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Fund Litigation – Where Are We?

A recent Dechert article summarizes recent fund industry litigation.  The article notes that due to the success of the industry in defending suits as well as the Supreme Court’s Decision in Janus Capital Group, Inc. v. First Derivatives Traders, the number of lawsuits stemming from disclosures in fund prospectuses has declined.  In another victory for the fund industry, most shareholder claims filed in connection with the collapse of the auction rate preferred markets in 2008 have been dismissed.

In spite of the difficulties in establishing a case based on Section 36(b) (which imposes a fiduciary duty on an adviser for the compensation it receives from a fund), plaintiffs continue to pursue these cases.  The article discusses recent 36(b) cases which have primarily involved funds that employ a sub-adviser or sub-advisers.  While many of the cases focus on the fee split between the adviser and sub-adviser, the article points out that new cases are challenging the overall advisory fees paid by the fund as lower fee splits than were at issue during early cases.  In addition, the article outlines a recent case that focuses on an adviser that also provides sub-advisory services, challenging the higher fees the adviser receives when it advises its own funds.  The article also states that boards also are implicated in their approval of the advisory contracts at issue, stating that the cases typically allege “that the directors could not have focused sufficient attention on this task because they oversee all the funds in a large fund complex, and that the directors are beholden to the adviser due to the compensation they receive for their service on the board.”

Finally, the article discusses the recent use by plaintiffs of Section 36(b) to challenge the fees received by advisers and their affiliates in connection with securities lending programs.  While one case in this area was dismissed, the SEC’s Office of Compliance Inspections and Examinations is doing a sweep exam of securities lending programs.


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