STATEMENT OF IDENTITY,
INTEREST, AND AUTHORITY TO FILE
The amicus curiae, Secretary
of the United States Department of Labor (the "Secretary") has
primary enforcement authority for Title I of the Employee Retirement Income
Security Act ("ERISA"), 29 U.S.C. § 1001, et seq. The Secretary's interests include promoting
uniformity of law, protecting beneficiaries, enforcing fiduciary standards, and
ensuring the financial stability of employee benefit plan assets. Secretary of Labor v. Fitzsimmons,
805 F.2d 682 (7th Cir. 1986) (en banc).
The Secretary has a
particular interest in this case because the district court's ruling undermines
the fiduciary's duty under ERISA section 404(a)(1)(D), 29 U.S.C. §
1104(a)(1)(D), to decline to follow the terms of a plan if following them would
require the fiduciary to breach his fiduciary duties.
On April 22, 2004, the court
granted the Secretary leave to file this brief on or before May 7, 2004.
QUESTIONS PRESENTED
1. Whether
amending a plan to require the sale of a particular plan asset is a fiduciary
act within the meaning of ERISA section 3(21), 29 U.S.C. § 1002(21).
2. Whether a fiduciary has a duty under ERISA section
404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), to ignore the terms of the plan
document where those terms require him to violate his fiduciary duties under
ERISA section 404(a)(1)(A) and (B), 29 U.S.C. § 1104(a)(1)(A) and (B).
STATEMENT OF THE CASE
Until June 15, 1999, RJR Nabisco Holdings, Inc. ("RJRN") was
the parent company of R. J. Reynolds Tobacco Co. ("RJRT"), R. J.
Reynolds Tobacco Holdings, Inc. ("RJRTH"), and several Nabisco food
companies. Tatum v. R. J. Reynolds
Tobacco Co., 294 F. Supp. 2d 776, 778 (M.D. N.C. 2003). The RJRN Capital Investment Plan (the
"Plan") was a 401(k) pension plan that had several investment options
from which the participants could choose, including the Nabisco Group Holdings
Common Stock fund and the Nabisco Common Stock fund (collectively "the
Nabisco stocks" or "Nabisco stock funds"). Id.
On
June 15, 1999, RJRT and RJRTH were "spun-off" as separate
companies. In anticipation of the
spin-off, the Plan was amended on June 14, 1999, to create a separate plan
known as the R. J. Reynolds Tobacco Capital Investment Plan (the "Tobacco
Plan") for the employees of RJRT and RJRTH after the separation. 294 F. Supp. 2d at 778. Under the terms of the Tobacco Plan, the
Nabisco stocks held by the Tobacco Plan were to be "frozen" as of
June 15, 1999. Id. With respect to the Tobacco Plan, the June
14, 1999 amendment provided that:
The Trustee shall maintain
the following separate Investment Funds within the Trust Fund: the Interest
Income Fund, [the Nabisco stock funds], the Total International Fund,
the Conservative Growth Fund, the Moderate Growth Fund and the Growth
Fund. All Investment Funds under the
Plan are active Funds; provided, however, the [Nabisco stock funds] are
frozen and, as of the Effective Date, Participants are prohibited from
investing contributions or reallocating amounts held under the Plan to such
Funds. In addition, the Trustee shall
maintain any other Investment Funds as are designated by the RJR Pension
Investment Committee.
Id. at 783 (emphasis added).
In October 1999, the Tobacco
Plan participants were notified that the frozen Nabisco stocks would be
eliminated from the Tobacco Plan on January 31, 2000. 294 F. Supp. 2d at 778.
On November 18, 1999, the Tobacco Plan was amended to specify the
investment options effective on February 1, 2000. Id. at 779. The
Nabisco stocks were not specified as options.
Id. The November 18, 1999
amendment also provided that "the Trustees shall maintain any other
Investment Funds as are designated by the RJR Pension Investment
Committee." Id. at
783.
In the months after the June 1999 spin-off, the stocks
substantially declined in value. 294 F.
Supp. 2d at 779. Market analysts rated
the stocks as attractive and recommended that investors buy or hold the stocks. Id.
The Tobacco Plan fiduciaries sold the Nabisco stocks on January 31,
2000, when their market prices had declined sixty and forty percent, to $8.50
per share and $30 per share respectively.
Id. Because of these
record low prices, the sale allegedly caused a substantial loss to the
plan. Id. By late June 2000, the price of those stocks
rose to $30 per share and $55 per share respectively. Id.
