On April 8, 2016, the Department of Labor’s Employee Benefits Security Division implemented the final version of the fiduciary rule (29 CFR sections 2509, 2510 and 2550), setting forth the circumstances giving rise to the responsibilities of an employee benefit plan fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). This rule also applies to the role of an individual retirement account (IRA) fiduciary. The fiduciary rule addresses conflicts of interest in providing retirement plan advice. It has raised public awareness about the responsibilities of a fiduciary and whether those duties are being met in a variety of situations beyond the pension plan context.
The term "fiduciary" is derived from the Latin word "fides," which means faith, trust, reliance and confidence. From the legal standpoint, the term fiduciary means that one is vested with the rights and powers to act for the benefit of another person or entity. The fiduciary relationship is based on trust or confidence, as in the case of a trustee – beneficiary relationship.
The law imposes duties on fiduciaries to prevent harmful abuse of those relationships, which can bring financial and other losses to the beneficiaries or principals. While fiduciary duties generally fall under the categories of duty of care and duty of loyalty, the law has expanded those responsibilities. Other fiduciary duties include: a duty of confidentiality, a duty to make disclosures and act with complete candor, a duty of prudence and a duty of good faith. When people and organizations enter into financial and legal situations involving reliance on another, a fiduciary duty is important to protect such persons and organizations from those giving priority to their own interests or the interests of others at the expense of the entrusting party or principal.
Breach of Fiduciary Duty
The fiduciary responsibilities of board members and corporate officers often give rise to lawsuits for breach of fiduciary duty. One such case concerned a situation where the controlling shareholder of Dole Food Co. enlisted the help of the company’s president (who was also a director) to acquire the shares he did not own in an attempt to take the company private. The controlling stockholder was appointed chief executive officer (CEO) by the board of directors. The trial court ruled in favor of the minority shareholders, holding that the president breached his duty of loyalty by intentionally depressing Dole’s stock price for the purpose of facilitating the take-private transaction. The court found that both the controlling shareholder as CEO and the president breached their duty of loyalty. Although the president was found liable as both a director and an officer, he was the only director held liable.
Under the Department of Labor’s new fiduciary rule, if an entity qualifying as a fiduciary under 29 CFR section 2510.3-21 fails to fulfill the duties enumerated under the rule, that entity can be held liable to the aggrieved parties under 29 U.S. Code section 1109.
Even before the applicability of the new fiduciary rule, ERISA required the fiduciary of a pension plan to act prudently in managing the plan's assets. An interesting lawsuit based on a claimed breach of that duty was filed against Fifth Third Bancorp (NASDAQ: FITB). The plaintiffs who brought suit were former employees of Fifth Third, participating in the bank’s pension plan. The pension plan offered a selection of 20 mutual funds and an employee stock ownership plan (ESOP). However, when the matching contributions of up to 4% were made by the bank, they would initially appear in the ESOP, although the participants could reallocate the value of those assets to another fund.
After the stock market crash resulted from the financial crisis, the plaintiffs filed a class action suit against Fifth Third. One of the theories of liability asserted in the case was that various Fifth Third officers, as fiduciaries and administrators of the plan, breached their fiduciary duties of loyalty and prudence imposed by ERISA by failing to act on non-public, insider information about the bank’s financial prospects due to its significant involvement in subprime mortgage lending. The plaintiffs claimed that the plan administrators had a duty to sell the stock before its price sank or, in the alternative, stop additional purchases of FITB stock, cancel the plan’s ESOP option or disclose the inside information to allow the stock price to adjust accordingly.
This case, Fifth Third Bancorp v. Dudenhoeffer, was ultimately decided by the United States Supreme Court. The Court ruled that to state a claim for breach of the fiduciary duty of prudence on the basis of inside information, plaintiffs must allege an alternative course that the fund administrators could have taken without violating the securities laws and that a prudent fiduciary in the same circumstances would not view the alternative as more likely to harm the fund than to help it. The Court vacated the decision by the U.S. Court of Appeals for the Sixth Circuit, reversing the dismissal of the complaint by the District Court.