In the Supreme Court of the United States

No. 18-1165

In the Supreme Court of the United States

RETIREMENT PLANS COMMITTEE OF IBM, ET AL.,

PETITIONERS

v.

LARRY W. JANDER, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING NEITHER PARTY

RACHEL MONDL

Deputy Solicitor of Labor

G. WILLIAM SCOTT

Associate Solicitor

THOMAS TSO

Counsel for Appellate and

Special Litigation

EIRIK CHEVERUD

Trial Attorney

Department of Labor

Washington, D.C. 20210

ROBERT B. STEBBINS

General Counsel

MICHAEL A. CONLEY

Solicitor

DAVID D. LISITZA

Senior Litigation Counsel

Securities and Exchange

Commission

Washington, D.C. 20549

NOEL J. FRANCISCO

Solicitor General

Counsel of Record

EDWIN S. KNEEDLER

Deputy Solicitor General

JONATHAN Y. ELLIS

Assistant to the Solicitor

General

Department of Justice

Washington, D.C. 20530-0001

SupremeCtBriefs@usdoj.gov

(202) 514-2217

QUESTION PRESENTED

Whether the “more harm than good” pleading consideration from Fifth Third Bancorp v. Dudenhoeffer,

573 U.S. 409, 430 (2014), can be satisfied by generalized

allegations that the harm of an inevitable disclosure of

an alleged fraud generally increases over time.

(I)

TABLE OF CONTENTS

Page

Interest of the United States....................................................... 1

Statement ...................................................................................... 2

Summary of argument ............................................................... 11

Argument:

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 .............................................. 13

A. ERISA’s duty of prudence to disclose material

nonpublic information should be informed by

Dudenhoeffer and its emphasis on the

requirements and objectives of the securities laws ... 14

1. ERISA’s duty of prudence cannot require

ESOP fiduciaries to violate the securities laws’

disclosure requirements ......................................... 15

2. An ERISA-based duty to disclose exceeding

the securities laws’ requirements would

generally be inconsistent with the objectives of

those laws ................................................................. 18

3. Whether a prudent fiduciary could conclude

that a disclosure required by the securities

laws would do more harm than good should,

absent extraordinary circumstances, be

determined by reference to the securities laws ... 22

B. The court of appeals’ and the parties’ alternative

approaches are misguided ............................................ 24

C. The Court should vacate the judgment below and

remand the case to allow the court of appeals to

apply the correct standard in the first instance ......... 33

Conclusion ................................................................................... 34

(III)

IV

TABLE OF AUTHORITIES

Cases:

Page

Amgen Inc. v. Harris, 136 S. Ct. 758 (2016) ......... 4, 6, 28, 29

Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................... 5

Backman v. Polaroid Corp., 910 F.2d 10

(1st Cir. 1990) ...................................................................... 19

Basic Inc. v. Levinson, 485 U.S. 224 (1988) .................. 19, 26

Bateman Eichler, Hill Richards, Inc. v. Berner,

472 U.S. 299 (1985).............................................................. 13

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)................... 5

Black & Decker Disability Plan v. Nord,

538 U.S. 822 (2003).............................................................. 18

Burlington Coat Factory Sec. Litig., In re,

114 F.3d 1410 (3d Cir. 1997) .............................................. 19

Central States, Se. & Sw. Areas Pension Fund v.

Central Transp., Inc., 472 U.S. 559 (1985) ......................... 2

Chiarella v. United States, 445 U.S. 222 (1980) ........... 19, 21

Digital Realty Trust, Inc. v. Somers,

138 S. Ct. 767 (2018) ..................................................... 21, 23

Dirks v. SEC, 463 U.S. 646 (1983) ........................................ 17

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) ....... 18, 22

Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409

(2014) ........................................................................... passim

Higginbotham v. Baxter Int’l Inc., 495 F.3d 753

(7th Cir. 2007) ...................................................................... 21

International Ass’n of Heat & Frost Insulators v.

IBM Corp., 205 F. Supp. 3d 527 (S.D.N.Y. 2016) .. 7, 8, 9, 10

Jander v. IBM Corp., 205 F. Supp. 3d 538

(S.D.N.Y. 2016) ............................................................... 9, 10

Kokesh v. SEC, 137 S. Ct. 1635 (2017) ................................. 19

Lorenzo v. SEC, 139 S. Ct. 1094 (2019) ............................... 18

V

Cases—Continued:

Page

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27

(2011) .................................................................................... 19

Melvin, In re, SEC Release No. 3682, 2015 WL

5172974 (Sept. 4, 2015) ....................................................... 20

NLRB v. Amax Coal Co., 453 U.S. 322 (1981) .................... 23

Pegram v. Herdrich, 530 U.S. 211 (2000)............................ 29

SEC v. Materia, 745 F.2d 197 (2d Cir. 1984) ...................... 20

United States v. Newman, 664 F.2d 12 (2d Cir. 1981) ...... 20

United States v. O’Hagan, 521 U.S. 642 (1997) ............ 16, 20

Varity Corp. v. Howe, 516 U.S. 489 (1996) ................ 3, 25, 30

Whitley v. BP, P.L.C., 838 F.3d 523 (5th Cir. 2016)........... 24

Statutes and regulations:

Employee Retirement Income Security Act of 1974,

Pub. L. No. 93-406, 88 Stat. 829 .......................................... 1

29 U.S.C. 1001(b) ............................................................... 2

29 U.S.C. 1002(21)(a) ......................................................... 2

29 U.S.C. 1002(34) ............................................................. 3

29 U.S.C. 1021(i) .............................................................. 17

29 U.S.C. 1102(a)(1) ........................................................... 2

29 U.S.C. 1103(a) ............................................................... 2

29 U.S.C. 1104 .................................................................. 23

29 U.S.C. 1104(a) ............................................................... 2

29 U.S.C. 1104(a)(1)(B) ..................................... 2, 3, 14, 30

29 U.S.C. 1104(a)(1)(C) ..................................................... 3

29 U.S.C. 1104(a)(2) ........................................................... 4

29 U.S.C. 1105(a) ....................................................... 23, 24

29 U.S.C. 1105(a)(3) ......................................................... 23

29 U.S.C. 1107(d)(3)(A)(ii) ................................................ 3

29 U.S.C. 1107(d)(5) .......................................................... 3

29 U.S.C. 1107(d)(6)(A) ..................................................... 3

VI

Statutes and regulations—Continued:

Page

29 U.S.C. 1108(c)(3) ......................................................... 16

29 U.S.C. 1132(a)(2) ........................................................... 3

29 U.S.C. 1132(a)(3) ........................................................... 3

Private Securities Litigation Reform Act of 1995,

Pub. L. No. 104-67, 109 Stat. 737 ...................................... 10

Securities Act of 1933, ch. 38, Tit. I, 48 Stat. 74

(15 U.S.C. 77a et seq.) ......................................................... 15

Securities Exchange Act of 1934, ch. 404, 48 Stat. 881:

§ 10(b), 48 Stat. 891 ..................................................... 7, 16