Richard Tatum brought a class action suit on behalf of himself and the
other plan participants against the Tobacco Plan fiduciaries alleging that they
violated their duties of prudence and loyalty under ERISA section 404(a)(1)(A)
and (B), 29 U.S.C. § 1104(a)(1)(A) and (B), by selling the Plan's Nabisco
stocks at a loss on January 31, 2000.
294 F. Supp. 2d at 779.
Defendants moved to dismiss and argued that the complaint fails to state
a claim because the challenged actions were not subject to ERISA's fiduciary
duties or, alternatively, even if the challenged actions were subject to
ERISA's fiduciary duties, the complaint fails to state a claim for breach of
fiduciary duty. Id. at 780. The district court granted the motion to
dismiss on the grounds that the challenged actions were not subject to ERISA's
fiduciary duty provisions because they were "performed as part of settlor
functions, and were not an exercise of fiduciary discretion." Id. at 783.
The
district court began with the proposition that the act of creating or amending
a plan is a settlor, not a fiduciary act.
294 F. Supp. 2d at 782, citing Lockheed Corp. v. Spink, 517 U.S.
882, 890 (1996). Accordingly, the June
14, 1999 amendments to the original Plan that created the Tobacco Plan and the
November 18, 1999 amendment to the Tobacco Plan were settlor functions. Id. at 783. The district court interpreted the November 18 amendment as
requiring the sale of the stocks on January 31, 2000. Id. Because the
plan documents required the sale, the court concluded that the plan's
fiduciaries were obligated to sell the stock and had no discretionary authority
as fiduciaries to do otherwise. Id. In the court's view, the decision to sell
"was made and effectuated pursuant to settlor authority," and could
not be challenged as activity subject to ERISA's fiduciary duties. Id. at 784.
The
district court erred in holding that the complaint does not state a claim for
relief that appellees violated their duties of prudence and loyalty under ERISA
section 404(a)(1)(A) and (B), 29 U.S.C. § 1104(a)(1)(A) and (B), when they sold
the Nabisco stocks on January 31, 2000.
ERISA places few
restrictions on plan sponsors in making plan design or settlor decisions such
as creating, amending, and terminating a plan and determining eligibility rules
and the type and level of benefits. Hughes
Aircraft Co. v. Jacobson, 525 U.S. 432, 443 (1999). Consequently, as explained below, the
Supreme Court has long held that when a plan sponsor amends a plan, even to
require the sale of a plan asset, the plan sponsor is not generally subject to
ERISA's fiduciary duties. Accordingly,
even assuming that the plan document was amended to require the sale of the
stocks, the plan sponsor's act of amending the plan was not a fiduciary act
within the meaning of ERISA section 3(21), 29 U.S.C. § 1002(21). E.g., Hughes, 525 U.S. at 443;
Sutton v. Wierton Steel Div. of Nat'l Steel Corp., 724 F.2d 406, 411
(4th Cir. 1983). This Court's decision
in Coyne & Delaney Co. v. Selman, 98 F.3d 1457 (4th Cir. 1996), does
not require a different conclusion.
Nevertheless, as plan
fiduciaries, the appellees who sold the stock had a duty under ERISA section
404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), to ignore the terms of the plan if
selling the stock on January 31, 2000, would violate their duties of loyalty
and prudence under ERISA section 404(a)(1)(A) and (B), 29 U.S.C. §
1104(a)(1)(A) and (B). E.g., Central
States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc.,
472 U.S. 559, 568 (1985); Wright v. Oregon Metallurgical Corp., No.
02-35853, 2004 WL 439861, at *7 (9th Cir. Mar. 11, 2004). Because a person is a fiduciary under ERISA
to the extent that he exercises discretionary authority or control over the
management or administration of a plan or exercises any authority or control
over its assets, ERISA section 3(21), 29 U.S.C. § 1002(21), the sale of plan
assets is unquestionably a fiduciary act subject to ERISA's fiduciary
responsibility provisions. As discussed
in section II, that responsibility includes a duty to refuse to follow the
terms of the plan if doing so would be imprudent or otherwise in violation of
ERISA. A plan sponsor cannot, as the
district court implicitly held, effectively eliminate the fiduciary duties of
prudence and loyalty by mandating the sale of a plan asset in the text of the
plan.
