse and render judgment for ANB.

                     Factual and Procedural Background

      The Fund was established in 1968 to provide retirement income

for laborers employed in several southern and central states.                    It

is   governed   by    a    volunteer    Board   of   Trustees    (Trustees)      who

represent contributing employers and union officials. From 1971 to

1994, the Fund hired ANB as one of several investment managers

responsible for handling its $1 billion portfolio.                     The Fund’s

portfolio has two types of accounts: fixed-income (bonds and

mortgage-backed securities) and equity (stocks).                    In September

1991, ANB invested $11 million of the Fund’s fixed-income account

in IOs.    ANB sold the IOs at a loss for $4.2 million in September

                                            2
1992. Despite this loss, the portion of the Fund’s total portfolio

(fixed-income and equity) managed by ANB experienced a positive

return   of   6    percent   for   calendar   year   1992,   generating

approximately $18 million.1

     Interest-only mortgage-backed securities (IOs) were created in

the late 1980s.      An IO is a right to receive a portion of the

interest only from payments on mortgage loans.        Each IO is paid

from the stream of interest payments made on mortgage loans by a

pool of homeowners.    Thus, prepayment of mortgage loans by members

of the pool tends to diminish or extinguish the yield on the

related IO.     The rate at which mortgages are paid off increases

more than expected if interest rates on mortgage loans decline

unexpectedly prompting an unanticipated higher number of homeowners

to refinance.      Given these characteristics, IOs can result in

significantly greater price and yield volatility than traditional

debt securities.    See Olkey v. Hyperion 1999 Term Trust, Inc., 98
F.3d 2, 6 (2d Cir. 1996), cert. denied, 117 S. Ct. 2433 (1997).      In

addition, however, IOs can serve as a hedge to prevent significant

losses in value due to interest rate changes because IOs generally

increase as interest rates rise and mortgage-backed securities

generally decline as interest rates rise.      Id. at 3-4.

     1
      In 1991, six investment managers handled the Fund’s assets.
During that year, ANB managed approximately $170 million of the
Fund’s fixed-income account and $130 million of the Fund’s equity
account. The $11 million IO investment represented 6.5 percent of
the Fund’s fixed-income account managed by ANB and 3.7 percent of
the Fund’s total portfolio managed by ANB.

                                    3
     The Fund and the Trustees sued ANB in 1995 for breach of

fiduciary duties pursuant to ERISA.         Following a bench trial, the

district court determined that (1) ANB failed to consider the

Fund’s investment guidelines or whether IOs would violate the

spirit of the guidelines; (2) ANB’s investment in IOs was not

consistent with the Fund’s stated guidelines; and (3) a prudent

investment manager would not consider IOs an appropriate investment

for the Fund in light of the Fund’s guidelines.              In its written

opinion, the district court stated that “[i]t does not matter that

other investment consultants in the industry held the opinion that

IOs were appropriate for modern investment portfolios or that the

portfolio as a whole made an adequate return.”                 Based on a

conclusion that ANB failed to fulfill its fiduciary duties, the

district court awarded the Trustees $7,161,549 in damages.               ANB

filed a notice of appeal, after which the district court entered an

amended    final    judgment   awarding     the   Trustees    $281,937   for

prejudgment interest and $398,384 for attorneys’ fees.

                           Standards of Review

     The district court’s findings and inferences of fact are

reviewed    under    the   clearly       erroneous   standard,    and    its

interpretations and applications of law are reviewed de novo.

Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997); Reich v.

Lancaster, 55 F.3d 1034, 1044-45 (5th Cir. 1995).

                                Discussion

                                     4
     ERISA was enacted to regulate employee benefit plans and

protect the funds invested in such plans.       29 U.S.C. § 1302(a).

ERISA assigns to plan fiduciaries “a number of detailed duties and

responsibilities,    which    include    ‘the   proper     management,

administration, and investment of [plan] assets, the maintenance of

proper records, the disclosure of specified information, and the

avoidance   of   conflicts   of   interest.’”    Mertens   v.   Hewitt

Associates, 508 U.S. 248, 251-52, 113 S. Ct. 2063, 124 L. Ed. 2d 161

(1993) (citation omitted).