15 U.S.C. 78j-1(b) ............................................................ 21

15 U.S.C. 78m (2012 & Supp. V 2017) ........................... 19

15 U.S.C. 78o(d) (2012 & Supp. V 2017) ........................ 19

15 U.S.C. 78u-4(a)(1) ....................................................... 32

15 U.S.C. 78u-6 ................................................................ 23

15 U.S.C. 7245 .................................................................. 21

18 U.S.C. 1514A ..................................................................... 23

17 C.F.R.:

Section 205.3 .................................................................... 21

Section 240.10b-5 ......................................................... 7, 16

Section 240.10b5-1(c) ....................................................... 17

Section 240.10b5-1(c)(1)(i)(C) ......................................... 17

Section 240.10b5-2 ........................................................... 20

Sections 240.13a-1-240.13a-20 ........................................ 19

Section 240.15d-21 ........................................................... 16

Section 243.100 .......................................................... 17, 21

Section 243.101(c) ............................................................ 21

Section 243.101(e) ............................................................ 17

Sections 249.306–249.447 ................................................ 19

Section 249.311 ................................................................ 16

VII

Miscellaneous:

Page

Accounting Standards Codification 360-10-35-17 ................ 8

George Gleason Bogert et al., The Law of Trusts and

Trustees (2d ed. 1993) ......................................................... 25

Steven R. Hunsicker, Conflicts of Interest, Economic

Distortions, and the Separation of Trust and Commercial Banking Functions, 50 S. Cal. L. Rev. 611

(1977) .................................................................................... 30

Restatement (Second) of Trusts (1959) ................... 15, 23, 25

Restatement (Third) of Trusts (2007) ................................. 25

Securities and Exchange Comm’n:

Employee Benefit Plans, Release No. 6188,

1980 WL 29482 (Feb. 1, 1980)................................... 16

Selective Disclosure and Insider Trading,

Release No. 7881, 2000 WL 1201556

(Aug. 15, 2000) ............................................................ 21

2 Austin Wakeman Scott, The Law of Trust

(3d ed. 1967)......................................................................... 25

In the Supreme Court of the United States

No. 18-1165

RETIREMENT PLANS COMMITTEE OF IBM, ET AL.,

PETITIONERS

v.

LARRY W. JANDER, ET AL.

ON WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING NEITHER PARTY

INTEREST OF THE UNITED STATES

This case concerns the scope of fiduciary duties imposed on plan fiduciaries by the Employee Retirement

Income Security Act of 1974 (ERISA), Pub. L. No.

93-406, 88 Stat. 829, and the relationship between those

duties and the federal securities laws. The Secretary of

Labor has primary authority for administering ERISA.

The Department of Justice and the Securities and Exchange Commission (SEC) administer and enforce the

federal securities laws. The United States therefore

has a substantial interest in this Court’s resolution of

the question presented.

(1)

2

STATEMENT

1. a. ERISA is designed to “protect * * * the interests of participants in employee benefit plans and their

beneficiaries * * * by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate

remedies, sanctions, and ready access to the Federal

courts.” 29 U.S.C. 1001(b). The statute requires every

plan to be established and maintained pursuant to a

written instrument and to have named fiduciaries who

have authority to control and manage the administration of the plan and its assets. 29 U.S.C. 1102(a)(1),

1103(a). A person is a fiduciary if “he exercises any discretionary authority or discretionary control respecting

management of [an ERISA] plan * * * or control respecting management or disposition of its assets,” if “he

renders investment advice * * * with respect to any

moneys or other property of such plan,” or if “he has

any discretionary authority or discretionary responsibility in the administration of such plan.” 29 U.S.C.

1002(21)(A).

ERISA subjects plan fiduciaries to certain fiduciary

duties derived from the common law of trusts. 29 U.S.C.

1104(a); see Central States, Se. & Sw. Areas Pension

Fund v. Central Transport, Inc., 472 U.S. 559, 570

(1985). A fiduciary must “discharge his duties with respect to a plan solely in the interest of [its] participants

and beneficiaries,” and “with the care, skill, prudence,

and diligence under the circumstances then prevailing

that a prudent man acting in a like capacity and familiar

with such matters would use in the conduct of an enterprise of a like character and with like aims.” 29 U.S.C.

1104(a)(1)(B). Plan participants and their beneficiaries

3

may seek judicial redress against a fiduciary for violations of the plan or the statute, including breaches of

ERISA’s fiduciary duties. 29 U.S.C. 1132(a)(2) and (3);

Varity Corp. v. Howe, 516 U.S. 489, 507-515 (1996).

b. This case concerns the application of ERISA’s fiduciary duties to individuals who administer an employee stock ownership plan (ESOP), a type of “individual account plan.” 29 U.S.C. 1107(d)(3)(A)(ii). An individual account plan is “a pension plan which provides for

an individual account for each participant and for benefits based solely upon the amount contributed to the

participant’s account, and any income, expenses, gains

and losses.” 29 U.S.C. 1002(34). Such plans often give

each participant the discretion to select from a range

of investment options chosen by the plan fiduciaries. An

ESOP is an individual account plan that “is designed

to invest primarily in qualifying employer securities”

and meets certain other requirements. 29 U.S.C.

1107(d)(6)(A). An employer’s common stock is one type

of “qualifying employer security.” 29 U.S.C. 1107(d)(5).

ERISA’s duty of prudence ordinarily requires

ERISA fiduciaries to “diversify the investments of the

plan so as to minimize the risk of large losses, unless

under the circumstances it is clearly prudent not to do

so.” 29 U.S.C. 1104(a)(1)(C). Because ESOPs “ ‘invest

primarily in’ the stock of the participants’ employer,”

Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 416

(2014) (citation omitted), they are by definition “not

prudently diversified.” Ibid. Congress thus made clear

that ESOP fiduciaries do not violate the diversification

requirement of Section 1104(a)(1)(C) or the prudence

requirement of Section 1104(a)(1)(B), “to the extent

that it requires diversification,” by acquiring or holding

“qualifying employer securities”—e.g., common stock of

4

the participants’ employer. 29 U.S.C. 1104(a)(2). As a

result, ESOP fiduciaries “are not liable for losses that

result from a failure to diversify.” Dudenhoeffer,

573 U.S. at 419. “But aside from that distinction, * * *

ESOP fiduciaries are subject to the duty of prudence

just as other ERISA fiduciaries are.” Ibid.

c. The Court described how these principles operate

in the context of ESOPs holding publicly traded stock

to a certain extent in Dudenhoeffer, supra, and Amgen

Inc. v. Harris, 136 S. Ct. 758 (2016) (per curiam).

In Dudenhoeffer, although declining to adopt a “presumption of prudence” for ESOP fiduciaries “when

their decisions to hold or buy employer stock are challenged as imprudent,” the Court acknowledged the “legitimate” concerns that had led some lower courts to

adopt such a presumption. 573 U.S. at 417, 423. The

Court recognized the potential for conflict between the

duty of prudence and the federal securities laws, observing that “ESOP fiduciaries often are company insiders” who are alleged to have acted imprudently by

“failing to act on inside information they had about the

value of the employer’s stock,” despite the prohibition

on insider trading. Ibid. The Court also acknowledged

that meritless ERISA suits can place an ESOP fiduciary “between a rock and a hard place: If he keeps investing and the stock goes down he may be sued for acting imprudently * * * , but if he stops investing and the

stock goes up he may be sued for disobeying the plan

documents.” Id. at 424.

