Fiduciaries for employee stock ownership plans who want to avoid litigation over the prudence of their actions in either buying or selling employer stock should focus on the fallout from the U.S. Supreme Court's decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (U.S. 2014) and procedures set forth in the Department of Labor's June settlement agreement with GreatBanc Trust Co., according to experts in a video webcast sponsored by the American Law Institute—Continuing Legal Education.
According to the panelists, the Dudenhoeffer decision has spawned a requirement for fiduciaries to use an “efficient market presumption” when determining the price to buy or sell publicly-traded employer stock with the ESOP.
Additionally, the panelists advised, the DOL has specifically pointed to the GreatBanc settlement as the guidelines that its investigators will use when auditing an ESOP transaction and so fiduciaries would do well to be familiar with it.
Efficient Market Presumption
According to David Cowart, a partner at Dentons in Dallas, the Supreme Court's opinion in Dudenhoeffer replaced the previous special presumption of prudence enjoyed by ESOP fiduciaries with the “efficient market presumption.”
However, he warned, “I don't think many ERISA lawyers or ERISA fiduciaries have the faintest idea what the efficient market presumption even is.
David Godofsky, a partner at Alston & Bird LLP in Washington, summarized the presumption as “you are not smarter than the market.” He warned that, if the stock market values the employer stock at a certain price, using that price in a transaction would allow the ESOP fiduciary to successfully argue that the transaction was at least presumptively prudent.
Cowart agreed, advising plan fiduciaries to engage in what he called a “prudent decision matrix,” which would involve periodic and regular reviews of the employer stock using benchmarks. He also argued that plan sponsors might consider appointing an independent fiduciary without access to inside information or at least engaging an outside adviser to evaluate the stock itself.
Finally, Cowart urged plan fiduciaries to become more familiar with securities laws, indicating that the recent decision by the U.S. Court of Appeals for the Ninth Circuit in Harris v. Amgen, Inc., 770 F.3d 865 (9th Cir. 2014) implicated the close relationship of those laws with the duties of prudence and loyalty with which ESOP fiduciaries are charged.
Excerpted from a story that ran in Pension & Benefits Daily (12/05/2014).
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