     In ERISA, “[r]ather than explicitly enumerating all of the

powers and duties of trustees and other fiduciaries, Congress

invoked the common law of trusts to define the general scope of

their authority and responsibility.”2      Central States, Southeast

and Southwest Areas Pension Fund v. Central Transport, Inc., 472
U.S. 559, 570, 105 S. Ct. 2833, 86 L. Ed. 2d 447 (1985).      The manner

in which trustees and other fiduciaries may exercise their powers,

however, is further defined in the statute through the provision of

strict standards of conduct, also derived from the common law of

trusts – most prominently a standard of loyalty and a standard of

     2
      Traditionally, fiduciaries have abided by the common law of
trusts which held that the riskiness of each investment in a
portfolio must be measured in isolation. Leslie J. Bobo, Comment,
Nontraditional Investments of Fiduciaries: Re-Examining the Prudent
Investor Rule, 33 Emory L.J. 1067, 1078 (1984); see also Chase v.
Pevear, 419 N.E.2d 1358, 1366 (Mass. 1981) and In re Bank of New
York, 323 N.E.2d 700, 703 (N.Y. 1974) (stating that under common
law, trustee must exercise prudence in making each investment and
is chargeable with any loss for failing to do so).

                                   5
prudence.      Id. at 570-71 (citing 29 U.S.C. § 1104(a)(1)(A) (“a

fiduciary shall discharge his duties with respect to a plan solely

in the interest of the participants and beneficiaries and for the

exclusive purpose of: (i) providing benefits to participants and

their beneficiaries; and (ii) defraying reasonable expenses of

administering the plan”) and 29 U.S.C. § 1104(a)(1)(B) (a fiduciary

must act “with the care, skill, prudence, and diligence under the

circumstances then prevailing that a prudent man acting in a like

capacity and familiar with such matters would use in the conduct of

an enterprise of a like character and with like aims”)).

      In determining compliance with ERISA’s prudent man standard,

courts objectively assess whether the fiduciary, at the time of the

transaction, utilized proper methods to investigate, evaluate and

structure    the   investment;    acted      in   a   manner   as   would    others

familiar with such matters; and exercised independent judgment when

making investment decisions.        Katsaros v. Cody, 744 F.2d 270, 279

(2d   Cir.),    cert.   denied    sub       nom.,     469 U.S. 1072    (1984).

“‘[ERISA’s] test of prudence . . . is one of conduct, and not a

test of the result of performance of the investment.                 The focus of

the inquiry is how the fiduciary acted in his selection of the

investment, and not whether his investments succeeded or failed.’”

Donovan v. Cunningham, 716 F.2d 1455, 1467 (5th Cir. 1983), cert.

denied, 467 U.S. 1251 (1984).           Thus, the appropriate inquiry is

“whether the individual trustees, at the time they engaged in the

challenged     transactions,     employed     the     appropriate     methods    to

                                        6
investigate the merits of the investment and to structure the

investment.”     Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir.

1983), cert. denied, 464 U.S. 1040 (1984).

     The Secretary of Labor may prescribe such regulations as he

finds necessary to carry out the provisions of ERISA.          29 U.S.C. §

1135.   In 1979 the Secretary prescribed regulations under ERISA

further defining a fiduciary’s investment duties.             29 C.F.R. §

2550.404a-1.      In   general,   the   regulations    provide   that    the

fiduciary shall be required to act as a prudent investment manager

under the modern portfolio theory rather than under the common law

of trusts standard which examined each investment with an eye

toward its individual riskiness.        Specifically, they state that a

fiduciary’s investment duties under 29 U.S.C. § 1104(a)(1)(B) are

satisfied if he has given appropriate consideration to facts he

knows or should know to be relevant to the particular investment or

investment course of action involved, “including the role the

investment or investment course of action plays in that portion of

the plan’s investment portfolio with respect to which the fiduciary

has investment duties” and has acted accordingly.             29 C.F.R. §

2550.404a-1(b)(1)(i)-(ii).        For    these   purposes,    “appropriate

consideration”    includes   determining     that     the   investment    or

investment course of action “is reasonably designed, as part of the

portfolio (or, where applicable, that portion of the plan portfolio

with respect to which the fiduciary has investment duties), to

further the purposes of the plan, taking into consideration the

                                    7
risk of loss and the opportunity for gain (or other return)

associated with the investment or investment course of action,” and

consideration of the following factors: “(A) The composition of the

portfolio with regard to diversification; (B) The liquidity and

current return of the portfolio relative to the anticipated cash

flow requirements of the plan; and (C) The projected return of the

portfolio relative to the funding objectives of the plan.”                29

C.F.R. § 2550.404a-1(b)(2)(i)-(ii).