The Court reasoned that such concerns were better

addressed “through careful, context-sensitive scrutiny

of a complaint’s allegations” to “divide the plausible

sheep from the meritless goats.”

Dudenhoeffer,

573 U.S. at 425. The Court instructed lower courts to

5

subject duty-of-prudence claims to “careful judicial consideration,” ibid., in determining whether a complaint’s

allegations meet the pleading standard described in

Ashcroft v. Iqbal, 556 U.S. 662 (2009), and Bell Atlantic

Corp. v. Twombly, 550 U.S. 544 (2007). Under that

standard, the Court stated 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 in the same circumstances

would not have viewed as more likely to harm the fund

than to help it.” Dudenhoeffer, 573 U.S. at 428.

The Court then identified three considerations that

should “inform” a district court’s consideration of

whether a plaintiff has satisfied that standard. Dudenhoeffer, 573 U.S. at 428. First, the Court stated that

lower courts “must bear in mind” that “ERISA’s duty

of prudence cannot require an ESOP fiduciary to perform an action * * * that would violate the securities

laws.” Ibid. Second, the Court instructed that, where

an ESOP fiduciary is faulted for failing to act “on the

basis of the inside information,” lower courts must consider whether an “ERISA-based obligation either to refrain on the basis of inside information from making a

planned trade or to disclose inside information to the

public could conflict with the complex insider trading

and corporate disclosure requirements imposed by the

federal securities laws or with the objectives of those

laws.” Id. at 429. Third, the Court explained that lower

courts must consider “whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s

position could not have concluded that stopping purchases * * * or publicly disclosing negative information

6

would do more harm than good to the fund by causing a

drop in the stock price and a concomitant drop in the value

of the stock already held by the fund.” Id. at 429-430.

In Amgen, the Court repeated its concern for the

“potential for conflict” between an ESOP fiduciary’s

ERISA obligations and the federal securities laws.

136 S. Ct. at 759. It also reiterated a district court’s obligation to apply the considerations from Dudenhoeffer

whenever an ESOP fiduciary is alleged to have breached

his duty of prudence based on his response to “inside

information.” Ibid.

2. International Business Machines Corporation

(IBM) sponsors an individual account retirement plan

for its employees called the IBM 401(k) Plus Plan

(Plan). Second Amended Complaint (SAC) ¶¶ 10, 45.

Among the investment options for Plan participants is

the IBM Company Stock Fund (Fund)—an ESOP that

primarily invests in publicly traded IBM common stock.

SAC 1. Respondents are Plan participants who bought

and held Fund shares during the class period of January 21, 2014, through October 20, 2014. SAC 1, ¶¶ 3839, 141. Petitioners are the Retirement Plans Committee of IBM and several individuals who served as

ERISA fiduciaries to the Plan during that time. SAC

¶¶ 40-43. The individual petitioners were also high-level

executives at IBM. SAC ¶¶ 41-43.

The complaint in this case is based on petitioners’ administration of the Fund leading up to IBM’s divestiture of its Microelectronics business in October 2014.

The Microelectronics business was a division of IBM’s

Systems and Technology Segment (STG) that designed

and produced microchips. SAC ¶ 55. During most of

relevant period, the Microelectronics business was reflected on IBM’s balance sheets as carrying a value of

7

$2.4 billion. SAC ¶¶ 11, 78. Microelectronics, however,

lost more than $600 million per year: $638 million in

2012, $720 million in 2013, and $619 million in the first

three quarters of 2014. SAC ¶ 78.

In early 2013, IBM began looking for a buyer for its

Microelectronics business. SAC ¶ 59. Although IBM

continued to value the business at over $2 billion, it was

unable to find a buyer willing to pay that amount. SAC

¶ 60. Eventually, on October 20, 2014, IBM announced

that it had reached an agreement with chipmaker GlobalFoundries. SAC ¶ 80. Under the agreement, IBM

paid GlobalFoundries $1.5 billion to acquire the Microelectronics business and to continue supplying semiconductors to IBM. Ibid. At the same time, IBM announced

a complete $2.4 billion write-down of Microelectronics’

carrying value and $800 million in estimated costs of the

agreement. SAC ¶¶ 81, 92. By the end of the announcement day, IBM’s stock price had declined more than

$12.00 per share and lost more than 7% of its value.

SAC ¶¶ 91, 129.

3. Following these events, two suits were filed in the

Southern District of New York on behalf of certain IBM

shareholders.

a. In International Ass’n of Heat & Frost Insulators v. IBM Corp., 205 F. Supp. 3d 527 (S.D.N.Y. 2016)

(Insulators), a group of investors in IBM common stock

filed a securities class action on behalf of all such investors between January 22, 2014, and October 17, 2014,

against IBM and several individual IBM executives, including petitioner Martin Schroeter. Id. at 530. These

plaintiffs alleged that IBM and the executives had violated Section 10(b) of the Securities Exchange Act of

1934, ch. 404, § 10(b), 48 Stat. 891 (Exchange Act), and

Rule 10(b)(5), 17 C.F.R. 240.10b-5, by, among other

8

things, failing to report that the Microelectronics business was materially impaired prior to the October 20,

2014 announcement of its sale, and by representing

that IBM’s financial statements had been prepared

in accordance with Generally Accepted Accounting

Principles (GAAP) despite that failure. Insulators,

205 F. Supp. 3d at 532. According to the plaintiffs, under

the relevant GAAP standards, 1 Microelectronics’ losses

in 2012, 2013, and 2014 should have triggered impairment testing for the business. Id. at 534-535. They alleged that such testing would have led to a write-down of

the business prior to the third quarter of 2014. Id. at 534.

b. In this case, respondents rely on the same alleged

accounting errors to assert a claim under ERISA, rather than the securities laws. According to respondents, IBM’s failure to recognize the impairment of the

Microelectronics business led it to “grossly overstate[]

the value” of the business in its 2013 and 2014 financial

reporting. SAC ¶ 9. Respondents allege that IBM’s

failure to disclose such “critical, material information to

the public[] caused the market to improperly value

IBM’s stock,” and that, by virtue of their high-level positions in the company, petitioners knew or should have

known that IBM’s stock was “artificially inflated * * *

throughout the Class Period.” Ibid.; see SAC ¶ 19.

Respondents contend that petitioners violated

ERISA’s duty of prudence when they failed to take action to prevent the Fund from making additional purchases of IBM stock at inflated prices during the class

period. SAC ¶ 20. As relevant here, to prevent that ongoing harm to Plan participants, respondents allege

Under GAAP, a long-lived asset is impaired if the carrying

amount of the asset is not recoverable and exceeds its fair value.

Accounting Standards Codification (ASC) 360-10-35-17.

1

9

that petitioners could have “issued truthful or corrective disclosures to cure the fraud,” and that petitioners

could not have reasonably believed that taking such action would do “more harm than good” to the Plan. SAC

¶¶ 21, 25. They allege that an earlier disclosure would

have “ended the artificial inflation in IBM’s stock price”

and mitigated the long-term reputational damage that

IBM would suffer when the truth came to light. SAC

¶ 105; see SAC ¶¶ 104-119.

