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In two recent decisions, the Fourth and Sixth Circuits both applied the Supreme Court’s decision in Fifth Third Bancorp v. Dudenhoeffer, 134 S. Ct. 2459 (2014),[1] to hold that an ERISA fiduciary may rely on the market price of a publicly-traded stock as an assessment of the stock’s riskiness. The Fourth Circuit held that a prudent fiduciary may consider public information concerning a stock’s riskiness when determining whether to divest. Tatum v. RJR Pension Investment Committee, 2017 WL 1531578 (4th Cir. 2017) (Motz, J.). The Sixth Circuit ruled that a fiduciary’s failure to investigate the accuracy of a publicly-traded company’s stock price is not a “special circumstance” within the meaning of the Fifth Third decision. Saumer v. Cliffs Natural Resources, 853 F.3d 855 (6th Cir. 2017) (Cook, J.).

Fourth Circuit: A Prudent Fiduciary May Consider Public Information Concerning a Stock’s Riskiness When Determining Whether to Divest 

On April 28, 2017, the Fourth Circuit held that “in an efficient market, a fiduciary can rely on the market price to reflect the public information about risk of loss, even if, in the beneficiaries’ view, the market valuation is not properly accounting for the true risk of loss.” Tatum, 2017 WL 1531578. The court further found that ERISA does not require “a more compelling reason for divestment decisions than for investment decisions.”

The Fourth Circuit rejected plaintiffs’ claim that “a hypothetical prudent fiduciary is not justified in divesting a stock based on public information about risk.” The court explained that in Fifth Third, the Supreme Court “merely held that a fiduciary is not required to divest a high-priced stock based on public information that shows a risk of price decrease.” In the case before it, the Fourth Circuit found the district court correctly held that “a prudent fiduciary would have” considered the “risk of loss . . . reflected in the low stock price” of the stocks at issue when determining whether to divest.

Significantly, the Fourth Circuit deemed meritless plaintiffs’ argument that “a hypothetical prudent fiduciary would have concluded that [the stock at issue] was undervalued and that some unknown event would occur to increase its value unexpectedly or to cease its precipitous decline.” The court found that ERISA “does not demand such an impossible feat.” The court stated that “[h]aving a standard in which the fiduciary is held liable regardless of whether an outcome is foreseeable is akin to having no standard at all.”

Sixth Circuit: Failure to Investigate the Accuracy of a Publicly-Traded Company’s Stock Price Is Not a “Special Circumstance” within the Meaning of Fifth Third

On April 7, 2017, the Sixth Circuit held that Fifth Third foreclosed the argument that a stock’s “risk profile exceeded the reasonable bounds for a retirement option.” Saumer, 853 F.3d 855. The Sixth Circuit explained that Fifth Third “plainly holds that a fiduciary may rely on market price as an unbiased assessment of a security’s value,” including its riskiness.

The Sixth Circuit further held that “a fiduciary’s failure to independently verify the accuracy of the market’s pricing” does not constitute a “‘special circumstance’ rendering [the fiduciary’s] reliance on the market price imprudent” under Fifth Third. The court found “that even if the special-circumstances exception encompasses more than market inefficiency, it doesn’t include a fiduciary’s failure to independently verify the accuracy of the market’s pricing.”

The Sixth Circuit explained that the Fifth Third Court “reasoned that an investor’s inquiry into a publicly traded company is unlikely to reveal the company’s ‘true’ value, much less the future course of its stock price.” Because ERISA fiduciaries have “little hope of outperforming the market . . . based solely on their analysis of publicly available information,” the Fifth Third Court held ERISA fiduciaries may “as a general matter, prudently rely on the market price.” Id. (quoting Fifth Third, 134 S. Ct. 2459).