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.