4. The Insulators case and this case were assigned

to the same district judge, who dismissed both complaints. Pet. App. 25a-44a (dismissing the SAC); Jander

v. IBM Corp., 205 F. Supp. 3d 538 (S.D.N.Y. 2016) (dismissing previous complaint); Insulators, supra (dismissing complaint).

a. In Insulators, the district court held that the

plaintiffs had plausibly alleged that Microelectronics’

losses required impairment testing of the business before October 20, 2014, but that the complaint failed to

adequately plead the scienter required to state a private

claim under the federal securities laws. 205 F. Supp. 3d

at 534, 535-537. The court explained that whether impairment testing was required turned on whether the

Microelectronics business was properly treated under

GAAP as an independent “asset group” or, as the defendants urged, an integrated part of IBM’s larger

STG segment. Id. at 532. And the court concluded that,

“while IBM raise[d] strong arguments that Microeletronics was so vertically integrated into [the larger

STG segment] that it could not be classified as a standalone asset group,” the complaint sufficiently alleged to

the contrary at that stage of the litigation. Id. at 533.

The court further held, however, that the plaintiffs

failed to adequately allege, with the specificity required

10

by the Private Securities Litigation Reform Act of 1995

(PSLRA), Pub. L. No. 104-67, 109 Stat. 737, that the defendants acted with scienter in representing that IBM’s

financial statements had been prepared in accordance

with GAAP. Insulators, 205 F. Supp. 3d at 535-537.

No party appealed the Insulators decision.

b. In this case, the district court held that respondents also adequately alleged that the Microelectronics

business was impaired prior to October 20, 2014, and

that petitioners were aware of that impairment. Jander,

205 F. Supp. 3d at 542. The court nevertheless dismissed the complaint on the ground that respondents

failed to adequately plead that petitioners could not

have concluded that an earlier disclosure was “more

likely to harm the fund than to help it.” Pet. App. 31a

(quoting Dudenhoeffer, 573 U.S. at 428). The court rejected respondents’ concerns about the potential for additional reputational harm caused by a delay in disclosure, noting that such general allegations “fail[ed] to

shed any light” on whether a prudent fiduciary under

the particular circumstances of this case could have concluded that an earlier disclosure would do more harm

than good. Id. at 33a.

5. The court of appeals reversed. Pet. App. 1a-24a.

The court listed five allegations that it believed would

support a determination that no prudent fiduciary could

have concluded that an earlier disclosure would have

done more harm than good: (1) petitioners “knew that

IBM stock was artificially inflated through accounting

violations,” id. at 15a; (2) petitioners were “uniquely situated” to disclose the truth and correct the artificial inflation through IBM’s ordinary SEC filings, id. at 16a

(citation omitted); (3) the eventual disclosure of a pro-

11

longed fraud causes “ ‘reputational damage’ that ‘increases the longer the fraud goes on[],’ ” ibid. (citation

omitted; brackets in original); (4) “ ‘IBM stock traded in

an efficient market,’ ” and thus a prudent fiduciary need

not fear “an irrational overreaction to the disclosure of

fraud,” id. at 18a-19a (citation omitted); and (5) petitioners “knew that disclosure of the truth * * * was inevitable, because IBM was likely to sell the business and

would be unable to hide its overvaluation from the public at that point,” id. at 19a.

SUMMARY OF ARGUMENT

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.

A. In Dudenhoeffer, the Court identified three considerations that should inform whether an ERISA

plaintiff has plausibly stated a duty-of-prudence claim

against an ESOP fiduciary for failing to disclose inside

information about the employer’s stock. 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 are participants in

an ESOP. A prudent fiduciary therefore could not conclude that complying with a securities-laws-based duty

to disclose would do more harm than good. But by the

same token, in all but extraordinary circumstances, a

12

prudent fiduciary could conclude that disclosing confidential information when disclosure is not required by

the securities laws would do more harm than good.

B. The courts below and the parties appear to expect

a fiduciary to make an ad hoc prediction about whether

a public disclosure would do more harm than good in a

particular case. But ESOPs have multiple participants

and beneficiaries who, at any given time, are likely to

have competing economic interests. Both the direction

and the strength of those interests in a public disclosure

would turn on information about the future that, in

many cases, neither the participant nor a fiduciary

would know with reasonable certainty. An ad hoc costbenefit analysis is therefore too indeterminate to serve

the meaningful filtering role the Court contemplated.

The better course is to recognize that Congress and the

SEC have already made a judgment about when a public disclosure would do more harm than good, and prudent fiduciaries should generally not second-guess that

judgment.

Petitioners alternatively contend that an ESOP fiduciary never has an ERISA-based duty to disclose information that is obtained in a corporate capacity. But that

contention is squarely inconsistent with Dudenhoeffer.

Petitioners also worry that imposing an ERISA-based

duty to disclose would permit an end-run around the

PSLRA. But district courts must subject duty-ofprudence claims to careful scrutiny to determine

whether requiring a public disclosure would have conflicted with the objective of the securities laws.

C. Because the courts below did not apply the correct

legal standard, this Court should vacate the judgment

below and remand the case for further consideration.

13

ARGUMENT

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

This case concerns when an ESOP fiduciary who is

also a corporate official of the employer is required by

ERISA’s duty of prudence to publicly disclose material,

nonpublic information about the employer. The federal

securities laws already impose a comprehensive disclosure regime governing when, how, and by whom such

disclosures must be made when the stock is publicly

traded. But the courts below largely ignored that regime, focusing instead on an ad hoc analysis about when

an ESOP fiduciary could conclude that public disclosure

would do “more harm than good” in the particular case.

The government respectfully suggests that is the wrong

approach.

The disclosure regime of the federal securities laws

is designed for the “protection of the investing public

and the national economy.” Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 315 (1985). Those objectives are served both by the disclosure obligations

the securities laws impose and by the discretion they

preserve for corporate management when they do not

require disclosure. Courts should be reluctant to impose ERISA-based duties to publicly disclose confidential corporate information that exceed those imposed by

the federal securities laws, and a prudent ESOP fiduciary generally should be able to rely on the judgment of

Congress and the SEC about when such disclosures are

required. Absent extraordinary circumstances, an ESOP

14

fiduciary has an ERISA-based duty to publicly disclose

material, nonpublic information when, and only when,

he has a securities-laws-based obligation to do so. Because the court of appeals did not consider whether the

defendants were individually subject to such a duty, its

judgment should be vacated and the case remanded for

further consideration.

A. ERISA’s Duty Of Prudence To Disclose Material NonPublic Information Should Be Informed By Dudenhoeffer And Its Emphasis On The Requirements And Objectives Of The Securities Laws

ERISA imposes a duty of prudence on all plan fiduciaries. The statute provides that a “fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—(A) for

the exclusive purpose of * * * providing benefits to participants and their beneficiaries * * * ; [and] (B) with

the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting

in a like capacity and familiar with such matters would

use in the conduct of an enterprise of a like character

and with like aims.” 29 U.S.C. 1104(a)(1)(B). Those

standards govern “fiduciaries’ investment decisions and

disposition of assets.” Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409, 419 (2014) (citation omitted).

