This is No Fable: Eleventh Circuit Adopts Moench Presumption and Rejects Duty to Disclose Non-Public Information Under ERISA with Regard to Employer Stock

On May 8, 2012, in Lanfear, et al. v. Home Depot, Inc., et al., the Eleventh Circuit joined the Second, Third, Fifth, Sixth and Ninth Circuits by officially adopting the Moench presumption of prudence as the applicable standard of review with regard to a plan fiduciary’s decision to offer company stock as an investment option in eligible individual account plans. The Eleventh Circuit also joined those courts applying the presumption at all stages of litigation (including the pleading stage). Further, the Eleventh Circuit adopted the “sponsor intent” test originally promulgated in Moench (rather than a viability or brink of collapse test). As such, we reiterate our prior recommendation that sponsors include an explicit statement of their intent regarding the employer stock fund.

The Eleventh Circuit also rejected the notion that allegedly inaccurate and incomplete public securities filings lead to plausible claims under ERISA. The Court recognized that incorporation by reference of public filings (10ks and 10Qs) into an S-8 and/or a prospectus is not a fiduciary act, so such public filings are not subject to ERISA. This affirms again that plan fiduciaries wear multiple hats, and are not acting as fiduciaries when making SEC filings. Nonetheless, we continue to recommend that clients separate their employer stock prospectus from the SPD, just to make it clear that any incorporation by reference of public filings is into a prospectus – not the SPD separate and apart from a prospectus.

Finally, this case is significant for its rejection of a duty to disclose non-public information under ERISA. It is helpful that the Court explicitly found that participants are not entitled to a market advantage over other shareholders, and that disclosures to plan participants of inside information could not practically be done in a way that would benefit them in any event. However, the Court’s reliance on language in Home Depot’s summary plan descriptions as adequately informing participants of the inherent risks of the undiversified employer stock fund may create problems for companies that do not have such aggressive warnings in their SPDs. As such, we recommend that clients review their SPDs and other information provided to participants regarding an employer stock fund and make sure they provide clear warnings regarding the undiversified and risky nature of such a fund.

With these holdings, the Eleventh Circuit followed the majority of its sister courts, yet managed to keep the opinion anything but ordinary, regaling us with allusions from none other than Aesop and his famed fables. The case is Lanfear, et al. v. Home Depot, Inc., et al., No. 10-13002 (11th Cir. May 8, 2012).

Read our full advisory here.