Extracted from Law360
The disclosure requirements under the Employee Retirement Income Security Act are enumerated, specific and limited. So are ERISA’s fiduciary duties. By its terms, ERISA does not impose any fiduciary “duty to disclose” information beyond that described in the statute. However, some courts have interpreted the fiduciary duties of loyalty and prudence as imposing additional disclosure obligations with regard to benefit plans in certain circumstances.
Until recently, no circuit court held there was any duty on ERISA fiduciaries to disclose nonpublic financial information about a publicly traded company whose securities were offered in its benefit plan or the soundness of company stock. To the contrary, several circuits have declined to impose a fiduciary “duty to disclose” nonpublic information to plan participants under ERISA.[1] This is because such a requirement would improperly transform fiduciaries into investment advisers.”[2] Further, creating such a fiduciary duty under ERISA would “run the risk of disturbing the carefully delineated corporate disclosure laws.”[3]
The U.S. Supreme Court has yet to directly address whether such an affirmative fiduciary “duty of disclosure” exists under ERISA. See Varity Corp. v. Howe, 516 U.S. 489, 506 (1996) (reserving the question “whether ERISA fiduciaries have any fiduciary duty to disclose truthful information on their own initiative, or in response to employee inquiries”). Recently, however, the Supreme Court had the opportunity to opine upon an ERISA fiduciary’s obligation to disclose nonpublic “inside” information to plan participants in Fifth Third v. Dudenhoeffer.[4]
Fifth Third v. Dudenhoeffer
In Dudenhoeffer, participants in Fifth Third’s 401(k) plan brought a putative class action alleging the plan’s fiduciaries breached their ERISA fiduciary duties by continuing to invest in and hold Fifth Third stock despite its decline in value. The complaint alleged that the defendants knew or should have known — on the basis of both publicly available information and inside information — that Fifth Third stock was overpriced and excessively risky. According to the complaint, by virtue of their positions as corporate officers, some of the defendants had “inside” information indicating that the market was overvaluing Fifth Third stock. The complaint alleged that a prudent fiduciary in the defendants’ position would have used this inside information by: “(1) selling the [employee stock ownership plan] holdings of Fifth Third stock; (2) refraining from future stock purchases (including by removing the plan’s ESOP option altogether); or (3) publicly disclosing the inside information so that the market would correct the stock price downward, with the result that the ESOP could continue to buy Fifth Third stock without paying an inflated price for it.”[5] According to the plaintiffs, the defendants did none of these things, and the price of Fifth Third stock ultimately fell, reducing the participants’ retirement savings.
In considering the plaintiffs’ “duty to disclose” theory, the Supreme Court did not specifically hold that any such affirmative fiduciary duty exists under ERISA. Rather, where a complaint faults fiduciaries for failing to decide, on the basis of the inside information, to refrain from making additional stock purchases or for “failing to disclose that information to the public,” the Supreme Court instructed lower courts to “consider the extent to which an ERISA-based obligation either to refrain on the basis of inside information from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements imposed by the federal securities laws or with the objectives of those laws.”[6]
Post-Dudenhoeffer Decisions
In the wake of the Supreme Court’s decision in Dudenhoeffer, the Ninth Circuit expressed an entirely different view than that of its sister circuits. In Harris v. Amgen Inc.[7] plaintiffs alleged that the defendants violated their fiduciary duties of loyalty and care by failing to provide “material” inside information to plan participants about investment in the employer securities at issue. In response, the defendants argued that they have limited obligations under ERISA to disclose information to plan participants and that their disclosure obligations do not extend to information that is “material” under the federal securities laws.
Rejecting the defendants’ argument, the court held that an ERISA fiduciary does have an obligation to disclose complete and accurate information that is “material” to the participants’ circumstances.[8] Further, the court held that, when dealing with employer stock, an ERISA fiduciary’s duties of loyalty and care are no “less” than the duty they owe to the general public under the securities laws.[9] In short, the Ninth Circuit held that “there is no contradiction between defendants’ duty under the federal securities laws and ERISA,” and when “properly understood, these laws are complimentary and reinforcing.”[10]
To date, the Ninth Circuit appears to be the only circuit court adopting this view, arguably creating a split with the Second, Fifth and Eleventh Circuits.
Analysis
As the Supreme Court noted in Dudenhoeffer, the securities laws are “complex” and govern both “insider trading” and “corporate disclosure” obligations. The securities laws are comprehensive, explicitly setting forth the who, what, when and how public disclosures must be made. Indeed, there is a specific regulation designed to ensure that public company disclosures are made to the market as a whole and not made privately to some individuals and not others.[11] Further, such laws mandate disclosures be made by specified officers and directors of such companies, who do so acting in their corporate roles. The securities laws do not require ERISA fiduciaries to make such disclosures, or even contemplate that other individuals will make public disclosures upon which the market can rely.
Given the comprehensive nature of the securities laws and regulations, the existence of the U.S. Securities and Exchange Commission and over 80 years of jurisprudence established under such laws and regulations about who, what, when and how disclosures about public companies must be made, there is simply no role for ERISA or the U.S. Department of Labor in this area.