In Dudenhoeffer, the Court explained 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 in the same circumstances would not have viewed as more likely to

harm the fund than to help it.” 573 U.S. at 428. The

15

Court identified three considerations that should “inform” a district court’s consideration of whether a plaintiff has satisfied that standard: (1) whether the alternative action would “require an ESOP fiduciary to * * *

violate the securities laws”; (2) whether an “ERISAbased obligation” to take the action “could conflict with

the complex insider trading and corporate disclosure

requirements imposed by the federal securities laws or

with the objectives of those laws”; and (3) “whether the

complaint has plausibly alleged that a prudent fiduciary

in the defendant’s position could not have concluded

that” taking that action “would do more harm than good

to the fund.” Id. at 429-430.

In this case, the courts below and the parties have

largely focused on Dudenhoeffer’s third consideration.

But nothing in Dudenhoeffer suggests that the three

considerations are independent criteria. In the government’s view, to intelligently consider whether public

disclosure would do “more harm than good,” it is important first to address Dudenhoeffer’s other considerations. The government will address each consideration

in turn.

1. ERISA’s duty of prudence cannot require ESOP

fiduciaries to violate the securities laws’ disclosure

requirements

First, “the duty of prudence, under ERISA as under

the common law of trust, does not require a fiduciary

to break the law.” Dudenhoeffer, 573 U.S. at 428 (citation omitted); see Restatement (Second) of Trusts § 166

cmt. a (1959) (Restatement (Second)). Publicly traded

companies that offer a voluntary, contributory ESOP

are required to register the ESOP’s offers and sales under the Securities Act of 1933, ch. 38, Tit. I, 48 Stat. 74

(15 U.S.C. 77a et seq.), and their ESOP’s transactions

16

are subject to the securities laws’ antifraud provisions.

See Employee Benefit Plans, SEC Release No. 6188,

1980 WL 29482, at *9-*11 (Feb. 1, 1980). Such ESOPs

are also subject to reporting requirements under the

Exchange Act. 17 C.F.R. 240.15d-21, 249.311. ERISA

expressly contemplates corporate insiders serving as

ERISA fiduciaries for such companies, 29 U.S.C.

1108(c)(3), and the practice is common, Dudenhoeffer,

573 U.S. at 423. But as the Court recognized in Dudenhoeffer, that practice raises the potential for conflict between the fiduciary’s obligations under the securities

laws and his ERISA fiduciary duties.

The fact that the ERISA duty of prudence cannot require a fiduciary to violate his securities-laws obligations, Dudenhoeffer, 573 U.S. at 428, has important implications in this context. As the Court recognized, that

imperative will affect the ESOP fiduciary’s investment

decisions on behalf of the plan. Section 10(b) of the Exchange Act and Rule 10b-5, 17 C.F.R. 240.10b-5, prohibit a corporate insider from “trad[ing] in the securities of his corporation on the basis of material, nonpublic information.” United States v. O’Hagan, 521 U.S.

642, 651-652 (1997). Thus, as the Court observed,

ERISA’s duty of prudence cannot require an ESOP fiduciary to “divest[] the fund’s holdings of the employer’s stock on the basis of inside information.”

Dudenhoeffer, 573 U.S. at 428.

Rule 10b-5 will also affect the fiduciary’s ability to

prevent the plan or plan participants from making additional purchases. Ordinarily, declining to purchase

stock based on inside information would not violate the

insider trading rules. An ESOP fiduciary, however,

who deviates from an ESOP’s pre-authorized trading

plan by suspending ESOP purchases, but not ESOP

17

sales, would expose himself to insider trading liability

for the sales. See 17 C.F.R. 240.10b5-1(c)(1)(i)(C). To

avoid violating insider trading laws, an ESOP fiduciary

with inside information may not suspend ESOP purchases without suspending ESOP sales as well. See

29 U.S.C. 1021(i) (providing a formal mechanism for

instituting such a “blackout period”). But purchasing

and selling shares of employer stock according to a preexisting contract or pre-authorized trading plan, including an ESOP plan under which the fiduciaries will make

purchases and sales on behalf of individual participants

or the plan itself, would generally not violate the insider

trading rules. See 17 C.F.R. 240.10b5-1(c).

Finally, as most relevant here, the securities laws

also constrain how an ESOP fiduciary may (and therefore may be required to) disclose material, nonpublic

information to the plan’s participants and beneficiaries.

Disclosure of such information solely to plan participants and beneficiaries would be impermissible. If

the disclosure were made on behalf of the publicly

traded employer, it would violate the selective disclosure rules under Regulation FD of the Exchange Act.

See 17 C.F.R. 243.100. If it were made in violation of

the ESOP fiduciary’s confidentiality obligations to the

employer, it would be an unlawful tip of inside information. Dirks v. SEC, 463 U.S. 646, 659-661 (1983). Accordingly, any disclosure must be “effected by a public

release * * * designed to achieve a broad dissemination

to the investing public generally and without favoring

any special person or group.” Id. at 653 n.12; see

17 C.F.R. 243.101(e).

18

2. An ERISA-based duty to disclose exceeding the securities laws’ requirements would generally be inconsistent with the objectives of those laws

Second, under Dudenhoeffer, a court must consider

whether an “ERISA-based obligation either to refrain

on the basis of inside information from making a

planned trade or to disclose inside information to the

public could conflict with the complex insider trading

and corporate disclosure requirements imposed by the

federal securities laws or with the objectives of those

laws.” 573 U.S. at 428. As the Court observed, although

Congress expected courts to “develop a federal common

law of rights and obligations under ERISA-regulated

plans, the scope of permissible judicial innovation is

narrower in areas where other federal actors are engaged.” Ibid. (quoting Black & Decker Disability Plan

v. Nord, 538 U.S. 822, 831 (2003)). The Court noted that

the view of the SEC “may well be relevant” on that

question. Ibid. In the view of the SEC and the United

States, it would generally be inconsistent with the objectives of the securities laws to impose an ERISAbased duty to publicly disclose inside information in the

absence of a securities-laws duty. And the Department

of Labor concurs in the conclusion that ERISA does not

impose a duty to disclose in those circumstances.

This Court has recognized that the Exchange Act

“substitute[d] a philosophy of full disclosure for the philosophy of caveat emptor.” Lorenzo v. SEC, 139 S. Ct.

1094, 1103 (2019) (citation omitted); Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 194-195 (1976) (“The Securities Act of 1933 was designed [1] to provide investors

with full disclosure of material information * * * , [2]

to protect investors against fraud, and [3] to promote

ethical standards of honesty and fair dealing.”). And

19

this principle has animated securities laws ever since.

See Kokesh v. SEC, 137 S. Ct. 1635, 1640 n.1 (2017).

Nevertheless, the securities laws “do not create an

affirmative duty to disclose any and all” material nonpublic information. Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011). “Even with respect to

information that a reasonable investor might consider

material, companies can control what they have to disclose under [§ 10(b) and Rule 10b-5] by controlling what

they say to the market.” Ibid.; see id. at 44 (“Disclosure

is required under these provisions only when necessary

‘to make . . . statements made * * * not misleading.’ ”)

(citation omitted); Chiarella v. United States, 445 U.S.

222, 235 (1980) (“A duty to disclose under § 10(b) does

not arise from the mere possession of nonpublic market

information.”). Other provisions of the securities laws

impose mandatory reporting requirements for additional information in certain circumstances. See, e.g.,

15 U.S.C. 78m and 78o(d) (2012 & Supp. V 2017);

17 C.F.R. 240.13a-1–240.13a-20, 249.306-249.447. “Except for [such] specific periodic reporting requirements

(primarily the requirements to file quarterly and annual

reports),” however, “there is no general duty on the

part of a company to provide the public with all material

information.” In re Burlington Coat Factory Sec.

