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MetWest Judge Strikes Blow to Plaintiff Arguments in Subadvisory Lawsuit

A district court’s thorough and decisive findings in MetWest’s Section 36(b) legal victory are feeding industry optimism, although plaintiffs have already appealed the decision. The opinion  by Judge George Wu of the Central District of California analyzed the claims common to “subadvisory” lawsuits in which plaintiffs focus on alleged disparities between fees charged by advisers for managing their affiliated funds and the fees they charge as subadvisers to unaffiliated funds. The plaintiffs argued in part that MetWest charges its fund a higher advisory fee than the fee it charges to subadvised funds, despite providing substantially the same services to both. The judge in his opinion agreed with MetWest’s assertion that it provides substantially different services to its funds and takes on substantially different risks on behalf of its funds compared to subadvised funds. Those services included daily pricing and striking the NAV; satisfying shareholders’ redemption requests; compliance; public filings; assisting the board; portfolio management; overseeing and coordinating with third-party service providers; and client servicing. “MetWest incurs substantial reputational, financial, litigation, regulatory, and business risks when serving as the adviser to the Fund. The Court concludes the same is not true (or it is greatly reduced) when MetWest acts as a subadviser to the Subadvised Funds,” the judge wrote. The court’s detailed analysis in MetWest might invalidate these plaintiff arguments going forward, industry observers have said. The court also rejected the plaintiffs’ challenge of the robustness of the board’s 15(c) process and the claim that the board did not review subadvisory agreements entered into by the adviser. Witnesses testified that the contractual language in subadvisory agreements are not typically reviewed by the fund board.

 

 
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