Solicitor General Asks High Court to Strike Pro-Fiduciary Presumption of Prudence


The U.S. Supreme Court should strike down the pro-fiduciary presumption of prudence that some federal courts have used to shield fiduciaries of employer stock plans from liability for declining share value, the U.S. solicitor general said in a brief filed with the high court (Fifth Third Bancorp v. Dudenhoeffer,U.S., No. 12-751, brief filed 11/12/13).          

In the Nov. 12 brief announcing the government's position, the solicitor general said that the courts that have imposed the presumption “have rested it largely on policy considerations that extend beyond [the Employee Retirement Income Security Act's] text and are unconvincing in their own right.”        

However, the solicitor general didn't urge review of whether plan fiduciaries could be liable for misstatements contained in Securities and Exchange Commission filings that have been incorporated into plan documents. On that point, the solicitor general said that “no conflict of authority exists on that issue.”         

In 2012, the U.S. Court of Appeals for the Sixth Circuit reversed a district court ruling that Fifth Third Bancorp didn't breach its fiduciary duties by continuing to offer company stock as a retirement plan investment option at a time when the stock's price dropped 74 percent as a result of the company's involvement in subprime mortgage lending.         

In its ruling, the Sixth Circuit determined that the presumption of prudence that shields fiduciaries of plans that invest in employer stock from liability didn't apply at the pleadings stage of litigation.           

Stock-Drop Claims          

The lawsuit against Fifth Third was brought by participants in its employee stock ownership plan. The participants alleged that the plan's fiduciaries imprudently allowed investment in company stock that was overvalued because of inaccurate financial statements that didn't properly disclose the company's risky lending practices.         

The participants further alleged that the fiduciaries violated their duties by failing to provide complete and accurate information or to correct inaccurate statements and misleading omissions about the company's financial condition and prudence of investing in its stock. This allegedly inaccurate and incomplete information appeared in filings with the SEC, which were incorporated by reference into the plan's summary plan description.         

The district court dismissed the imprudent investment claim in 2010, finding that the complaint didn't allege the type of dire financial circumstances needed to establish a fiduciary breach under the pro-fiduciary presumption of prudence. It also dismissed the participants' misrepresentation claim on the basis that the defendants weren't acting as fiduciaries when they made the misstatements.         

Sixth Circuit Applies Pfeil          

On appeal, the Sixth Circuit observed that the district court's decision was issued before the Sixth Circuit's 2012 ruling in Pfeil v. State Street Bank and Trust Co., 671 F.3d 585 (6th Cir. 2012). The Pfeil court clarified that the presumption of reasonableness isn't a pleading requirement and isn't applicable at the motion-to-dismiss stage, the Sixth Circuit said.         

To that end, the Sixth Circuit clarified that the presumption of reasonableness can be overcome, when “applied to a fully developed evidentiary record,” if the participants show that “a prudent fiduciary acting under similar circumstances would have made a different investment decision.” The presumption-of-reasonableness test didn't apply to the participants' claims against Fifth Third because the claims hadn't moved beyond the pleadings stage, the Sixth Circuit reasoned, concluding that the participants plausibly alleged that Fifth Third breached fiduciary duties by failing to divest the plan's employer stock and removing the stock as an investment option.         

Finally, the Sixth Circuit also reversed the district court on the issue of the alleged SPD misrepresentations. ERISA requires plan administrators to issue SPDs, but it does not require a company to incorporate its SEC filings into the SPD, the Sixth Circuit said. It determined that Fifth Third “exercised discretion” when it chose to incorporate the SEC filings and that “selecting the information to convey through the SPD is a fiduciary activity.” The participants sufficiently alleged that Fifth Third breached fiduciary duties by providing false and misleading information about company stock, the Sixth Circuit concluded.

Excerpted from a story that ran in Pension & Benefits Daily (11/26/2013).