Compliance September 9, 2011

Court Upholds Decision in Excessive Fee Case

The 3rd U.S. Circuit Court of Appeals has upheld a district court ruling dismissing charges that Unisys Corporation and Fidelity Management Trust Company caused participants in Unisys’ retirement savings plan to pay excessive fees.
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The appellate court noted the trust agreement between Unisys and Fidelity allows for amendment of the investment options included in the trust agreement by mutual agreement of the parties. Fidelity entities were required to give their consent in order for funds to be added to the group of plan investments it administers. This provision extends Fidelity’s control only over which investments were to be administered by Fidelity and not over which investments were selected for inclusion in the plan as a whole.   

The court said, as a directed trustee, Fidelity had no contractual authority to control the mix and range of investment options, to veto Unisys‟s selections, or to constrain Unisys from including other investment options in the plan administered by an entity other than Fidelity. It therefore did not a function as a fiduciary with respect to selecting and maintaining the range of investment options in the plan.   

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In dismissing all claims against Fidelity, the court said the plaintiffs did not contend Fidelity had knowledge about Unisys‟s allegedly flawed decision-making process regarding investment options to be included in the plan. In fact, by contending that Fidelity failed adequately to review the plan‟s fees in light of the size of the plan‟s assets, plaintiffs effectively concede Fidelity did not possess actual knowledge of Unisys‟s alleged breach. 

In addition, the 3rd Circuit used its precedent to find the plaintiffs cannot bring suit against “nonfiduciaries charged solely with participating in a fiduciary breach.”   

Looking at the Unisys plan as a whole in the context of plaintiffs’ allegations, the court was unable to infer from what is alleged that the its investment selection process was flawed. The appellate court agreed with the district court that the Unisys plan contains a variety of investment options including company stock, commingled funds, and mutual funds (see "Unisys, Fidelity Win Excessive Fee Case Dismissal"). As of the filing of the second amended complaint, the plan contained 73 distinct investment options. Among the retail mutual funds specifically targeted in the complaint were funds with a variety of risk and fee profiles, including low-risk and low-fee options, according to the opinion.   

In light of the reasonable mix and range of investment options in the Unisys plan, the court said plaintiffs‟ factual allegations about Unisys' conduct do not plausibly support their claims.  

Finally, the 3rd Circuit court found that because the district court properly dismissed the complaint, it could refrain from deciding whether Unisys was entitled to summary judgment on the defense that Employee Retirement Income Security Act (ERISA) Section 404(c) shielded it from liability for participants’ investment choices.  

The 3rd Circuit opinion is available at http://www.ca3.uscourts.gov/opinarch/102447p.pdf.
The Markets September 9, 2011

ETF Assets Down Nearly 4% in August

According to State Street Global Advisors’ ETF Snapshot report, exchange-traded fund assets fell $42 billion in August, down 3.8%.
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This dip comes after positive inflows seen in June and July (see “ETF Flows Positive in July“). Both the MSCI EAFE Index and the S&P 500 Index fell, losing 9% and 5.4%, respectively. Commodities also suffered, with the S&P GSCI Index down 1.8%, even though Gold soared 11.4%. U.S. Bonds were also positive with the Barclays U.S. Treasury up 2.8% and the Barclays U.S. Aggregate Index up 1.5%.   

ETF flows topped $2 billion in August. The Fixed Income category continued to see positive inflows attracting $4.8 billion in the month and $23.6 billion year-to-date. With $2.9 billion leaving the category, the International – Emerging category saw the most significant outflows.   

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Concerning market performance, International – Developed and Emerging Markets declined 9% and 8.9%, respectively. Domestic Large Cap, Mid Cap and Small Cap Markets all continued to decline, dropping 5.4%, 7.1%, and 7.7%, respectively. Conversely, the U.S. Aggregate, the U.S. Treasury, and the U.S. Corporate bond markets were all positive in August. Commodities dipped 1.8%.   

According to SSgA data, 1,116 ETFs with assets totaling $1 trillion were managed by 36 ETF managers as of August 31, 2011.  The top three managers in the U.S. ETF marketplace were BlackRock, State Street, and Vanguard. Collectively, they account for approximately 83% of the U.S.-listed ETF market.   

The top three ETFs in terms of dollar volume traded for the month were the SPDR S&P 500 [SPY], iShares Russell 2000 [IWM], and SPDR Gold Shares [GLD]. The top three ETFs in terms of assets for the month were the SPDR S&P 500 [SPY], SPDR Gold Shares [GLD], and Vanguard Emerging Markets [VWO].

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