In a bit of a surprise, the United States Supreme Court declined today in Fifth Third Bancorp v. Dudenhoeffer to adopt the Moench presumption of prudence, which entitled fiduciaries of qualified defined contribution plans (including ESOPs) a presumption of prudence for continued investments in qualifying employer securities. In its holding, the Court did unanimously reverse the 6th Circuit’s ruling that a presumption of prudence exists only after the pleading stage. While the reversal itself may not come as a surprise, the Court’s rationale does, particularly given how the question accepted on certiorari was presented.
As noted in our prior blog posting on the case, the question on certiorari focused on whether plaintiffs must allege that a fiduciary abused its discretion in offering employer securities as an investment option in order to overcome the presumption that offering employer securities was reasonable. The Court seemed to reject the DOL’s request as Amicus Curiae to rule on whether the presumption of prudence exists at all. In today’s ruling though, the Court appears to have done just this in holding that “ESOP fiduciaries are not entitled to any special presumption of prudence…” and that “aside from the fact that ESOP fiduciaries are not liable for losses that result from a failure to diversify, they are subject to the duty of prudence like other ERISA fiduciaries.”
It was not all bad news for plans holding employer securities, as the Court did find in remanding the case back to the 6th Circuit that a complaint cannot simply allege that the employer security offering was imprudent. Instead, plaintiffs must allege an alternative action that the fiduciaries could have taken that would have been legal and consistent with the prudent fiduciary standard, taking into account securities laws and the impact of a decision modify the offering of employer securities. Specifically, the court held that:
- “Where a stock is publicly traded, allegations that a fiduciary should have recognized on the basis of publicly available information that the market was overvaluing or undervaluing the stock are generally implausible and thus insufficient to state a claim…” and
- “To state a claim for breach of the duty of prudence, a complaint must plausibly allege an alternative action that the defendant could have taken, that would have been legal, and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it. Where the complaint alleges that a fiduciary was imprudent in failing to act on the basis of inside information, the analysis is informed by the following points. First, ERISA’s duty of prudence never requires a fiduciary to break the law, and so a fiduciary cannot be imprudent for failing to buy or sell stock in violation of the insider trading laws. Second, where a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws. Third, courts confronted with such claims should consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.”
These latter holdings are certainly beneficial for plans of publicly-traded sponsors holding qualifying employer securities in the standard “stock drop” scenarios. For plans of non-publicly-traded entities though – a group that would include a great majority of private company ESOPs – the outcome here is a little more murky.
More to come on the impact of this ruling. Stay tuned.