Tatum's reliance on Coyne
& Delaney, 98 F.3d at 1464-66, to support his argument that the act of
amending the plan to require the sale of the stocks was subject to ERISA's
fiduciary rules is misplaced. The
question in that case was whether the plan sponsor, Coyne & Delaney, had
standing to bring suit, which, in turn, required the court to determine whether
Coyne & Delaney was a plan fiduciary.
Id. at 1464. The Court
found that Coyne & Delaney had the "power to appoint, retain and
remove the Plan Administrator and Plan Supervisor," id., and held that it "was a fiduciary to
the limited extent it exercised its discretionary responsibility 'to monitor
appropriately' and remove the Plan Administrator and Plan
Supervisor." Id. at
1465-66, quoting Miniat, Inc. v. Global Life Ins. Group, Inc.,
805 F.2d 732, 736 (7th Cir. 1986) and Leigh v. Engle, 727 F.2d 113, 135
(7th Cir. 1984).
As settlor, Coyne &
Delaney designated particular persons to be the Plan Administrator and Plan
Supervisor in the text of the plan itself.
Coyne & Delaney, 98 F.3d at 1461. If Coyne and Delaney chose to remove those persons, it did so by
amending the plan. Id. The appointment, monitoring, and removal of
plan fiduciaries are themselves fiduciary functions. Hickman v. Tosco Corp., 840 F.2d 564, 566 (8th Cir. 1988); Miniat, 805 F.2d at 736; Leigh,
727 F.2d at 135; 29 C.F.R. § 2509.75-8 at D-4. Coyne & Delaney thus exercised both the fiduciary discretion
to appoint, monitor, and remove the Plan Administrator and Plan Supervisor, and
the settlor power to amend the plan to effectuate those decisions. Under ERISA, the employer sponsoring the
employee benefit plan is authorized to act in two separate capacities: as the
settlor of the trust when it sets up or amends the plan, and as a fiduciary
when it administers the plan it has set up.
Sutton, 724 F.2d at 410-11.
The fact that these two separate functions were performed by one entity
did not make the act of amending the plan a fiduciary act.
To be sure, there is
somewhat broader language in Coyne and Delaney, which Tatum cites:
We recognize that plan sponsors such as Delaney are generally
free under ERISA to amend plans without triggering fiduciary status. See Lockheed, 517 U.S. at
[889], 116 S. Ct. at 1789. However, the
power (through plan amendment) to appoint, retain and remove plan fiduciaries
constitutes "discretionary authority" over the management or administration of a plan within the meaning of §
1002(21)(A).
98 F.3d at 1465 (citations omitted). This language, however, need not be read as
indicating that amending a plan to require the sale of the stocks (or to
appoint a new fiduciary for that matter) is itself a fiduciary act. For one thing, such a reading blurs the
well-established distinction between settlor and fiduciary function, and
thereby conflicts with the Supreme Court's rulings in Hughes, Lockheed,
and Curtiss-Wright.
Nor is the broad reading
urged by Tatum essential to the Court's central holding that the authority to
appoint, monitor, and remove plan fiduciaries confers fiduciary status. The fact that the Court recognized that
Coyne & Delaney's monitoring and removal authority derived from its power
to amend the plan does not mean that this Court considered the act of amending
the plan itself to be a fiduciary act.
Instead, Coyne & Delaney is best read as standing for the
more narrow proposition that the plan sponsor "was a fiduciary to the
limited extent it exercised its discretionary responsibility 'to monitor
appropriately' and remove the Plan Administrator and Plan
Supervisor." 98 F.3d at 1466 (emphasis added; citations
omitted).
Therefore,
the company's act of amending the plan was not itself a fiduciary act within
the meaning of ERISA section 3(21), 29 U.S.C. § 1002(21), and the defendants
are not subject to ERISA's fiduciary duties merely by virtue of their
involvement, if any, in amending the plan.
II.
Even
If The Tobacco Plan Required The Sale Of The Nabisco Stocks, The Fiduciaries
Had The Duty To Ignore The Plan Document If It Was Imprudent Or Disloyal To
Sell
The district
court implicitly held that a fiduciary is freed from his fiduciary duties if
acting pursuant to plan terms. The court
assumed that following the terms of the plan in administering the plan's assets
is as much a settlor function as writing the plan. The court's reasoning is flawed because it ignores ERISA section
404(a)(1)(D), 29 U.S.C. § 1104(a)(1)(D), which requires a fiduciary to follow
the terms of the plan document only "insofar as such documents and
instruments are consistent with the provisions of [title I] and title IV"
of ERISA. While the act of amending the
plan to require the sale of the stocks was a settlor function, the fiduciary's
decision to sell the stocks in a block on January 31, 2000, was a fiduciary act
subject to the duties of prudence and loyalty under ERISA section 404(a)(1)(A)
and (B), 29 U.S.C. § 1104(a)(1)(A) and (B).