Litig., 114 F.3d 1410, 1432 (3d Cir. 1997) (Alito, J.).

Indeed, public corporations regularly, and legitimately, keep confidential potential merger discussions,

new product announcements, and the like. See Basic

Inc. v. Levinson, 485 U.S. 224, 234-235, 239 n.17 (1988)

(mergers and acquisitions); Backman v. Polaroid Corp.,

910 F.2d 10, 16 (1st Cir. 1990) (en banc) (new products).

The disclosure of such information in an efficient mar-

20

ket may well change the stock price, but neither the corporation nor its insiders who possess such information

necessarily have a duty under the securities laws to disclose it. 2 And although it would not violate the securities laws to make a full and fair public disclosure of such

information in the absence of any securities-laws duty,

to construe ERISA to require disclosure of confidential

information that the securities laws do not (or do not

yet) require to be disclosed could have significant

market-distortive effects. The premature disclosure of

confidential information during a potential acquisition

or disposition, for example, could easily scuttle a deal

that, if permitted to proceed, could add real value (or

prevent greater loss) to the company, benefitting all

shareholders. See, e.g., SEC v. Materia, 745 F.2d 197,

199 (2d Cir. 1984) (“Because even a hint of an upcoming

tender offer may send the price soaring, information regarding the identity of a target is extremely sensitive

and zealously guarded.”); United States v. Newman,

664 F.2d 12, 17-18 (2d Cir. 1981) (premature disclosure

of a tender offer can “drive up the price of the target

company’s shares,” and the “tender offer will appear

commensurately less attractive”) (citation omitted); In

re Melvin, SEC Release No. 3682, 2015 WL 5172974, at

*4 & n.31 (Sept. 4, 2015).

The securities laws afford companies discretion

around the timing of public disclosures, to permit companies to pursue strategic initiatives in a manner

that maximizes value for their shareholders while ensuring that no one purchaser or seller of stock has an

In many cases, absent an affirmative legal duty to disclose, such

persons may have contractual, employment, fiduciary, or other obligations to keep such information confidential. See O’Hagan,

521 U.S. at 651-654, 663; 17 C.F.R. 240.10b5-2.

2

21

information-access advantage over another with respect to the initiative. Interpreting ERISA to impose a

duty to disclose confidential information that exceeds

the securities laws’ requirements “would be inconsistent with the careful plan that Congress has enacted

for regulation of the securities markets,” Chiarella,

445 U.S. at 235.

Similar concerns counsel against imposing an

ERISA-based duty to disclose on ESOP fiduciaries who

do not themselves also have a personal securities-laws

duty to disclose, even when the company or other corporate officers do have such a duty. An individual on

whom the securities laws do not impose such a duty may

be less likely to have the familiarity with both the facts

and the law to accurately determine what those obligations are. Cf. Higginbotham v. Baxter Int’l Inc.,

495 F.3d 753, 760-761 (7th Cir. 2007) (“Prudent managers conduct inquiries rather than jump the gun with

half-formed stories as soon as a problem comes to their

attention. [The company] might more plausibly have

been accused of deceiving investors had managers called

a press conference before completing the steps necessary to determine just what had happened.”). Public

companies frequently “designat[e] a limited number of

persons who are authorized to make disclosures” that

can be considered as made “on behalf of an issuer” to

comply with the securities laws. Selective Disclosure

and Insider Trading, SEC Release No. 7881, 2000 WL

1201556, at *9-*10 & n.44, *20 n.90 (Aug. 15, 2000);

see 17 C.F.R. 243.100, 101(c). And, indeed, certain

individuals—such as auditors and attorneys representing an issuer—are required to disclose a fraud internally. See 15 U.S.C. 78j-1(b), 7245; 17 C.F.R. 205.3;

Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767, 780

22

(2018). ERISA should not be construed to impose a

duty on an ERISA fiduciary to make a public disclosure

in similar circumstances. The risk of harm to a wellfunctioning market posed by the unilateral disclosure

by a well-intentioned, but non-fully informed, ERISA

fiduciary would conflict with the objectives of the securities laws’ reticulated reporting and disclosure regime.

3. Whether a prudent fiduciary could conclude that a

disclosure required by the securities laws would do

more harm than good should, absent extraordinary

circumstances, be determined by reference to the securities laws

Finally, against this backdrop, whether “a prudent

fiduciary in the defendant’s position could not have concluded that * * * publicly disclosing negative information would do more harm than good to the fund”

should be straightforward. Dudenhoeffer, 573 U.S. at

429-430. In all but extraordinary cases, the first two

considerations will answer that question. The securities

laws’ disclosure rules were designed “to protect investors.” Hochfelder, 425 U.S. at 194-195. 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.

23

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. 29 U.S.C.

1104. Although personally effecting or attempting public disclosure would be inconsistent with the overall balance and objectives of the securities laws and could reasonably be regarded as doing more harm than good,

prudence may require the ESOP fiduciary to urge a cofiduciary or other responsible corporate officers to

make a required disclosure, to utilize internal company

reporting mechanisms, or to report possible violations

to the SEC, see 15 U.S.C. 78u-6, or the Department of

Labor, see 18 U.S.C. 1514A. See Somers, 138 S. Ct. at

772-774. None of these steps would present the same

risks to investors and the market as an unnecessary and

potentially inaccurate public disclosure. Here, however, respondents have challenged only the petitioners’

alleged failure to make public disclosure. Pet. App. 15a.

Moreover, ESOP fiduciaries also may be liable if

they knowingly participate in or conceal a co-fiduciary’s

breach of his fiduciary duty and fail to make “reasonable efforts” to remedy that breach. 29 U.S.C. 1105(a)(3).

Section 1105(a) “imposes on each trustee an affirmative

duty to prevent every other trustee of the same fund

from breaching fiduciary duties.” NLRB v. Amax Coal

Co., 453 U.S. 322, 333 (1981); cf. Restatement (Second)

§ 184 (“If there are several trustees, each trustee is under a duty to the beneficiary * * * to use reasonable

care to prevent a co-trustee from committing a breach

24

of trust or to compel a co-trustee to redress a breach of

trust.”).

Under Section 1105(a), a fellow ESOP fiduciary who

knows or should know that a co-fiduciary is engaging in

such a breach of fiduciary duty has an obligation to take

reasonable steps to prevent it. In some circumstances,

that may also require, after reasonable investigation,

urging a co-fiduciary to make a required disclosure, utilizing internal reporting mechanisms, or reporting possible violations to the SEC or to the Department of Labor. But for the same reasons that a prudent ESOP fiduciary who has no personal duty under the securities

laws could reasonably conclude that his disclosure

would do more harm than good, Section 1105(a) would

not require such an action as a “reasonable effort” to

prevent a co-fiduciary from breaching his obligations. 3

B. The Court Of Appeals’ And The Parties’ Alternative Approaches Are Misguided

1. Petitioners, respondents, and the courts below

take a different approach. Although they reach different conclusions on the allegations in this case, each appear to consider the “more harm than good” question

largely apart from Dudenhoeffer’s other considerations,

and each expect a fiduciary to make an ad hoc prediction

In an amicus brief filed in the Fifth Circuit in Whitley v. BP,

P.L.C., 838 F.3d 523 (2016), the Department of Labor suggested

that, as a matter of “last resort,” an ESOP fiduciary without an independent duty to disclose material, nonpublic information may

nevertheless have an ERISA-based duty to disclose such information, if he were unable to convince his co-fiduciary to comply with

his obligation to do so. Secretary of Labor Amicus Br. 19, Whitley,

supra (No. 15-20282). After further reflection and consultation with

the SEC, the United States has reconsidered that position for the

reasons explained in the text.

