U.S. mutual fund trustees feel the heat
of investor lawsuits
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[December 27, 2016]
By Ross Kerber
BOSTON (Reuters) - Before New York's famed
21 Club steakhouse drew attention in November for hosting Donald Trump,
the wealthy U.S. president-elect, it quietly fed other public
representatives: trustees of Paris-based AXA SA <AXAF.PA> investment
funds.
The trustees - board members tasked with overseeing AXA funds - had
events there and at other ritzy spots, legal records show. A 2011
holiday party at a Del Frisco's restaurant cost $25,775, a $1,000
average for each of roughly 25 people present.
"The wine was very good," a trustee recalled of one meal.
The trustees' dining experiences emerged in a federal case decided in
August. Investors including a teacher and a retired police officer
accused the firm of collecting excessive fees, a charge the firm denied.
U.S. District Judge Peter Sheridan sided with AXA in his 146-page
decision, but he wrote the suit had prompted a "more scrupulous and
rigorous" review of board expenses. One result was to reimburse
investors for some of the meal costs.
![](http://archives.lincolndailynews.com/2016/Dec/27/images/ads/current/mcquellons_lda_LUAL_2016.png)
In courts across the land, investors are subjecting mutual fund boards
to greater scrutiny. Trustees, often paid hundreds of thousands of
dollars a year, are under pressure to prove they have stood up for
shareholders in an industry that has $16 trillion under management.
The lawsuits accuse fund boards of missteps such as failing to
scrutinize fees or pass along to investors economies of scale as their
funds grow with rising markets. The claims illuminate the long obscure
role of fund trustees, sometimes known as directors.
Despite their compensation and influence, at many fund families these
individuals rarely appear before investors and face few official
qualification requirements. Many are current or retired executives,
attorneys or academics, much the same as at large publicly traded
companies.
Defendants include large fund managers like BlackRock Inc <BLK.N> and
Pacific Investment Management Co, or Pimco. The fund managers deny
wrongdoing. An AXA spokesman declined to comment.
FEES A SENSITIVE TOPIC
In theory, mutual fund trustees can demand lower fees on the funds or
fire the managers who choose the funds' investments. But firings, which
investors could see as disruptive, hardly ever happen.
A common concern is that the boards are more focused on following
technical rules than looking out for shareholder interests, said Stephen
Davis, a senior fellow at the Harvard Law School Program on Corporate
Governance.
Fees are a sensitive topic for many actively managed mutual funds, which
are losing billions of dollars in assets to cheaper index-tracking
funds. Even a small reduction in fees can make a big difference for
investors who include many U.S. workers whose savings are in 401(k)
retirement plans.
A 2015 Morningstar study showed that while industry assets increased by
143 percent over a 10-year period, fund fees charged to clients fell
only 27 percent while industry fee revenue rose 78 percent, showing
companies benefiting from the gains more than their investors.
LAWSUITS AGAINST BLACKROCK, PIMCO
In one suit, in federal court in Trenton, New Jersey, plaintiffs accuse
BlackRock units of benefiting too much as assets of its Global
Allocation Fund <MALOX.O> more than doubled to about $58 billion at Oct.
31, 2013, from about $23 billion at Oct. 31, 2007.
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![](../images/122716pics/news_r25.jpg)
The offices of Pacific Investment Management Co (PIMCO) (L) are
shown in Newport Beach, California August 4, 2015. REUTERS/Mike
Blake/Files
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U.S. District Judge Freda Wolfson last year denied a BlackRock motion to
dismiss, writing that plaintiffs at least had raised enough doubts about
fund trustees that there remained "sufficient allegations that allow for
an inference of rubber-stamping by the Boards."
BlackRock defended its boards of trustees. A BlackRock spokesman
wrote via email that Global Allocation is priced competitively,
adding, "The suit is without merit and we intend to vigorously
defend against the action."
A judge has asked both sides for reports on the discovery process by
Jan. 19.
A suit in federal court in Seattle compares Pimco's well-known $78
billion Total Return fund <PTTRX.O> with the $2.3 billion Harbor
Bond Fund, <HABDX.O> a similar fund Pimco subadvises.
The plaintiff cited how Pimco charged holders of Class A shares of
Total Return 0.85 percent of fund assets, while investors were
charged just 0.53 percent of fund assets to own a comparable Harbor
Bond Fund share class.
The plaintiff claimed Pimco trustees "have been subverted by
defendants and no longer serve in their 'watchdog' role" and cited
the trustees' generous pay.
Pimco argues its board follows a rigorous process and called the
comparison to Harbor Bond Fund inapt because its in-house funds can
require it to perform additional work and assume additional risks.
Last year U.S. District Judge Ricardo Martinez denied a Pimco motion
to dismiss the case, currently awaiting trial.
A Pimco spokeswoman declined to comment.
Some complaints against directors have been knocked down. In a case
against Hartford Funds in Camden, New Jersey, U.S. District Judge
Renee Marie Bumb likened claims that Hartford's fund board allowed
excessive fees to "armchair quarterbacking and captious
nit-picking." Closing arguments in the case are set for January.
But elsewhere even unsuccessful actions have brought board
critiques.
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In Los Angeles, U.S. District Judge Gary Feess in 2009 dismissed a
challenge to fees at American Funds but wrote the board's oversight
process "seems less a true negotiation and more an elaborate
exercise in checking off boxes and papering the file."
An American Funds spokesman said the company in response provided
trustees more information about its approach to compensation.
Directors were unavailable to comment, he said.
For a graphic on fund board compensation, click
http://fingfx.thomsonreuters.com/gfx/rngs/USA-FUNDS-FEES/010031442H3/index.html
(Editing by Carmel Crimmins and Howard Goller)
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