# In the Supreme Court of the United States

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A80259d5417af1564

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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

32
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,

33
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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A80259d5417af1564. Public record. Not legal advice.