The plain import of section 404(a)(1)(D) is that a plan sponsor may not
simply override ERISA's requirements.
To the contrary, section 404(a)(1)(D) provides that the fiduciary must
override plan provisions that are not in accordance with ERISA's
requirements.
The appellees correctly
contend that a fiduciary has a general duty under section 404(a)(1)(D) to
administer the plan in accordance with the plan documents, Appellees' Brief at
29, but that is only half the story.
The duty to follow plan terms is expressly limited: the plan fiduciary may follow plan terms
only "insofar as" they are consistent with ERISA. If obeying a plan provision requires the
fiduciary to act imprudently and disloyally in violation of ERISA section 404(a)(1)(A)
and (B), 29 U.S.C. § 1104(a)(1)(A) and (B), the provision is not consistent
with ERISA and the fiduciary has a duty to disregard it. Central States, 472 U.S. at 568
("trust documents cannot excuse trustees from their duties under
ERISA"); Wright, 2004 WL 439861, at *7 ("ERISA requires
fiduciaries to comply with a plan as written unless it is inconsistent with
ERISA"); Laborer's Nat'l Pension Fund v. Northern Trust Quantitative
Advisors, Inc., 173 F.3d 313, 322 (5th Cir. 1999) ("In case of a
conflict, the provisions of the ERISA policies as set forth in the statute and
regulations prevail over those of the Fund guidelines"); In re Sears,
Roebuck & Co. ERISA Litig., No. 02 C8324, 2004 WL 407007, at *4 (N.D.
Ill. Mar. 3, 2004); In re Enron Corp. Sec., Derivative &
"ERISA" Litig., 284 F. Supp. 2d 511, 670 (S.D. Tex. 2003)
("an investment fiduciary must disregard plan documents if following their
terms would be imprudent"); but see Nelson v. IPALCO
Enters., No. IP02-0477-C-H/K, 2003 WL 402253, at *8 (S.D. Ind. Feb. 13,
2003) ("ERISA should not be construed so as to require the plan
administrator to violate clear instructions in the plan").
Two recent cases
involving the purchase or sale of stock are instructive. In Enron, the plan required employer
contributions to be made "primarily in Enron stock." 284 F. Supp.2d at 669. The court expressly held that the
fiduciaries had a duty to disregard this command if it would be imprudent to
follow it. Id. at 669-70. Similarly, the Sears plan required employer
contributions to be invested exclusively in Sears stock and required that Sears
stock be offered as an investment option.
Sears, 2004 WL 407007, at *4.
The court held plaintiffs stated a claim that the fiduciaries had a duty
to override the plan language if it was no longer prudent to acquire Sears stock. Id.
These two recent
cases are consistent with a long line of cases holding that fiduciaries must
act prudently and solely in the interest of the participants and beneficiaries
in deciding whether to purchase or retain employer securities despite plan
language requiring the plan to purchase employer securities. See, e.g., Kuper v. Iovenko, 66 F.3d 1447, 1457
(6th Cir. 1995); Moench v. Robertson, 62 F.3d 553, 569-72 (3d Cir.
1995); Fink v. Nat'l Sav. & Trust Co., 772 F.2d 951, 954-56 (D.C.
Cir. 1985) (ERISA's prudence and loyalty requirements apply to all investment
decisions made by employee benefit plans, including those made by plans that
may invest 100% of their assets in employer stock); Donovan v. Cunningham,
716 F.2d 1455, 1467 (5th Cir. 1983) ("Though freed by
Section 408 from the prohibited transaction rules, ESOP fiduciaries remain
subject to the general requirements of Section 404"); Eaves v. Penn,
587 F.2d 453, 459 (10th Cir. 1978) ("While an ESOP fiduciary may be
released from certain Per se violations on investments in
employer securities . . ., the structure of the Act itself requires that in
making an investment decision of whether or not a plan's assets should be
invested in employer securities, an ESOP fiduciary, just as fiduciaries of
other plans, is governed by the 'solely in the interest' and 'prudence' tests
of §§ 404(a)(1)(A) and (B)"); Canale v. Yegen, 789 F. Supp. 147,
154 (D.N.J. 1992); Ershick v. Greb X-Ray Co., 705 F. Supp. 1482, 1487
(D. Kan. 1989) (plan terms authorizing ESOP fiduciary to invest up to 100% of
plan assets in employer stock could be followed only if the investment decision
was prudent), aff'd, 948 F.2d
660 (10th Cir. 1991); Central Trust Co. v. American Avents Corp., 771 F.
