By Emily A. Hayes, of Wilson Elser Moskowitz Edelman & Dicker LLP
- § 1104(a)(1)(B) imposes a “prudent person” standard on plan fiduciaries.
- § 1104(a)(1)(C) requires that ERISA fiduciaries diversify plan assets.
- §1104(a)(2) provides that “the diversification requirement of [1104(a)(1)(C)] and the prudence requirement (only to the extent that it requires diversification) of 1104(a)(1)(B) [are] not violated by acquisition or holding of [employer stock].
- First, the Court recognized that in situations where a stock is publicly traded, it is generally not imprudent to rely on the value of a stock on a major stock market: “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.”
- Second, the Court discussed the role of nonpublic information, stating that “to state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.”
- The Court further clarified this with three points. First, the duty of prudence (under ERISA and the common law of trusts) does not require a fiduciary to break the law. Therefore, a fiduciary cannot be expected to take any action that would break securities laws, including acting on inside information. Second, if a complaint alleges a breach by a fiduciary for failing – on the basis of inside information – to cease additional stock purchases or to disclose inside information to the public to create a market correction, the court should consider whether an ERISA-based obligation would conflict with the various requirements and objections of the federal securities laws, including insider trading and corporate disclosure requirements. Third, the Court noted that courts should consider whether the complaint adequately alleges that “a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases – which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment – or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
This is an important decision. Previously, under the presumption of prudence, ESOP fiduciaries were granted additional protections so long as the governing plan documents gave them the right to invest in employer stock and they invested consistent with the plan documents. Now their job is harder, in that they need to make sure that the decisions are actually prudent. The plan documents cannot waive this obligation. The value of this decision, especially for national companies that might be subject to such lawsuits in multiple jurisdictions, is that it provides clarity by resolving a previous circuit split. Further, it clarifies the use of diversification and inside information and other considerations that should be used by ESOP fiduciaries when making investment decisions, and still provides a measure of protection not available to general ERISA fiduciaries