Digesting Recent Stock-Drop Analyses - A Possible Alternative to the Moench-ies
With all the cases and articles swirling around the question of when there is a fiduciary duty to stop acquiring or to dispose of employer securities, and the recent oral arguments on the point before the Second Circuit, I'd like to set out a possible analytical framework, as follows:
1. First, I want to assume for the moment a situation in which a plan will be investing, or continuing to invest, in employer stock which is publicly traded and for which there is substantial float, and that there is a stock drop that in no way involves fraud, malfeasance or shenanigans of any kind. I think it makes sense to deal with the base case before going on to permutations.
2. ERISA, in Section 404(a)(1)(D), says that you have to follow plan documents insofar as they are consistent with ERISA. This is a command - it's mandatory. If the plan tells you to do something, you must do it. The DOL has recognized this directive in the context of the employer-securities question going all the way back at least to its seminal brief in the Texas Air case.
3. A. The DOL has with some success interpreted the "to the extent" language as sweeping in ERISA's prudence requirements. While that's not necessarily a completely obvious connecting of the dots, the position has gotten broad acceptance. Thus, under this construct, a fiduciary does not have to, and indeed cannot, follow a plan provision that would require the fiduciary to act imprudently in breach of ERISA.
B. There's potentially a real tension here, in that any given decision could bring about a violation of one rule or the other - you follow the plan document and risk breaching your prudence obligations, or you determine that it would be imprudent to follow the plan document and risk violating the rule requiring you to comply with the plan documents. The good news is (i) the range of prudence is generally broad, so in practice you may well not have a prudence violation for following the plan documents even if there's some murkiness surrounding the appropriateness of the decision, and (ii) on the other side of the coin, if you cogently decide that to follow the plan documents would be imprudent, and then in a measured way decline to follow the plan, a court might well be expected to be sympathetic to your approach. (See, e.g., Summers v. State Street (involving United Air Lines); cf. Tatum v. RJ Reynolds, Bunch v. WR Grace (both involving divestitures of stock where the stock subsequently increased in value).) (I’ll resist the inclination to say something like, “‘Moench’ a ‘Bunch’ of . . . .”)
4. Let's now assume a plan provision that says that a plan, or a particular investment fund under a plan, must be invested 100% in employer stock. What one is left with, then, if the provision requires specified fiduciary conduct by dictating a particular investment (more on that later), is a requirement that the plan be and stay invested in the stock unless . . . it is affirmatively outside the range of prudence. That's an important point, I think: it's not that you CAN invest or stay invested; it's that you must. So, then, once the fiduciary determines that a given course of conduct is within the range of prudence (or, at least, is not imprudent), the fiduciary must (as opposed to can) follow the plan documents and, in the plan imagined above, must (as opposed to can) invest and stay invested in the stock. There are attorneys over the years that have tried for this very reason to put as much clear direction into plans on investment issues, where a particular course of investment (e.g., investment in employer stock) has been desired (including in the case of plan terminations that involve specific dispositions of stock or other assets).
5. Under this approach, when is it possible to have an investment in publicly traded company stock be affirmatively outside the range of prudence? Assuming, again, no fraud, malfeasance or other shenanigans, I think it's going to be a pretty rare case in which the investment or ongoing investment is affirmatively outside the range of prudence, and even a rarer case in which the investment is provably outside the range. It's possible, I suppose - the stock could be outrageously volatile, or there could be other exceptional factors, but, without a diversification requirement, and with presumably rational pricing in a public market (assuming adequate float), I'm not sure that such a case is likely ever to arise, as a practical matter.
6. I think the DOL's FAB on a directed trustee's responsibilities (Field Assistance Bulletin 2004-03) is extremely instructive here, even if not entirely apposite. There, the question was a directed trustee's following of the directions of a named fiduciary, and here the question is a fiduciary's following of a plan provision. At the end of the day, though, the real ultimate question is: In what circumstances is a fiduciary authorized and maybe required not to do what it's told (whether by a named fiduciary or the plan) and, moreover, when does the fiduciary have to do what it's told (whether by a named fiduciary or a plan). The DOL essentially asks, at least as to pricing, how it's possible for anyone to be smarter than the market. Buy high sell low, anyone? If people are buying and selling at any given price on any given day, on what basis am I to conclude that they're necessarily wrong (indeed, irrational or at least imprudent)? The outside-the-range-of-prudence threshold seems like a pretty high bar, I would think.
7. A. This analysis is not really a Moench analysis, as it doesn't derive a free-standing presumption in favor of investing in employer stock from the penumbra of the network of ERISA provisions that facilitate and arguably encourage the holding of employer stock. I think the approach I’m suggesting is more of a strict application of the plan-documents rule of 404(a)(1)(D) (see also the Kennedy case), in the context of the inapplicability of the diversification rule to eligible individual account plans investing in employer securities. The Moench approach may well effectively get you to the same place, but I think the two approaches are not entirely identical.
B. I acknowledge that the plan-documents approach takes a potentially troubling turn in the case of plan-directed investments in other than employer securities, as you could get to a must-follow-the-plan result for any kind of investment, if whatever you’re required to do would satisfy applicable diversification requirements. What, however, do you do with plain dictate of the plan-documents rule in 404(a)(1)(D), which is a rule of general applicability? I think you do add the diversification wrinkle, but otherwise have the same overall analysis.
If I have this right, then the Citigroup and McGraw-Hill cases, which are now poised to be decided by the Second Circuit following the recent oral arguments, may have gone a step too far. To suggest that there is no fiduciary component to an otherwise fiduciary decision that happens to be manifested by a plan provision seems to allow mischief beyond that intended to be permitted by ERISA. For example, what if there is downright fraud that is evident to the plan fiduciaries or other elements that may be argued to rise to the level of a clear fiduciary breach? And, in any event, the structure of Section 404(a)(1)(D) arguably doesn’t seem to require that an investment-type provision in the plan be rendered non-fiduciary in nature merely by virtue of its inclusion in the plan (even in the case of investment in stock encouraged by other ERISA provisions).
Further, to me, you don’t need to go as far as the Southern District of New York has gone in order to get to the results they’ve reached. Indeed, because of the difficulty in imagining how a stock-investment could affirmatively be outside the range of prudence, the approach I’m suggesting could well support dismissal at extremely early stages of the litigation (albeit maybe not with the ringing out-of-court approach implicit in the Southern District’s approach).
I also think that the construct I’m suggesting above is consistent with Chief Justice Roberts' fairly apparent push in MetLife and Conkright to drive a trend (also evident in Justice Souter’s Kennedy opinion) towards focusing on, and being quite concerned about, administrative, legal and other costs surrounding an employer's decision to provide employee benefits. Using an almost no-good-deed-goes-unpunished approach, the Court seems to be extremely concerned that disputes (Kennedy), claims (MetLife) and errors (Conkright (see also the recent Verizon scrivener's-error case in the Seventh Circuit)) could bring unexpected costs upon the employer as its reward for having decided to provide employee benefits to its employees. This backdrop is already starting palpably to filter down to the lower courts.
We’ll see where the Second Circuit and other courts take all of this. I’m only suggesting that the Moench presumption, with its arguably somewhat dissatisfying technical underpinnings, may not be the only way to get to a result that many of us think is the right one under ERISA. I will now duck, in the event that slings and arrows are dispatched from all sides.