Legislation would make it harder for investors to sue mutual funds over high fees

A plaintiff would have to state in their initial complaint why fiduciary duty was breached, and then prove the violation with 'clear and convincing evidence'

Jan 17, 2018 @ 4:44 pm

By Mark Schoeff Jr.

[Update: On Jan. 18, the House Financial Services Committee approved the Mutual Fund Litigation Reform Act, 31-25.]

Legislation that would make it more difficult for investors to sue mutual fund companies for excessive fees was poised to advance in the House on Wednesday.

The House Financial Services Committee was set to take up a bill that would impose a higher legal burden for plaintiffs when they allege that a fund has violated its fiduciary duty by charging high fees.

Under Section 36(b) of the Investment Company Act of 1940, investors can sue a fund for breaching fiduciary duty regarding compensation for services. The bill's author, Rep. Tom Emmer, R-Minn., asserted that these suits lack merit.

"By cutting down the number of frivolous lawsuits targeted at mutual funds, we can allow Americans to continue to make the investments they need for their future," Mr. Emmer said in a Jan. 10 statement after introducing the bill, the Mutual Fund Litigation Reform Act.

The legislation was one of 17 bills the House financial panel began debating on Wednesday. The markup was to continue Wednesday evening. Votes could be postponed until Thursday.

Most of the legislation, including Mr. Emmer's bill, is likely to be approved by the Republican-majority committee and head to the House floor.

So far, mutual fund companies have not lost an excessive fee case. But more than a dozen cases are moving through the court system that are focused on sub-adviser fees.

For instance, plaintiffs allege that when a fund sponsor, such as a financial firm or insurance company, charges 75 basis points in management fees and then outsources management to a sub-adviser who it pays 25 bps, the difference amounts to an excessive fee.

"The sub-adviser arguments are getting the attention of a lot of judges," said Niels Holch, executive director of the Coalition of Mutual Fund Investors. "Now is not the time to change the rules, while we're in the middle of all these lawsuits."

Under Mr. Emmer's bill, a plaintiff would have to state "with particularity" in their initial complaint why fiduciary duty was breached, and then prove the violation with "clear and convincing evidence" rather than a preponderance of the evidence.

The Consumer Federation of America said the bill would force plaintiffs to plead with particularity before they have access to evidence.

The bill "would impose two new requirements that, between them, would make it virtually impossible for mutual fund shareholders to bring claims for excessive fees," Barbara Roper, CFA director of investor protection, and Micah Hauptman, CFA financial services counsel, wrote in a Jan. 16 letter to committee lawmakers. "The effect would be to further immunize fund companies from accountability when they charge excessive fees."

The Investment Company Institute, the mutual fund industry trade association, backs Mr. Emmer's bill, which it said would not curtail all Section 36(b) lawsuits, just the "abusive" ones.

"Rather, the legislation would discourage plaintiffs' attorneys from bringing non-meritorious lawsuits by allowing judges to dismiss those suits at an earlier stage," ICI president and chief executive Paul Schott Stevens wrote in a Jan. 16 letter to House Financial Services Chairman Jeb Hensarling, R-Texas, and ranking member Maxine Waters, D-Calif.

The language in Mr. Emmer's bill also is a provision of Mr. Hensarling's Financial Choice Act, a broad overhaul of the Dodd-Frank financial reform law that the House approved last year.

Mr. Hensarling's bill is unlikely to go anywhere in the Senate, where Democrats have 49 members in their caucus — plenty to support a filibuster.

If approved by the full House, it's unclear whether Mr. Emmer's bill or similar legislation would get traction in the Senate, especially if it depends mostly on Republicans for House passage.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Mar 15

Webcast

A Fintech Buyer’s Guide for Advisers

Are you ready to invest in technology? Heres everything you need to know before spending a dollar.Many advisers have embraced the value of digital tools to improve their firm, and are ready to invest in new technology to continue their... Learn more

Featured video

INTV

Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Cetera reportedly exploring $1.5 billion sale

The company confirmed it's talking to investment bankers to 'explore how to best optimize [its] capital structure at lower costs.'

SEC Chairman Jay Clayton outlines goals for a new fiduciary standard

Rule should provide clarity on role of adviser, enhanced investor protection and regulatory coordination.

Advisers bemoan LPL's technology platform change

Those in a private LinkedIn chat room were sounding off about fears the independent broker-dealer will require a move to ClientWorks before it is fully ready.

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want their 2017 bonuses.

Maryland jumps into fiduciary fray with legislation requiring brokers to act in best interests of clients

Legislation requires brokers to act in the best interests of clients.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print