3

25

about the likely effects of a public disclosure on the

ESOP and its participants and beneficiaries. See Pet.

Br. 42-44; Br. in Opp. 17-23; Pet. App. 15a-21a. That

approach is misguided, and in our view would not provide an administrable or effective way to “divide the

plausible sheep, from the meritless goats.” Dudenhoeffer, 573 U.S. at 425.

A principal difficulty arises from the fact that ESOPs

have multiple participants and beneficiaries who, at any

given time, are likely to have competing economic interests. At common law, “[w]hen there are two or more

beneficiaries of a trust, the trustee is under a duty to

deal impartially with them.” Restatement (Second)

§ 183; see 2 Austin Wakeman Scott, The Law of Trust

§ 183, at 1471 (3d ed. 1967) (“[I]t is the duty of the trustee to deal impartially as among the several beneficiaries.”). Recognizing that, “in typical trust situations,” fiduciaries will face “unavoidably and thus permissibly

conflicting duties to various beneficiaries with their

competing economic interests,” Restatement (Third) of

Trusts § 79 cmt. b (2007), this duty of impartiality does

not require fiduciaries to “treat all [such] beneficiaries

equally”—an impossible task. George Gleason Bogert

et al., The Law of Trusts and Trustees § 541 (2d ed.

1993). But it does require that the trustee “endeavor to

act in such a way that a fair result is reached with regard” to their competing interests and “not unnecessarily show a preference” for one category of beneficiaries over another. Ibid. ERISA’s fiduciary duties

“draw much of their content” from common law standards. Varity Corp. v. Howe, 516 U.S. 489, 496 (1996).

The duty of impartiality is part of the common law of

trusts that informs the scope of an ERISA fiduciary’s

26

duties to the participants and beneficiaries of an ERISA

plan. See id. at 514.

In an efficient market, the disclosure of material,

negative information about a company will cause the

company’s stock price to fall. See Basic, 485 U.S. at 246

(“[T]he market price of shares traded on well-developed

markets reflects all publicly available information.”).

Such a drop in price, however, will affect the economic

interests of ESOP participants and beneficiaries in varying ways. On the one hand, a lower stock price would

make purchases of that stock less costly, benefiting

those participants who are building a position in the employer’s stock. On the other hand, the drop in the stock

price would also decrease the value of the stock that

participants already own, and harm those participants

who are in the process of selling the employer’s stock.

Whether (and to what extent) a given participant’s or

beneficiary’s economic interests would be served by

such a disclosure would turn on, among other things, the

size of their existing interests in employer stock; the

rate at which they are currently buying and will buy additional shares or are selling and will sell shares; and

whether the nonpublic information would otherwise become public at a time when it remained material to the

company’s stock price, and, if so, when it would otherwise be disclosed. The answers to those questions

would typically vary among the participants and beneficiaries of any given plan, as would the strength of their

respective interests. Both the direction and the

strength of those economic interests would turn on information about the future that, in many cases, neither

the participant nor a fiduciary would know with reasonable certainty—much less the ERISA plaintiff who

27

must plead sufficient facts to withstand the “careful judicial consideration” that the pleading standards require. Dudenhoeffer, 573 U.S. at 425. And the analysis

would only be further complicated by a prudent fiduciary’s consideration of the interests of the ESOP itself

as a long-term investor, in addition to those of the particular participants who happen to be buying or selling

in the short term.

These variations counsel against an attempt to define a prudent fiduciary’s ERISA duty by reference to

the relative interests of particular buyers, sellers, and

holders of stock, instead of by reference to the securities laws. To be sure, in some cases, some inside information may be more likely to come to light or to cause

reputational harm to the company once it does. See Pet.

App. 16a. But contrary to the court of appeals’ reasoning, those observations do not demonstrate that a prudent fiduciary could not have concluded that a disclosure would do more harm than good. Even if disclosure

were inevitable and delay would increase the eventual

reputational harm, some of the participants in the

ESOP would still benefit from the higher stock price until such disclosure occurred. And if what seemed inevitable never occurred, or were overcome by unforeseen

events, the harm caused to sellers by an ERISA-based

disclosure would only be more acute. Instead of simply

eliminating some gains for participants who otherwise

would sell their stock before public disclosure, the

ESOP fiduciary’s unnecessary disclosure would eliminate those gains for all shareholders.

These uncertainties make an ad hoc cost-benefit

analysis too indeterminate to serve the meaningful filtering role the Court intended. The better course

therefore is to recognize that Congress and the SEC

28

have already made the judgment about when a public

disclosure is and is not required for the protection of

investors generally, which include the ESOP fund and

its participants, and that requiring a prudent fiduciary

to second-guess that judgment by trying to assess

whether disclosure would do more harm than good to

the ESOP fund and its participants, in particular, would

undermine the objectives of the securities laws.

2. Aside from offering an ad hoc approach, petitioners posit two additional grounds for rejecting an

ERISA-based duty to disclose even when the securities

laws impose a parallel duty. Neither has merit.

a. In their broadest assertion, petitioners contend

(Br. 22-32) that an ERISA fiduciary never has a duty

under ERISA to use material, nonpublic information

“learned in a corporate capacity to make decisions in

their fiduciary capacity,” even if a prudent fiduciary

could not have concluded that acting on such information would do more harm than good. Br. 22. That

contention would preclude a duty-of-prudence claim

even where the fiduciary had an independent securitieslaws obligation to disclose, but it is also plainly inconsistent with this Court’s decisions in Dudenhoeffer and

Amgen Inc. v. Harris, 136 S. Ct. 758 (2016) (per curiam).

Both those decisions indicate that an ESOP fiduciary

may, in some circumstances, have an ERISA-based obligation to act on the basis of inside information obtained as a company insider. While the Court in Dudenhoeffer held that allegations that a fiduciary violated his

duty of prudence by failing to outsmart the market

based on publicly available information “are implausible as a general rule,” 573 U.S. at 426, it discussed at

length the considerations that should inform whether a

complaint plausibly alleges a violation of the duty based

29

on a fiduciary’s failure to act on inside information, id.

at 427-430. None of those considerations is whether the

individual acquired such inside information in a corporate or fiduciary capacity. Pet. Br. 22. And, in Amgen,

the Court repeated Dudenhoeffer’s standard as a means

of “divid[ing] the plausible sheep from the meritless

goats,” 136 S. Ct. at 759 (citation omitted), and reasoned

that the plaintiffs may have been able to state a plausible claim based on the defendants’ failure to halt trading in the employers’ stock on the basis of inside information, without any mention of whether that information was obtained in a corporate capacity, id. at 760.