Creating and adding a new, separate, additional affirmative “duty to disclose” under ERISA to the existing duties under the securities laws is completely unnecessary. The securities laws protect ERISA plans and their participants just like every other shareholder. If inside information about a publicly traded company is sufficiently “material” to require a plan’s fiduciaries to disclose such information to the public, presumably the securities laws already require disclosure of that information, and there are specific rules already established about who, what, when and how such disclosures must be made. Any obligation on ERISA fiduciaries to make separate or competing public disclosures would necessarily conflict with the complex disclosure obligations under the securities laws and/or the “objectives of those laws.” This is precisely what the Supreme Court has counseled lower courts to avoid.[12]
This is not to say that ERISA fiduciaries who believe they are in possession of undisclosed, material information about the company lack any recourse. But this situation is not common, and determining that there is, in fact, information known to the fiduciary that should be disclosed under the securities laws would require a level of securities knowledge and expertise that most ERISA plan fiduciaries do not have. Indeed, if a fiduciary thinks this might be the case, the first step would be to ascertain whether there is, in fact, an obligation under the securities laws to disclose such information and whether, in fact, no such disclosure has occurred. This would require obtaining the advice of securities counsel, cooperation and assistance from the individuals responsible for such disclosures within the company and a complete knowledge of the information already disclosed by the company. If, having completed this analysis, the fiduciary believes disclosure is indeed required by the securities laws, he or she could request/demand that the company comply with the securities laws and, in extreme cases, contemplate contacting the SEC. Rarely, if ever, would such action be required.
The potential harm and disruption of requiring ERISA fiduciaries to take it upon themselves to make public disclosures about employer securities is enormous. Any duty of disclosure that did not match exactly and precisely the duties imposed by the specific regulations and jurisprudence of the securities laws would be potentially devastating to the carefully crafted and well-known disclosure obligations that already exist. Moreover, the public policy behind any ERISA duty would presumably match the public policy behind the securities laws, as there is no reasoned basis for ERISA plan participants to receive more, different or better information about public company investments than the market as a whole. Indeed, any duty to disclose under ERISA that is entirely consistent with the federal securities laws would be, by definition, superfluous and unnecessary. If Congress had intended to impose a duplicative disclosure obligation about public companies when it fashioned ERISA’s fiduciary duty provisions, presumably it would have made such a significant duty clear. Any imposition of a separate disclosure obligation under ERISA with regard to public companies would be an obvious and significant intrusion into the SEC’s jurisdiction.
As the Supreme Court acknowledged in Dudenhoeffer, ERISA fiduciaries must consider whether their actions will cause “more harm than good.”[13] It is hard to imagine how a new, separate, distinct duty to disclose under ERISA that applies to inside information about public companies, and the specter of ERISA fiduciaries becoming a new source of “material” information about public companies, would do anything else.
[1] See, e.g., Kopp v. Klein, 722 F.3d 327, 342-43 (5th Cir. 2013) (“No general duty to disclose nonpublic information exists under ERISA or under [Fifth Circuit] precedents.”); Lanfear v. Home Depot, 679 F.3d 1267, 1284 (11th Cir. 2012) (“ERISA does not explicitly impose a duty to provide participants with nonpublic information affecting the value of the company’s stock.”); In re Citigroup ERISA Litig., 662 F.3d 128, 142 (2d Cir. 2011) (“We decline to ... create a duty to provide participants with nonpublic information pertaining to specific investment options.”).
[2] See, e.g., Edgar v. Avaya, 503 F.3d 340, 350 (3d Cir. 2007) (fiduciaries do “not have a duty to ‘give investment advice’ or ‘to opine on’ [a] stock’s condition.”)
[3] Baker v. Kinsley, 387 F.3d 649, 661-62 (7th Cir. 2004).
[4] 134 S.Ct. 2459 (2014).
[5] Id. at 2472 (emphasis added).
[6] Id. at 2473 (noting that the SEC had not weighed in with its views on these matters, and noting those views may very well be “relevant”).
[7] 770 F.3d 865 (9th Cir. 2014).
[8] Id. at 880.
[9] Id.
[10] Id.
[11] Further, appointing fiduciaries cannot disclose such information to independent fiduciaries because doing so would clearly violate Regulation FD. 17 C.F.R. §§ 243.100-243.103.
[12] See Dudenhoeffer, 134 S.Ct. at 2473 citing 29 U.S.C. § 1144(d) (“Nothing in this subchapter [which includes § 1104] shall be construed to alter, amend, modify, invalidate, impair or supersede any law of the United States ... or any rule or regulation issued under any such law”); Black & Decker Disability Plan v. Nord, 538 U.S. 822, 831 (2003) (“Although Congress ‘expect[ed]’ courts would develop ‘a federal common law of rights and obligations under ERISA-regulated plans,’ the scope of permissible judicial innovation is narrower in areas where other federal actors are engaged” (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 56, (1987))).
[13] 134 S.Ct. at 2473.