From the Editor...

June 24, 2016

By Hillary Jackson

From the Editor...

 

"Facing headwinds" is how some would describe the mutual fund industry's position with regard to the years-long spate of lawsuits filed that claim violations of Section 36(b) of the Investment Company Act of 1940. The plaintiffs bar has not been shy in the nearly 10 years since Jones v. Harris Associates when it comes to making allegations about excessive fees, and the industry has had few real wins along the way. That changed this week, with State Farm Investment Management succeeding with its motion to dismiss in the U.S. District Court in the Central District of Illinois. Ingenhutt et al v. State Farm Inv. Mgmt. Corp. isn't over, of course, as the plaintiff has 14 days to file an amended complaint (which would start the whole process over, meaning State Farm would have to file another motion to dismiss), but the win stands and is being viewed—albeit cautiously—as a good sign.

 

Metropolitan West Asset Management wasn't successful with its own motion to dismiss, however. In his June 16 ruling on Kennis v. Metropolitan West Asset Mgmt, LLC, U.S. District Court Judge George Wu said the plaintiff had sufficiently alleged three of the five Gartenberg factors and therefore the case could proceed. Meanwhile, U.S. District Court Judge Peter Sheridan of the District of New Jersey heard closing arguments in the Sivolella v. AXA Equitable Life Insurance Co. case at the beginning of this month and has stated that his decision will take months. The AXA case is the first to go to trial, so Judge Sheridan's ruling is one to watch.

 

While all this is going on, directors remain attentive to governance issues in their own boardrooms. Two years ago when PIMCO was a constant news story—in both the trade and general press—because of turmoil in its C-suite, its boardroom was facing its own problems. Two of its five independent directors abruptly stepped off the board, leaving it vulnerable to violating the independence rule, and Morningstar publicly criticized its governance practices. Since then, the board has worked to improve its practices and most recently it created a lead independent trustee position. Look for more changes, though, as the new LID is on the brink of retirement and clearly won't be at the helm for the long haul. 

 

At the other end of the scale, in terms of assets under management overseen, is the Boston Trust & Walden Funds board, which is doing its own succession planning ahead of a long-serving director's retirement at year-end. 

 

While these two boards may seem worlds apart because of the size of the advisers with which they are associated, each may be able to gain insight from the other as they both deal with issues of planning and succession, independence, and ensuring policies and procedures are relevant and appropriate. 

 

Finally, the Independent Directors Council has submitted a letter to the Securities and Exchange Commission to supplement previous comments its made about the regulator's liquidity risk management and fund use of derivatives proposals. In it, the IDC warns of the importance of the oversight-versus-management line and calls for a roundtable to discuss the role of independent fund directors. 

 

We value feedback on these and all our stories, so feel free to reach out. We'd love to hear from you. 

 

For now,

 

Hillary Jackson, founding editor, Fund Board Views