Incorporation by reference of SEC filings into SPDs is a fiduciary act

The Ninth Circuit has joined the Sixth Circuit in ruling that the incorporation by reference of allegedly false and misleading SEC filings into plan summary plan descriptions is a fiduciary act under ERISA.

June 2013 opinion

In June 2013, the Ninth Circuit ruled that plan fiduciaries could not rely on the presumption of prudence with respect to the failure to remove artificially inflated company stock from the plan’s investment menu where the terms of the plan did not require or encourage investment primarily in employer stock (see Pension Plan Guide Report 2001, August 5, 2013). Absent the presumption of prudence, the court further determined that the plan participants sufficiently alleged that the fiduciaries violated their duty of care under ERISA.

The fiduciaries had maintained that omissions and misrepresentations made in statements to the SEC (Form 8-K and Form 10-K) were not made in their fiduciary capacity and, thus, could not be considered in an ERISA suit for breach of fiduciary duty. The court dismissed the distinction, noting that “[I]rrespective of the capacity in which the misleading statements were made, defendants made them and they were factored into the price of the Amgen stock.” Accordingly, the court ruled that the statements could be used to establish that the fiduciaries knew or should have known that the price of the company stock was artificially inflated and that the participants presumptively relied on the statements.

Revised opinion clarifies scope of fiduciary duty

In the revised opinion, the Ninth Circuit directly addressed the issue of whether the express incorporation by reference of the allegedly misleading SEC statements into the plans’ SPDs constituted a fiduciary act. Initially, the court drew a distinction between acts performed in a corporate capacity and those performed as ERISA fiduciaries. The preparation of documents exclusively for filing in accordance with securities law, and not to be incorporated ERISA required documents, such as a SPD, the court explained, would not be an act of an ERISA fiduciary. By contrast, the preparation and distribution of the SPDs, including the incorporation of the SEC filings by reference, were acts performed by the company officers in their fiduciary capacity.

The court relied on the Sixth Circuit’s opinion in Dudenhoefer v. Fifth Third Bancorp, that the SPD is a fiduciary communication to plan participants and the discretionary act of selecting the information to convey through the SPD is a fiduciary activity. The Ninth Circuit agreed with the Sixth Circuit that recognizing an artificial distinction between information directly stated in the SPD and information incorporated by reference would effectively authorize fiduciaries to communicate misleading and patently untrue information, while being insulated from ERISA liability.

Having established an ERISA foundation, the court, accordingly, affirmed its earlier holding that the statements made in the SEC filings and incorporated into the plans’ SPDs could be used to establish that: (1) the fiduciaries knew or should have known that the price of the company shares was artificially inflated; and (2) the plan participants presumptively detrimentally relied on the statements under the fraud-on-the-market theory.

Source: Harris v. Amgen, Inc. (CA-9).

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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