     In investments, the term “derivative” refers to “financial

instruments whose performance is derived in whole or in part from

the performance of an underlying asset (such as a security index of

securities).”   See BNA Pension Benefits Report No. 23, at 1046

(Apr. 15, 1996) (citing Department of Labor-Comptroller Letter of

Guidance and Statement on Derivatives signed by Assistant Labor

Secretary   Olena   Berg    on   Mar.   28,   1996).   Examples   of   these

financial instruments include futures, options, options on futures,

forward contracts, swaps, structured notes and collateral mortgage

obligations, and interest-only and principal-only strips.               Id.;

David R. Levin & Tess J. Ferrera, ERISA Fiduciary Answer Book 7-73,

7-74 (3d ed. 1998).        In the Letter of Guidance and Statement on

Derivatives, the Department of Labor and the Comptroller made the

following statements:

           Investments in derivatives are subject to the
     fiduciary responsibility rules in the same manner as are
     any other plan investments . . . . In determining whether
     to invest in a particular derivative, plan fiduciaries
     are required to engage in the same general procedures and

                                        8
     undertake the same type of analysis that they would in
     making any other investment decision.        This would
     include, but not be limited to, a consideration of how
     the investment fits within the plan’s investment policy,
     what role the particular derivative plays in the plan’s
     portfolio, and the plan’s potential exposure to losses.
                               * * *
          Plan fiduciaries have a duty to determine the
     appropriate methodology used to evaluate market risk and
     the information which must be collected to do so. Among
     other things, this would include, where appropriate,
     stress   simulation   models    showing  the   projected
     performance of the derivatives and of the plan’s
     portfolio under market conditions. Stress simulations
     are particularly important because assumptions which may
     be valid for normal markets may not be valid in abnormal
     markets, resulting in significant losses . . . .
                              * * *

     Investment managers are also charged with making investments

in accordance with documents and instruments governing the plan

insofar as the plan documents are consistent with the provisions of

ERISA.    29 U.S.C. § 1104(a)(1)(D).   The Fund investment guidelines

in the present case, in pertinent part, provide:

     1.     Investments are limited to holdings which would be
            permitted under the prudent man rule as set forth
            in the Employee Retirement Income Security Act of
            1974.
                                 * * *
     4.     Bond investments shall be limited to Federal or
            Federal Agency obligations or corporate bonds of
            the first three quality grades (at the time of
            purchase) as established by one or more of the
            nationally recognized bond rating services . . . .
     5.     The investment managers are not authorized to
            engage in investment transactions involving stock
            options, short sales, purchases on margin, letter
            stocks,   private  placement   debt,    commodities,
            venture capital.    Future investments in foreign
            securities   will  not    be made    without   prior
            consultation with, and approval by, the Board of
            Trustees . . . .

     The parties treated the Pension Fund Investment Philosophy and

                                  9
General Policy on Investments as part of the plan documents.      The

Investment Philosophy, in pertinent part, provides:

          The Trustees of the Laborers National Pension Fund,
     in order to protect the interests of the participants and
     beneficiaries for the purpose of providing them with
     benefits and defraying the reasonable expenses of
     administering the Plan, are committed to protect the
     corpus of the Fund, meet the actuarial assumptions, and
     comply with applicable Federal and state laws. In order
     to accomplish these goals in a prudent manner, the
     Trustees believe that the investments of the Fund must be
     diversified    among    government    securities,   bonds,
     mortgages, common stock, real estate, insurance company
     contracts,   money    market    instruments,   and   other
     appropriate investments.      Therefore, it will be the
     policy of the Trustees to invest the assets of the Fund
     with care in those vehicles which should preserve the
     principal while recognizing the need for income and
     appreciation with a minimal risk. This policy will be
     carried out by the Trustees in a prudent manner with the
     assistance of reputable professional money managers,
     consultants, insurance companies and banks to make the
     investments. The performance of these investments will
     be reviewed at least quarterly using various evaluation
     techniques   that    prove   reliable   and   face-to-face
     discussion and review among the parties . . . .

