The recent case, Dudenhoefer v. Fifth Third Bancorp, 2012 FED App. 0299P (6th Cir., 9/5/12) continues the procession of “stock drop” cases, where 401(k) plan participants allege that it was imprudent to provide them with an option of investing in employer stock. Of particular interest is the court’s discussion of the summary plan description (SPD). The plaintiffs claimed that the fiduciaries responsible for preparing and distributing the SPD violated their duties under ERISA, because the document contained material misrepresentations concerning the employer’s participation in the subprime lending market. The purported misstatements appeared, however, not in the text of the SPD but in SEC filings. Therefore, the underlying issue focused on whether or not a fiduciary could be held liable under ERISA for what was stated in documents created under laws unrelated to ERISA and possibly by persons who had no fiduciary connection to the plan.

Reversing the district court decision, the Sixth Circuit held that the claim could not be dismissed out of hand. The court reasoned that even though the SEC filings were not prepared in an ERISA fiduciary capacity, the decision to incorporate the filings into the SPD was a fiduciary act. Therefore, any misrepresentations that they might have contained were just as serious as if they had been set forth in the SPD itself. From the Sixth Circuit:

Defendants exercised discretion in choosing to incorporate the filings into the Plan’s SPD as a direct source of information for Plan participants about the financial health of Fifth Third and the value of its stock, an investment option in the Plan. . . . The SPD is a fiduciary communication to plan participants and selecting the information to convey through the SPD is a fiduciary activity. Moreover, whether the fiduciary states information in the SPD itself or incorporates by reference another document containing that information is of no moment. To hold otherwise would authorize fiduciaries to convey misleading or patently untrue information through documents incorporated by reference, all while safely insulated from ERISA’s governing reach. Such a result . . . would create a loophole in ERISA large enough to devour all its protections.

Although the Sixth Circuit held that incorporation of SEC filings into an SPD is a fiduciary act, it did not address what a fiduciary must do to satisfy any fiduciary responsibility it may have in this context. One approach, of course, would be to require fiduciaries to treat the contents of the SEC filing as if they were set forth verbatim in the SPD. A cautious fiduciary would then have to review the contents of the incorporated document independently and determine that they were not materially misleading.

The alternative is to consider whether a reasonable fiduciary would believe the SEC filing to be substantially accurate so that it can be incorporated by reference without line-by-line scrutiny. He would presumably consider whether the incorporated documents were facially compliant with SEC requirements, had been prepared by competent personnel, and had received proper legal and accounting review. If those standards were met, presumably he would not be liable for problems with the documents’ contents that were later discovered.

The latter approach is obviously less burdensome and does not reduce participants’ protections. The securities laws are pretty stringent about misrepresentations. Piling ERISA on top of them adds a substantial burden to fiduciaries with little apparent benefit. Whether the courts will take that view remains to be seen.