October 5, 2015
- Council Asks U.S. Supreme Court to Review ‘Stock Drop’ Case
- ‘Women’s Pension Protection Act’ Introduced in Senate
- DOL Notice Supports QPAM Exemption from Prohibited Transactions
Council Asks U.S. Supreme Court to Review ‘Stock Drop’ Case
In an amicus (“friend of the court”) brief filed on October 5, the Council urged the U.S. Supreme Court to consider a case with major implications for retirement plan fiduciaries.
In Harris et al. v. Amgen et al., the plaintiffs (current and former employees of Amgen and AML), participated in two retirement plans that qualified as "eligible individual account plans" under ERISA. When the value of Amgen common stock fell, the plaintiffs alleged that the employers breached their fiduciary duties. Lawsuits based on a plan fiduciary’s alleged failure to divest of an investment – company stock – that subsequently drops in value are commonly known as “stock drop” suits. This case is significant because of the Ninth Circuit’s interpretation of the U.S. Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer.
The Supreme Court had previously vacated the Ninth Circuit’s prior ruling and sent the case back for further consideration in light of the Dudenhoeffer decision, which established new pleading standards in fiduciary stock drop cases. The Supreme Court, in Dudenhoeffer, indicated that“[t]o state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary would not have viewed as more likely to harm the fund than to help it.”
As the Council’s brief argues, the Ninth Circuit largely misinterpreted those new standards when it issued a new decision and later amended and replaced that new decision and denied a more comprehensive re-hearing in the case. The amended opinion indicated that if fiduciaries simply stopped allowing investment in the company stock once they were made aware of negative information, they would have mitigated the effect of the eventual stock drop on plan participants.
In Dudenhoeffer, the Supreme Court also stated that courts should “consider whether the complaint has plausibly alleged that a prudent fiduciary could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price.”
The Council’s brief further notes that this ruling expands fiduciary liability far beyond what was intended under ERISA. “If the Ninth Circuit’s decision is allowed to stand, there will be no effective pleading controls to weed out meritless company stock claims. The decision also leaves fiduciaries in a quandary as to what appropriate action should be taken with a stock fund. The upshot is that employers are likely to react by eliminating company stock as an investment option in their pension plans, a result that would both frustrate congressional intent and foster retirement insecurity.”
The Council, together with the U.S. Chamber of Commerce, offered similar arguments in an amicus ("friend of the court") brief with the Ninth Circuit at the earlier stage (See the July 2, 2013, Benefits Byte).
The Supreme Court will likely announce whether it will take up the case sometime between November 2015 and January 2016. For more information on this issue or the Council's amicus brief program, contact Jan Jacobson, senior counsel, retirement policy, at (202) 289-6700.
‘Women’s Pension Protection Act’ Introduced in Senate
Senator Patty Murray (D-WA), the ranking Democratic member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, has introduced a bill that would expand access to workplace retirement plans, specifically targeting low-wage and part-time workers.
According to a fact sheet released by Murray’s office, the Women’s Pension Protection Act (S. 2110) would amend the minimum participation standards for long-term, part-time workers to “require employers to allow employees to participate in a plan once they have reached the earlier of the current minimum participation standards (age 21 or the completion of one year of service (generally 1,000 hours of service during a 12-month period)) or once they have completed at least 500 hours of service for three consecutive years.” This provision was previously featured in President Obama’s Fiscal Year 2016 federal budget proposal.
The measure seeks to “safeguard” retirement savings by extending current defined benefit plan spousal consent protections to defined contribution plans. Under S. 2110, consent would be required from both spouses before either may take a distribution or loan from a defined contribution arrangement like a 401(k) plan.
S. 2110 also includes a “financial literacy” component, consisting of two provisions: (1) financial providers “would be required to provide a link to the Consumer Financial Protection Bureau in any offer for the sale of a retirement financial product or service,” and (2) the U.S. Department of Labor would provide grants to established community-based organizations to improve the financial literacy of women who are of working or retirement age.
Introduction of S. 2110 follows a report commissioned by Murray earlier this year describing retirement challenges unique to women. The bill has 11 Democratic cosponsors (all women) and has been referred to the HELP committee for future consideration.
DOL Notice Supports QPAM Exemption from Prohibited Transactions
The U.S. Department of Labor (DOL) appeared to validate the importance of the Qualified Professional Asset Managers (QPAM) exemption to the ERISA prohibited transaction rules in a notice issued on October 2. These rules allow those dealing with funds holding retirement assets to engage in certain investment transactions that would otherwise not be allowed (for example, when an affiliated party has been convicted of criminal wrongdoing).
Prohibited Transaction Exemption (PTE) 2015-14 specifically allows QPAMs associated with Credit Suisse AG to continue to manage retirement plan assets provided certain requirements are met, effective November 18, 2015 (the first date following the last day of temporary relief provided under PTE 2014-11) through November 20, 2019. The exemption is structured to insulate the Credit Suisse QPAMs from Credit Suisse AG considering that the latter has not acted as a QPAM for ERISA-covered plans or IRAs. This will allow Credit Suisse AG’s retirement plan asset managers to continue to manage retirement assets despite the Zurich-based bank’s criminal conviction on conspiracy to violate U.S. tax laws.
In December 2014 written comments to DOL, the Council emphasized the importance of the QPAM exemption, without which it would be difficult for plans to engage professional asset managers, and plans would be severely limited in the investments that could be held in their portfolios and the counterparties with whom they could trade. (See the Council’s January 5 Benefits Byte for more details.)