And the General Policy on Investments, in pertinent part, states

that:

     a)   It is the intention of the Board of Trustees to
          allow the investment manager full discretion within
          the scope of the agreed upon investment guidelines
          and restrictions.    The manager’s performance in
          meeting the Fund’s objectives will be reviewed on a
          regular periodic basis. Results based on a total
          rate of return (including both realized and
          unrealized gains and losses) will be evaluated
          quarterly by a professional service retained by the
          Trustees.
                              * * *
     c)   All investment managers will be providing quarterly
          reports to the Trustees in the requested format.
          The reports include a review of previous actions,
          current status of the portfolio, recommendations,
          etc. If changing market or economic conditions or

                                10
           other events suggest that a special meeting or
           action of the Trustees is necessary it is expected
           that the manager will communicate with the Trustees
           promptly rather than waiting for submission of the
           scheduled report.
     d)    If in the judgment of the investment manager strict
           adherence to one or more of the following
           investment guidelines in connection with a specific
           transaction is not in the best interests of the
           Laborers National Pension Fund or would produce an
           undesirable investment result the manager shall
           consult with the Trustees before proceeding with
           the transaction.

     The district court clearly erred in determining that ANB

failed to consider Fund guidelines before purchasing IOs.       During

the period at issue, Tom Pierce was ANB’s Director of Fixed Income.

Before Mr. Pierce authorized the purchase of IOs in 1991 he and his

ANB associates consulted the ANB documents that incorporated the

Fund guidelines, reviewed general literature on IOs and discussed

the merits of investing in IOs with brokers.           Mr. Pierce also

utilized electronic Bloomberg stress simulation models to project

the performance of IOs and the Fund’s portfolio under market

conditions.     The Bloomberg stress simulation models based their

projections on the prepayment histories of various securities based

upon interest rate changes.       Mr. Pierce considered the whole

universe   of   investment   grade,    fixed-income   alternatives   and

evaluated the risks and rewards associated with these securities

relative to a Lehman Brothers Aggregate Index.

     Not only did Mr. Pierce consider the risks associated with IOs

in the context of the goals of the Fund; ANB also convened an

Account Review Committee which met quarterly to review client

                                  11
objectives and to ascertain whether ANB’s investment decisions

complied with these objectives.            ANB invested in IOs on behalf of

several pension plans covered by ERISA and the Account Review

Committee approved the use of IOs in the Fund’s fixed-income

account prior to their purchase. In addition, Standard Valuations,

the    company   retained      by   the   Trustees   to    be   responsible    for

monitoring ANB’s compliance with the Fund guidelines, considered

the IO investment permissible under the Fund guidelines.                 In fact,

at least one other investment manager, Lazard Freres, made an IO

investment for the Fund under the same investment guidelines during

the same period of time.

       As   we   read    the   plan    documents     and   instruments,      ANB’s

investment in IOs was not a violation of the investment guidelines

or their spirit.        The documents and instruments governing the plan

must generally be construed in light of ERISA’s policies, and those

documents cannot excuse either the trustees or the investment

managers from their duties under ERISA.              Central States, 472 U.S.

at 568.      In interpreting the provisions of plan documents and

instruments such as the investment guidelines with this view, we

are also guided by the principles of trust law.                    Firestone v.

Bruch, 489 U.S. 101, 111, 109 S. Ct. 948, 103 L. Ed. 2d 80 (1989)

(citing Central States Southeast and Southwest Areas Pension Fund

v. Central Transport, Inc., 472 U.S. 559, 570 (1985)).                  As they do

with    contractual      provisions,      courts   construe     terms   in   trust

agreements without deferring to either party’s interpretation.

                                          12
“‘The extent of the duties and powers of a trustee is determined by

the rules of law that are applicable to the situation, and not the

rules that the trustee or his attorney believes to be applicable,

and by the terms of the trust as the court may interpret them, and

not as they may be interpreted by the trustee himself or by his

attorney.’”      Firestone, 489 U.S. at 112 (citing 3 William F.

Fratcher, Scott on Trusts § 201, at 221 (1988)).                           “The terms of

trusts created by written instruments are ‘determined by the

provisions of the instrument as interpreted in light of all the

circumstances and such other evidence of the intention of the

settlor with         respect   to       the   trust   as     is   not     inadmissible.’”

Firestone, 489 U.S. at 112 (citing Restatement (Second) of Trusts

§ 4, Comment d (1959)).           Giving the written words of the guidelines

their plain meaning within the context of trust law principles and

ERISA policies, we conclude that the guidelines neither expressly

nor implicitly prohibit investments in IOs of the first three

quality grades; and that there is no reasonable basis for reading

such a prohibition into the plan documents.