The Court plainly contemplated that there would be

some “plausible sheep” to divide from the “meritless

goats.” Id. at 759 (citation omitted).

Petitioners rest their contrary contention on this

Court’s earlier decision in Pegram v. Herdrich, 530 U.S.

211 (2000). In that case, the Court held that an HMO

did not act in a fiduciary capacity when, through its physician owners, it “ma[de] decisions affecting medical

treatment” while influenced by the profit-sharing terms

of the HMO scheme. Id. at 226. The Court based its

conclusion on the fact that medical decisions bear “only

a limited resemblance to the usual business of traditional trustees,” id. at 231, and subjecting such decisions to ERISA’s duties would “in effect” accomplish

“nothing less than elimination of the for-profit HMO,”

despite Congress’s decades-long promotion of such organizations, id. at 233.

Pegram does not control here. Pegram concerned

whether a particular decision was taken in a fiduciary

capacity, not the type of information that a fiduciary

could or should consider when making an indisputably

30

fiduciary decision. Petitioners do not contest that decisions concerning the administration of an ESOP and its

investments, such as those complained of here, are fiduciary acts. See Pet. Br. 25. But once this point is conceded, they largely give up the game. See 530 U.S. at

226 (addressing when a defendant “was acting as a fiduciary (that is, was performing a fiduciary function) [by]

taking the action subject to complaint”). In any event,

even if the reasoning of Pegram might bear on the distinct question of what information a fiduciary may or

must rely on in making a concededly fiduciary decision,

that reasoning does not apply here.

In contrast to a medical decision, decisions about

how to protect the investments of an ERISA plan’s participants and beneficiaries are the quintessential business of a traditional trustee. That does not change just

because the trustee has obtained relevant information

by corporate means. Indeed, before the development

of insider trading laws, common law trustees were commonly thought to be required to seek out and utilize

such inside information for their trustees’ benefit. See,

e.g., Steven R. Hunsicker, Conflicts of Interest, Economic Distortions, and the Separation of Trust and

Commercial Banking Functions, 50 S. Cal. L. Rev. 611,

631 (1977) (collecting cases). And in Varity, the Court

held that an ERISA fiduciary violated its duty of loyalty

by making statements to its beneficiaries that it knew

to be false based on Varity’s corporate plans. 516 U.S.

at 493, 506. When a person acts in the capacity of both

ERISA fiduciary and corporate insider, the latter role

is part of the statutory inquiry of what a person “acting

in a like capacity” would do. 29 U.S.C. 1104(a)(1)(B). It

would be improper to require an insider to empty his

31

head of all corporate knowledge when he dons an

ERISA hat.

Unlike the for-profit HMOs in Pegram, moreover,

there is no reason to believe that requiring an ERISA

fiduciary to act on inside information would compel the

elimination of ESOPs or even, as petitioners contend

(Br. 22), prevent company insiders from serving as

ESOP fiduciaries. Far from creating conflict with those

individuals’ obligations under the federal securities

laws, the Court made clear in Dudenhoeffer that the

scope of ERISA’s duty of prudence must be interpreted

in light of those laws and their objectives. 573 U.S. at

429. While petitioners’ argument is premised on the notion that avoiding such conflict is infeasible, the position

advanced by the government here demonstrates that it

is entirely feasible. And petitioners’ concerns about an

ERISA duty to disclose “above and beyond the requirements of the securities laws,” Br. 28, largely fall away.

b. Petitioners also contend that permitting ERISA

fiduciary claims to proceed, even where petitioners’ allegations would establish that an insider fiduciary failed

to make a disclosure required by the securities laws,

would “impose heightened ERISA duties on dualcapacity fiduciaries” and “allow the circumvention of

limitations on securities suits deliberately fashioned by

Congress.” Pet. Br. 31 n.3; see id. at 58-60. But imposing an ERISA duty to disclose only when the fiduciary

already possesses a securities-laws duty to disclose

does not meaningfully impose “heightened” duties on

anyone. It may be true that dual-capacity fiduciaries

will more often have a securities-laws duty to disclose

than independent ESOP fiduciaries, and therefore more

often have a corresponding ERISA duty. But although

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it derives from a different statute, the legal duty itself

is not heightened at all.

The real objection, then, to an ERISA duty in these

circumstances cannot be to a heightened legal obligation, but rather to the potential for additional liability,

through the creation of what petitioners characterize as

an “end-run around the strict standards that Congress

has enacted to rein in abusive securities litigation” in

the PSLRA. Pet. Br. 58; see id. at 56-60. That is a

concern, but it is overstated. The PSLRA does not apply to duty-of-prudence claims under ERISA. See

15 U.S.C. 78u-4(a)(1) (“The provisions of this subsection

shall apply in each private action arising under this

chapter.”) (emphasis added). That does not mean, however, that ERISA plaintiffs may plausibly state a dutyof-prudence claim through merely generalized allegations of securities fraud.

This Court has already made clear that on a motion

to dismiss, a duty-of-prudence claim must be subjected

to a “careful, context-sensitive scrutiny.” Dudenhoeffer, 573 U.S. at 425. And the Court has instructed

district courts to consider not only whether a prudent

fiduciary could not have concluded that public disclosure would do more harm than good, but also whether

requiring such a disclosure would have furthered or

conflicted with the objective of the securities laws. Id.

at 429-430. Given the risks inherent in premature or

inaccurate public disclosures, meeting the ERISA

pleading requirements should entail more than generic

allegations that a securities-laws violation has occurred;

instead, to state an ERISA claim based on a failure to

make a public disclosure, complaints should allege sufficient facts to establish that the defendants themselves

actually had such a securities-laws-based duty and that,

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based on the circumstances at the time, those defendants plausibly knew or should have known the facts giving rise to that duty.

C. The Court Should Vacate The Judgment Below And Remand The Case To Allow The Court Of Appeals To Apply

The Correct Standard In The First Instance

The court of appeals held that respondents plausibly

alleged that, in the circumstances of this case, a prudent

fiduciary could not have concluded that effecting a public disclosure would have done more harm than good.

Pet. App. 15a. But the court reached that conclusion by

invoking an ad hoc balancing approach to determining

when a public disclosure would do more harm than

good, rather than considering the judgment reflected in

the securities laws; and neither the district court nor

the court of appeals considered whether respondents

plausibly alleged that each individual petitioner had an

independent legal duty to make such a disclosure. Because neither court below applied the correct legal

standard in determining whether respondents have

plausibly alleged a violation of ERISA’s duty of prudence, they should be given the first opportunity to apply that standard here.

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CONCLUSION

The judgment of the court of appeals should be vacated and the case remanded for further proceedings.

Respectfully submitted.

RACHEL MONDL

Deputy Solicitor of Labor

G. WILLIAM SCOTT

Associate Solicitor

T HOMAS TSO

Counsel for Appellate and

Special Litigation

EIRIK CHEVERUD

Trial Attorney

Department of Labor

ROBERT B. STEBBINS

General Counsel

MICHAEL A. CONLEY

Solicitor

DAVID D. LISITZA

Senior Litigation Counsel

Securities and Exchange

Commission

AUGUST 2019

NOEL J. FRANCISCO

Solicitor General

EDWIN S. KNEEDLER

Deputy Solicitor General

JONATHAN Y. ELLIS

Assistant to the Solicitor

General