Mixing SEC Filings and SPDs? Could Lead to a Fiduciary Hangover

November 5, 2013

Authored by: benefitsbclp

While “stock-drop” cases (i.e. cases based on the decline in value of company stock offered as an investment option in a retirement plan) are not new these days, a recent Ninth Circuit case added a new spin that retirement plan fiduciaries should be aware of. In Harris v. Amgen, the court found that statements made in SEC filings and expressly incorporated into a plan’s SPD are fiduciary activities that can form the basis of liability under ERISA.

Background: In June, the Ninth Circuit reversed a district court’s decision dismissing an ERISA lawsuit alleging breach of fiduciary duty when the company’s stock value declined, including stock held in two employee stock-ownership plans. Employees claimed that plan fiduciaries violated their duty of care “by continuing to provide Amgen common stock as an investment alternative when they knew, or should have known, that the stock was being sold at an artificially inflated price.” The court agreed. Last month, in an amended opinion, the court clarified its decision with respect to statements in SEC filings incorporated into SPDs.

Analysis: First, the court determined the decision to invest in company stock was not protected by the presumption of prudence (articulated in 1995 in the Moench case) because plan terms did not require or encourage investment in employer stock. Next, without the presumption in place, the court found the fiduciaries violated the normal prudent man standard by permitting continued investments in company stock when they knew, according to SEC filings, the stock price was inflated. While the fiduciaries contended that their omissions and misrepresentations were not made in their fiduciary capacity, the court noted that they did more than merely file and distribute the SEC filings (a corporate action), and instead, they incorporated them by reference into the plan’s SPD (a fiduciary action). Thus, the distribution of the SPDs, including the incorporation of the misleading statements, were acts performed in a fiduciary capacity.

Take-Away: Plan fiduciaries should be cautious about blurring the lines between SEC filings and plan documents (including incorporating SEC filings into SPDs), since this may increase ERISA liability exposure. Consideration should be given to creating an SPD for the plan which is separate from the prospectus, offering circular, and offering circular supplements covering employer stock when it is an available investment under the plan.