     On the other hand, we find the interpretation of the Fund

guidelines      by    the   district          court   and     the       Trustees   to   be

unreasonable     under      the     ordinary       meaning    of    the    words   of   the

document and especially so in light of the ERISA policies and the

principles of trust law.             The Investment Philosophy requires the

Trustees   to    “protect         the    interests     of     the    participants       and

beneficiaries for the purpose of providing them with [pension and

                                              13
other] benefits . . . protect the corpus of the Fund, meet the

actuarial assumptions, and comply with applicable Federal and state

laws . . . diversif[y] [investments] among government securities,

bonds, mortgages, common stock, real estate, insurance company

contracts,       money    market     instruments,         and     other     appropriate

investments . . . [and] invest the assets of the Fund with care in

those     vehicles       which     should     preserve      the    principal        while

recognizing the need for income and appreciation with a minimal

risk.”     The Trustees contend that the last clause implies a ban

against    IOs    because        derivatives      involve    a    risk     of     loss   of

principal.       We do not think that ambiguous clause standing alone

justifies such an inference.             Reading it together with the balance

of the Investment Philosophy and plan documents, we are certain

that it does not.        The clear words of the Investment Philosophy and

other plan documents require the Trustees to invest in many types

of assets involving the risk of loss of principal, such as common

stocks,    real    estate,        insurance       contracts,      and     money    market

instruments. Indeed, the evidence indicates that the Fund’s equity

and fixed-income portfolios have long contained many investments

having risk of principal losses.                  The goals of the plan are to

provide sufficient growth in assets for the payment of future

pensions and other benefits to large numbers of participants and

beneficiaries      and    to     protect    the    Fund   against       inflation        and

depreciation.        These objectives dictate an investment policy of

reasonable        risk,        healthy      appreciation          and       appropriate

                                            14
diversification. ERISA and the federal regulations likewise impose

prudent fiduciary duties of careful investments for the same

purposes.

       The Fund guidelines expressly prohibit investments “involving

stock options, short sales, purchases on margin, letter stocks,

private placement debt, commodities [or] venture capital. . . .”

IOs are not among the prohibited investments.3               The Fund guidelines

stated      that      investments   should    be   limited   to   federal   agency

obligations or corporate bonds of the first three quality grades.

The IOs at issue met this requirement, as they were rated “AAA” at

the time of their purchase. Furthermore, the Investment Philosophy

indicated that investments should be diversified among “government

securities, bonds, mortgages, common stock, real estate, insurance

company contracts, money market instruments, and other appropriate

investments.”          ANB’s investment in IOs was reasonably designed as

part       of   the    Fund’s   portfolio     to   further    the   purposes    of

diversification as a hedge against possible interest rate hikes and

consequent declines in values of fixed income securities.

       The Fund’s general policies further provide that investment

managers are given full discretion to make decisions within the

       3
      In 1994, the Trustees revised the Fund guidelines, adding IOs
to the list of prohibited investments. The Fund’s counsel advised
that the Fund guidelines should specifically state how mortgage-
backed securities were to be treated. The fact that the Trustees
and the Fund’s counsel recognized the need to revise the guidelines
indicates that the guidelines did not prohibit this type of
investment when ANB purchased the IOs.

                                         15
scope   of       the   Fund    guidelines      and    that    the   results    of    their

investment decisions would be evaluated quarterly by a professional

service retained by the Trustees based on a total rate of return.

The Trustees retained Standard Valuations for this purpose.                              The

general policies also directed ANB to provide quarterly reports to

the Trustees in a requested format reviewing previous actions,

current      portfolio        status,   and    recommendations.           There     is    no

contention that ANB failed to cooperate with Standard Valuations in

its evaluations or failed to file its own quarterly reports,

properly         disclosing       detailed         information      concerning        fund

investments and management.

      The Trustees argue that ANB breached its obligation to consult

with them prior to the IO investment.                      On the contrary, however,

the Fund guidelines and supporting documents require investment

managers to consult with the Trustees and obtain prior approval of

an   individual        investment       in    only    two    instances:      (1)    future

investments in foreign securities; and (2) if in the judgment of

the investment manager strict adherence to the guidelines in

connection with a specific transaction is not in the best interests

of the Fund or would produce an undesirable investment result.                           The

Trustees do not contend that the IOs involved foreign securities.

ANB considered the purchase of the small quantity of IOs to be a

prudent investment within the portfolio designed as a hedge and to

produce      a    desirable      result      for     the    portfolio   as    a     whole.

Therefore, because in the investment manager’s judgment the IO

                                              16
investments were in the best interest of the Fund, ANB was not

required to obtain prior approval of those investments.

