The Securities and Exchange Commission endorsed Labor Department guidelines governing the proper behavior for fiduciaries who manage company-stock funds in defined contribution plans and who learn that employer stock is “materially overvalued due to an undisclosed fraud.”
The impact of the SEC's comments — filed in an amicus brief in a stock-drop case, now before the 5th U.S. Circuit Court of Appeals in New Orleans — will go beyond this single case because it should clarify gray areas that have existed at the intersection of securities laws and the Employee Retirement Income Security Act.
The SEC filed its amicus brief late in the day on March 11 in Whitley et al. vs. BP PLC et al., a class-action lawsuit in which participants in a 401(k) plan run by the oil giant alleged that plan executives breached their fiduciary duties. The plaintiffs claim that BP executives failed to provide material information before and after BP's stock plunged following the April 20, 2010, explosion on the Deepwater Horizon oil rig in the Gulf of Mexico that killed 11 workers.
The defendants “contend, among other things, that it was impossible for them to have taken any action that would satisfy their ERISA duties without violating the securities laws,” the SEC document said. However, the SEC cited several examples in which ERISA standards and securities laws are in harmony.
The Department of Labor also filed a separate amicus brief on March 11, outlining the responsibilities of fiduciaries. Both the SEC and DOL documents were filed in support of the plaintiffs.
“In the circumstances here, putting an immediate end to the fraud advances the objectives of both ERISA and securities laws,” the DOL's amicus brief said.
The SEC said its amicus brief supplemented the DOL comments by describing what fiduciaries could do if they “are aware that the employer's publicly traded securities are materially overvalued due to an undisclosed fraud.”
For example, fiduciaries could take several actions — disclosing fraud, suspending purchases and sales of company stock when they become aware of fraud, and urging “the persons responsible for the fraud to disclose the fraud or report the fraud to the DOL and the SEC,” the SEC document said.
The SEC document also addressed plan executives' responsibilities regarding insider information and discussed how their actions must avoid doing “more harm than good.”
The “more-harm-than-good” concept was articulated in a June 2014 landmark decision by the U.S. Supreme Court. In Fifth Third Bancorp et al. vs. Dudenhoeffer et al., the court struck down the presumption-of-prudence principle, which the Supreme Court criticized as “defense friendly.” Fiduciaries managing company stock investments in DC plans frequently had been successful in relying on presumption-of-prudence to defeat stock-drop lawsuits.
In its 9-0 decision, the Supreme Court offered several suggestions on the appropriate legal behavior of fiduciaries managing company stock funds. It instructed lower courts to weigh how their responsibility under ERISA might conflict with the “complex insider trading and corporate disclosure requirements” of federal securities laws.
Writing for the court, Justice Stephen Breyer noted the SEC “has not advised us on its views on these matters, and we believe those views may well be relevant.” Among the key points in its amicus brief, the SEC said:
- It agreed with the DOL that a DC plan executive who is aware of an employer's undisclosed fraud “can satisfy ERISA obligations by disclosing the fraud.” Securities laws require a plan executive “who made or was responsible for misstatements or omissions constituting fraud” to make a public disclosure “that renders the prior statements not misleading.” Any disclosure must be public; a plan executive cannot disclose the fraud only to the participants in the company stock fund.
- It emphasized that a fiduciary must suspend purchasing and selling company stock on behalf of participants. ERISA may require fiduciaries to “refrain from purchasing additional shares of overvalued employer stock,” but they “must concurrently refrain from effecting sales” to avoid violating securities laws and “from trading on the basis of inside information about the employer's fraud.” Suspending trading must be reported “promptly” in an 8-K form.
- Several other DOL recommendations for fiduciaries “would not be inconsistent with the securities laws.” Noting that the DOL said a fiduciary “could urge persons responsible for the fraud to disclose it,” the SEC said such a request “does not conflict with securities laws.” Also, the DOL's suggestion that a fiduciary could report fraud to the DOL or SEC “would not conflict with securities laws,” the SEC said.
- The standard for defining “material” information in ERISA “is essentially identical” to the standard governing securities laws.