NEW YORK—The “Ancient Regime” is over, and fund companies can anticipate fewer lawsuits from shareholders over what they claim are excessive fees, according to panelists at the Practising Law Institute’s Investment Management Institute 2007 here last Friday.
A recent case seems to have cemented the shift that started in 2002 that has turned the courts from the patron saints of shareholders to strict adherents to the letter of the law.
Since the 1950s, the courts have allowed fund shareholders to bring civil cases against companies they considered in violation of the so-called “excessive fee” provisions of the Securtities Act of 1934.
Although the law itself does not address shareholders’ rights, the courts had, traditionally, considered the plaintiffs’ right to bring charges an implicit one.
Scores of shareholders in dozens of fund complexes brought cases against their fund companies, citing differences in share classes, among competitors and between retail and institutional customers. Often, shareholders in one fund would sue across the family, dragging funds into the litigation in which the shareholders had no express interest. Usually, investors prevailed, or the cases were settled.
The logic among judges, it seemed, was that the laws were written, after all, to protect shareholders. If violating them harmed shareholders, then shareholders had a right to pursue remuneration, said James N. Benedict, a partner at Millbank, Tweed Hadly & McCloy in New York.
Then came 2002.
In Olmstead v. Pruco, the Second Circuit Court ruled, in fact, although charging excessive fees is prohibited by law, there is no implied right allowing for shareholders to sue funds in which they have no direct holdings. Without such express legal standing, such cases have no place in court, the Second Circuit ruled.
“Implied rights were referred to as the ‘ancient regime,’” Benedict noted. Since then, 50 such cases have been tossed out by 30 separate judges, he added.
“It was not enough for Congress to have prohibited the conduct, they must have also prescribed enforcement,” said Benedict.
Last July, that ruling status went from trendsetting to precedent with the decision in Baker v. American Century. In that case, the plaintiff argued that because American Century charged a different, lower, fee to institutional investors, the company had breached the ruled prohibiting excessive fees.
In that case, the Kansas City, Mo.-based firm, represented by Benedict, proved that the difference in price was justified, and called the company “an ethical leader, with a strong record of executing its fiduciary role and good controls in place to protect them.
The court found the price difference “irrelevant” and dismissed the complaint with prejudice.
Only last month, the courts threw out another case—again, with prejudice—this time against Boston-based Eaton Vance. “The Plaintiff’s bar must increase its reliance on the 1934 and 1933 Acts,” said Lori A. Martin, of Wilmer Cutler Pickering Hale and Dorr. Attorneys will have to work harder to bring relevant shareholder grievances under the Investment Company Act of 1940, Benedict added.
“You can’t trot out what you think is dirty laundry and say, ‘This is dirty laundry because the fees are too high,’” Martin said. “Many of these cases will disappear.”