Supp. 871, 874-76 (S.D. Ohio 1989) (ESOP trustee properly ignored pass-through
voting provisions that would have prevented sale of an ESOP's stock where the
trustee determined that such a sale would be prudent); see also
DOL Opinion Letter No. 90-05A, 1990 WL 172964, at * 3 (Mar. 29, 1990) (despite
plan provisions to contrary, it is responsibility of fiduciaries to determine,
based on all the relevant facts and circumstances, the prudence of investing a
large percentage of plan assets in qualifying employer securities); DOL Opinion
Letter No. 83-6A, 1983 WL 22495, at *1-2 (Jan. 24, 1983) (same).
As this long and
consistent line of cases establishes, the Tobacco Plan fiduciaries had a duty
not to sell the stocks in the time and manner in which they sold them if it was
imprudent or disloyal under ERISA section 404(a)(1)(A) and (B), 29 U.S.C. §
1104(a)(1)(A) and (B), even if the plan terms required the sale. The district
court's holding to the contrary would undermine the fiduciary's independent
responsibility for ensuring that his management of plan assets complies with
ERISA's fiduciary standards, thereby nullifying an internal check and balance
that is critical to enforcement of ERISA.
For the reasons discussed above, the Secretary disagrees with the
defendants' argument that a plan sponsor can effectively eliminate the
fiduciary duty of prudence by mandating the sale of a plan asset in the text of
the plan. This is not to say, however,
that the sale of the Nabisco stocks was, in fact, imprudent, or that the
plaintiffs can prove imprudence merely by showing that the stocks' price had
dropped to historic lows as determined in hindsight. See Metzler v. Graham, 112 F.3d 207, 209 (5th Cir. 1997) ("[p]rudence is evaluated at
the time of the investment without the benefit of hindsight"). Publicly traded stocks, of course, move
both up and down, and it is only in hindsight that one can predict price
movements with anything approaching certainty.
Markets are generally efficient, and the stock price presumably reflects
all of the publicly available information on the stock. As a result, absent inside information, or
other unique circumstances, a fiduciary's decision to sell stock cannot be
challenged simply because he failed to accurately predict the direction in
which the stock ultimately moved. The
plan document, however, could not give the plan's fiduciaries a broad exemption
from considering the prudence of the sale.
Similarly,
even if analysts generally ranked Nabisco stock as a "buy" or
"hold" at the time of the stock sale, it does not follow that the
fiduciaries breached their obligations by reaching a different conclusion. An analyst's buy or hold rating, in
particular, need not be determinative of the appropriate course of action for a
specific plan in light of the plan's particular portfolio. Indeed, the National Association of
Securities Dealers ("NASD") has cautioned against the exclusive
reliance on such recommendations. See
NASD Guide To Understanding Securities Analysts Recommendations at http://www.nasdr.com/analyst_brochure.htm (Apr.
26, 2004). In NASD's view, an investor
should "[n]ever rely on a rating alone," particularly because
analysts do not use a common rating system and the meanings of the ratings
therefore vary. Id. ("Clear
'Sell' ratings have grown rare. Some
firms no longer even use 'Sell' or any word obviously like it. Frequently, a 'Hold' rating in effect means
'Sell.'").
For all the above reasons,
the decision of the district court should be reversed and remanded for a determination under Fed. R.
Civ. P. 12(b)(6) consistent with the analysis set forth herein.
Dated: May
7, 2004. Respectfully
submitted,
HOWARD M. RADZELY
Solicitor of Labor
TIMOTHY D. HAUSER
Associate Solicitor
Plan Benefits Security
Division
ELIZABETH HOPKINS
Counsel for Appellate and
Special Litigation
_________________________
G. WILLIAM SCOTT
Senior Trial Attorney
Plan Benefits Security
Division
U.S. Department of Labor
Office of the Solicitor
P.O. Box 1914
Washington, D.C. 20013
(202) 693-5600
