The Securities and Exchange Commission is poised to play an expanded role in ERISA litigation on how securities laws affect fiduciaries' management of company-stock funds in defined contribution plans.
By year-end, the SEC is expected to file a friend-of-the-court brief in a class-action suit by participants in a 401(k) plan administered by oil giant BP PLC. They allege breach of fiduciary duty in managing the BP Stock Fund option in the plan after BP's stock price fell following the April 2010 explosion of the Deepwater Horizon oil platform in the Gulf of Mexico that killed 11 workers.
“This will be a big deal,” said James P. McElligott Jr., a Richmond, Va.-based partner for McGuireWoods LLP, referring to the SEC amicus brief, which is scheduled to be filed on Dec. 28. “Much of the argument turns on what is the role of the fiduciary.” The Department of Labor is scheduled to file a concurrent friend-of-the court brief.
ERISA attorneys say the SEC's comments could transcend the facts of this case — Whitley et al. vs. BP PLC et al. — by providing greater detail on how plan fiduciaries can address the use of material non-public information in managing company stock funds without violating securities laws.
They also say the SEC's brief could help clarify a series of recommendations offered by the U.S. Supreme Court in its signature June 2014 decision on stock-drop cases — Fifth Third Bancorp et al. vs. Dudenhoeffer et al.
The Supreme Court provided several standards that lower courts should consider in assessing stock-drop allegations. However, it also said the SEC hadn't provided sufficient guidance on how fiduciaries should deal with non-public information in their administration of company stock plans.
Guidance from the SEC “would be a very interesting development,” said James Fleckner, a partner at Goodwin Procter LLP, Boston. “The SEC typically doesn't weigh in on ERISA cases. It was interesting that Justice Breyer observed (in the Supreme Court decision) that the SEC didn't weigh in.”
Justice Stephen Breyer wrote the 9-0 Supreme Court decision in the Fifth Third case. The court nullified a long-held legal principle — the presumption of prudence — that set a high bar for plaintiffs who argued 401(k) plan administrators breached their fiduciary duties when shares of company shares fell sharply.
This presumption of prudence — essentially giving sponsors the benefit of the doubt in offering company stock in DC plans — allowed many sponsors to win dismissals of stock-drop lawsuits. Mr. Breyer criticized presumption of prudence as “defense-friendly,” adding that lower courts should analyze stock-drop cases “through careful, context-sensitive scrutiny of a complaint's allegations.”
He outlined three guidelines for lower courts, adding that there are gray areas in the intersection of securities law and ERISA duties. The SEC “has not advised on its views on these matters, and we believe those views may well be relevant,” he wrote.
Less clear elsewhere
While Mr. Breyer wrote ERISA “does not require a plan fiduciary .... to perform an action — such as divesting the fund's holdings of the employer's stock on the basis of inside information — that would violate securities laws,” he noted the law is less clear elsewhere.
In particular, ERISA is less clear when a fiduciary refrains from making additional purchases for the company-stock plan based on insider information or fails to disclose insider information “so that the stock would no longer be overvalued,” he wrote. Lower courts must determine if such actions “could conflict with complex insider trading and corporate disclosure requirements.”
Mr. Breyer wrote that lower courts must evaluate whether fiduciaries' stopping the purchases of company stock for a DC plan might be viewed by the public as a negative commentary on the stock's value. Courts also must decide if fiduciaries stopping stock purchases or “publicly disclosing negative information would do more harm than good” by causing the stock to fall and the stock fund to lose value, he added.
ERISA attorneys say the refrain-from-purchase and the more-harm-than-good guidelines are causing confusion among sponsors and lower courts.
“These are hard standards for fiduciaries to comply with because it's not clear what they can do or should do with non-public information,” said Mr. Fleckner.
“There is still uncertainty how Fifth Third Bancorp vs. Dudenhoeffer should be applied to sponsors holding company stock,” Mr. Fleckner added.
Plan executives “don't want to base their decisions solely on litigation risk,” said Jeremy Blumenfeld, a Philadelphia-based partner at Morgan Lewis & Bockius LLP. Like several other ERISA attorneys interviewed, Mr. Blumenfeld said the SEC could help plans better manage company-stock options by providing more guidance about the halting of purchases of additional stock based on non-public information.
“The SEC has the option of making life miserable for fiduciaries,” said Thomas E. Clark Jr., St. Louis, of counsel to The Wagner Law Group “Congress should get involved to resolve the conflict on insider trading vs. a fiduciary's duty of prudence.”
In the near term, however, it will be up to the SEC to provide guidance via the Whitley case, part of a series of lawsuits related to BP's management of the company stock fund for the plaintiffs' 401(k) plan and for three other BP 401(k) plans.
On Oct. 30, U.S. District Judge Keith Ellison in Houston dismissed complaints by participants who alleged that certain BP corporate and plan executives had breached their fiduciary duties by permitting participants to invest in the BP Stock Fund after the Deepwater Horizon explosion.
However, that decision — In Re; BP PLC Securities Litigation — addressed whether certain executives were fiduciaries. Mr. Ellison also ruled participants didn't prove allegations that the defendants had failed in their duty to monitor the BP stock.
In the Whitley case, Mr. Ellison is dealing with broader issues of fiduciary responsibilities. Participants allege plan executives didn't disclose “material facts” and didn't conduct “any procedural review” to determine the prudence of continuing investing in the company stock fund, according to court documents.
Mr. Ellison allowed defendants to file an appeal with the 5th U.S. Circuit Court of Appeals for an interpretation of the Supreme Court's “more-harm-than-good” standard. As part of this interlocutory appeal, the plaintiffs submitted a response while the SEC and DOL plan to file amicus briefs.
Haven't chosen sides
Although amicus briefs often are filed on behalf of specific parties, court documents indicate the SEC and DOL haven't chosen sides. (Several attorneys speculated that the DOL will support the plaintiffs because it has often filed friend-of-the-court briefs endorsing participants' arguments vs. those of sponsors or providers.)
“We think it's a big deal,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, referring to the SEC's pending amicus brief. “This could be significant.”
The American Benefits Council has filed an amicus brief in the Whitley case supporting BP. The council argued that a pro-participant ruling could cause sponsors to drop company-stock investment options because “their risk of ERISA liability, or the costs of defending claims, would be too great.”
Supporting participants with their amicus brief in the Whitley case are the AARP Foundation Litigation, Washington, and the National Employment Lawyers Association, Oakland, Calif.
They contend BP has tried to “distort” the meaning of the Supreme Court's ruling by creating an “insurmountable requirement” for any plaintiffs in a stock-drop lawsuit.
However, the AARP Litigation Foundation does agree with the American Benefits Council on the potential impact of the SEC's comments.
“It is going to be very interesting what the SEC will say because it will set forth how the SEC and the DOL will reconcile their purposes,” Mary Ellen Signorille, senior attorney for AARP Foundation Litigation, said in an interview. “It will provide a way forward for everybody.” n
This article originally appeared in the December 14, 2015 print issue as, "SEC expected to take big step in BP company stock lawsuit".