August 21, 2019

DOL Argues Securities Law, not ERISA, Should Be the Basis for Whether to Disclose Adverse Information

In an August 18, 2019 amicus curiae brief to the Supreme Court in the case of Jander v. IBM, the Department of Labor argued that the proper standard for determining if a fiduciary should disclose insider information affecting company stock in a retirement plan should be what securities law requires. The brief argued that the case should be remanded to a lower court to make a decision on this basis, rather than, as in prior decisions, about whether disclosure would do more harm than good, the standard most courts have used since the Supreme Court's ruling in Fifth Third Bancorp v Dudenhoeffer.

The DOL argued that “Absent extraordinary circumstances, ERISA’s duty of prudence requires an ESOP fiduciary to publicly disclose inside information only when the securities laws require such a disclosure…Although the parties largely focus on the third consideration— whether a prudent fiduciary could not have concluded that disclosure would do more harm than good—the proper analysis should be informed by the requirements and objectives of the securities laws. The federal securities laws provide a comprehensive scheme of public disclosure rules designed to protect investors…There is no sound reason to adopt a different set of disclosure rules to protect those investors who also happen to be investors through an ESOP, or the ESOP itself. Accordingly, a prudent fiduciary could not rely on ERISA as a basis for declining to disclose information that he is required by the securities laws to disclose, and thus for concluding that to do so would do more harm than good to the fund and its participants and beneficiaries. But by the same token, a prudent fiduciary could conclude that not disclosing information that the securities laws do not require him to disclose would be consistent with the objectives of the securities laws, and thus that disclosure would do more harm than good.”

This alternative approach would arguably present as stiff a challenge for plaintiffs as the "more harm than good" standard. Plaintiffs could prevail, but it would be an uphill battle. The DOL argued that “To be clear, the fact that a prudent ESOP fiduciary without a personal securities-laws obligation to disclose would rarely, if ever, have an ERISA-based personal duty to publicly disclose inside information does not mean that he has no ERISA-based duty to do something in response to inside information suggesting that the employer’s stock is not a prudent investment.”