     In support of its conclusion that IOs were inconsistent with

the Fund guidelines, the district court stated: “It does not matter

that other investment consultants in the industry held the opinion

that IOs were appropriate for modern investment portfolios or that

the portfolio as a whole made an adequate return.”        This statement

indicates   that   the   district   court   erroneously   judged   the   IO

investment in isolation under the common law trust standard,

instead of according to the modern portfolio theory required by

ERISA policy as expressed by the Secretary’s regulations.                The

district court’s reasoning, which the Fund urges again in its

argument, is clearly at odds with ERISA and the regulations.              A

fiduciary may not discharge his duties in a manner inconsistent

with ERISA provisions.     29 U.S.C. § 1104(a)(1)(D); see also Gruby

v. Brady, 838 F. Supp. 820, 829 (S.D.N.Y. 1993) (“ERISA section

404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), requires fiduciaries to

discharge their duties in accordance with plan documents only

‘insofar as such documents and instruments are consistent with the

provisions of [ERISA].’”).      Since 1979, investment managers have

been held to the standard of prudence of the modern portfolio

theory by the Secretary’s regulations.         29 C.F.R. § 2550.404a-1;

Bobo, supra, at 1078.     In case of a conflict, the provisions of the

ERISA policies as set forth in the statute and regulations prevail

over those of the Fund guidelines.          There is no conflict in the

                                    17
present case because the plan documents do not require that the

prudence of the IO investments be judged in isolation, as the

district court and the Trustees suggest.                  If they did, the plan

documents    and    guidelines    would     be   forced      to    yield    to    the

regulations’ requirement that the investment be reasonably designed

as part of the portfolio to further the purposes of the plan.

     Under a proper application of the correct legal principles to

the evidence in the present case, there is not a reasonable basis

for concluding that ANB or Mr. Pierce acted imprudently or in

violation of their fiduciary responsibilities with regard to the

1991 investments in IOs. ANB considered the characteristics of IOs

and utilized stress simulation models to project the performance of

IOs and the Fund’s portfolio under various market conditions before

investing in IOs.      The Fund’s expert witnesses, none of whom were

active or experienced ERISA plan investment managers, failed to

point out any specific violation by Mr. Pierce or ANB of a

fiduciary    duty    required    by   the   prudent       investor    and    modern

portfolio standards of ERISA and the related federal regulations

and guidance.       Instead, the Fund’s experts based their opinions

that ANB’s IO investments were imprudent on analysis of those

investments    standing    alone,     in    isolation       from    the    relevant

portfolio.    Also, despite their ultimate conclusions, one or more

of the Fund’s expert witnesses conceded that IOs can serve as a

hedge   against     countervailing    risks      of   a    portfolio,      the   Fund

guidelines did not prohibit the investment in IOs, the investment

                                       18
community did not anticipate the sudden, unprecedented decrease in

interest rates which accelerated the prepayment of mortgages in

1992, and Mr. Pierce sufficiently investigated the available data

on the nature of the particular IOs prior to purchasing them.

       ANB’s expert witness, Mr. Henderson, an experienced ERISA plan

investment manager, testified that ANB’s IO investments were not

imprudent       when   analyzed     under     the   prudent    investor,    modern

portfolio principles of ERISA and the pertinent Department of Labor

regulations and guidances.            He was the only expert witness who

properly assessed ANB’s IO investments as of the time they were

made    using    the   correct      prudent    man,   modern    portfolio    ERISA

principles.       Mr. Henderson testified that in forming his opinion,

he reviewed the quarterly reports issued by ANB to the Fund in 1991

and 1992; the data on the pertinent IOs available to ANB prior to

the 1991 IO investments; the portfolio and investment goals and

guidelines;      and   Standard      Valuations’      assessment    of    ANB’s   IO

investments and overall performance for 1992.                 Based upon the Fund

guidelines, the economic conditions that prevailed in September

1991,    the    makeup   of   the    Fund’s     portfolio     and   Mr.   Pierce’s

objectives for the portfolio, Mr. Henderson concluded that the IO

investments were appropriate.

       From our review of the record, we conclude that the Trustees

failed to produce evidence from which it reasonably could be found

that Mr. Pierce or ANB acted imprudently or that the IO investments

in the present case violated the guidelines or ERISA policies.

                                         19
Accordingly, we REVERSE the district court’s judgment in favor of

the Trustees and RENDER judgment in favor of the defendants-

appellants and against the plaintiffs-appellees.

                               20