Q&A With MetWest Attorneys After Successful District Court Defense

Attorneys for the defense in Kennis vs. Metropolitan West say their victory in district court could be a turning point in a trend of securities litigation that emerged after a Supreme Court decision known as Jones vs. Harris.

Following an in-depth trial, a federal court judge recently found Metropolitan West Asset Management charged a reasonable fee for a fund it advises, considering the services it provides and risks it takes for the fund.

Amy Roy, one of the lead defense attorneys on the case and a partner in the securities litigation group of Ropes & Gray, fielded a series of questions about the lawsuit and what it’s outcome means for the investment management industry.

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PLANADVISER: Having now successfully represented the defendants, can you give us some contextual information and reflect broadly on the ruling in Kennis v. Metropolitan West Asset Management?

Roy: The case fits among a slew of others that have been brought in the last 10 years, following the Supreme Court ruling in Jones vs. Harris. That case established a new standard of liability in these matters that courts have since been grappling with and trying to apply. For context, the Supreme Court determined the Seventh Circuit erred in holding that claims alleging mutual fund management’s fees were too high is not cognizable under Section 36(b) of the Investment Company Act of 1940.

After that decision, we saw the plaintiffs’ bar bring more than 25 lawsuits against various investment companies. The cases all make claims based on the discrepancy that is typically charged when an entity is acting as a primary adviser for a fund versus acting as that fund’s sub-adviser.

This case in particular is among the first where the district court has so thoroughly dug into the evidence and the record. The court has firmly discerned and determined that there are very meaningful differences between the services provided and the risks carried by a primary investment adviser servicing a proprietary mutual fund compared with a sub-adviser fulfilling a much more discrete role for an externally sponsored mutual fund.

This court has identified a number of the differences in detail, and I think this will prove to be helpful in related cases yet to be decided. At this stage, only two of the 25 or so cases were dismissed, and only a handful have been resolved through summary judgement. This is the case because these matters are complex and they involve fact-based inquiries. We hope that the result of this court’s very thorough examination of the evidence is that it will allow other courts to acknowledge the fundamental difference between advisers and sub-advisers to mutual funds.

PA: We write a lot about lawsuits filed under the Employee Retirement Income Security Act. Many of those cases make it through the summary judgement and dismissal phases, ultimately to be decided in favor of the defense. Do you see parallels here?

Roy: Yes and I am hopeful that this finding will serve as something of a deterrent to the plaintiffs’ bar when contemplating these types of suits in the future. At the end of the day, this has been four years of investment in the lawsuit by the plaintiffs and they have not prevailed. That’s not a great outcome for them. So, I’m hopeful that this thorough finding by the court will act as a deterrent for erroneous suits.

PA: Can you elaborate on the core theories in the decision and explain the difference between the two types of services investment companies provide to mutual funds—advisory and sub-advisory?

Roy: Sure. Every mutual fund has its own primary adviser, often called the sponsor. That sponsor is responsible for carrying out the day-to-day activities that are required for the fund to be compliant with the Investment Company Act of 1940, such as striking the net asset value on a daily basis, making sure there is adequate liquidity to meet shareholder redemptions, making sure disclosures are meeting SEC regulations, etc. All of these things are managed by the primary adviser—not the sub-adviser.

When an investment firm is acting as a sub-adviser, the primary responsibility for all of that aforementioned activity rests with the fund’s primary adviser/sponsor. At the end of the day, the primary sponsoring entity is doing more of the day-to-day compliance work, and they are legally on the hook if anything goes wrong. If a sub-advised fund, for example, makes a net asset value calculation error, this is not ultimately going to come back to the sub-adviser. It’s ultimately the responsibility of the primary adviser/sponsor.

The court in our case has firmly recognized the differences are meaningful, both operationally and in terms of the overall risk/liability profile.

PA: To what extent do you think plaintiffs’ misunderstanding of the complexities of the mutual fund marketplace are to blame for the filing of this type of lawsuit?

Roy: My view is somewhat cynical here. I think it’s pretty clear that the investors that are buying these products are largely sophisticated institutional investors. Or, if the shareholders are retail investors, they are typically having their funds selected for them through sophisticated retirement plans or other sophistical intermediaries. In this particular case, nearly 80% of the shareholders were sophisticated institutional shareholders.

I think that fact is important to mention and it’s something that our judge really took notice of. The plaintiffs’ bar likes to paint a different picture of these lawsuits. They try to find individuals who claim after the fact not to have understood the products they own. At the end of the day, most of the investors influenced in these cases are sophisticated, and they pressure their advisers and asset managers to keep fees low. They also have every ability to vote with their feet every single day. They are free to pursue other funds. The court in this case recognized these facts.

PA: Do you expect an appeal in this case?

Roy:  In fact, the opposition has already filed a notice of appeal, and that’s not surprising. These plaintiffs have invested four years of time and resources into pursuing this claim, so there’s little downside for them to attempt an appeal. We feel very strongly that the decision, being so thorough and clearly reasoned, will stand.

Retirement Industry People Moves

Gramercy Funds hires global head of business development; Ascensus acquires retirement and benefits solution adviser; Private equity director joins Hirtle Callaghan; and more. 

Art by Subin Yang

Gramercy Funds Hires Global Head of Business Development

Jeffrey D. Sharon, CFP, CIMA has joined Gramercy Funds Management as global head of business development. Sharon will be responsible for the firm’s marketing, distribution and investor relations efforts and will also serve as a member of Gramercy’s Management Team.

Sharon brings 25 years of expertise in the asset management industry, as a business development professional and leader of institutional sales and client service teams. Prior to joining Gramercy, he spent nine years at OFI Global Asset Management, an OppenheimerFunds Company. He was most recently the head of North America Institutional. Sharon was also a member of the distribution senior leadership team, where he provided strategic direction and contributed to the broader global and multi-channel distribution effort.

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Prior to OppenheimerFunds, Sharon was at Bank of America Merrill Lynch (BAML), where he spent over seven years as director of Institutional Sales. Prior to BAML, he was vice president, business development officer at Trusco Capital Management where he spent three years in institutional business development. He began his career in 1994 at Putnam Investments, where he held various client management and sales positions for his six-year tenure.

Sharon earned a bachelor’s degree in finance from Florida Atlantic University, and he has obtained professional certifications from the University of Central Florida and The Wharton School at the University of Pennsylvania. He is a certified financial planner professional, certified investment management analyst, a member of the Investment Management Consultants Association (IMCA), a member of the Association of Investment Management Sales Executives (AIMSE), and is involved in nonprofit volunteerism by serving on the Board of Directors of the Children’s Home Society of Florida Foundation and as chairman of the Board of The Faine House.

Ascensus Acquires Retirement and Benefits Solution Adviser

Ascensus has acquired Beneco from Alpine Investors. The firm, which offers a full suite of recordkeeping, third-party administration (TPA), and benefit plan consulting services, will immediately become part of the FuturePlan by Ascensus line of business.

“At FuturePlan, we understand that contractors face unique challenges when it comes to creating and managing an employee benefits plan while keeping the cost of their bids down,” states Jerry Bramlett, head of FuturePlan. “Beneco is one of the largest prevailing wage specialists in the country—adding their significant scale and unrivaled expertise to the FuturePlan team will allow us to help prevailing wage businesses to build a better future for their employees while giving them the ability to be more competitive with their contract bids.”

“For more than 30 years, Beneco has partnered with prevailing wage businesses all over the country to help them provide their employees with comprehensive benefits and valuable retirement plans,” states Kristy Bryson, Beneco’s chief executive officer. “We have invested time and resources to successfully position our business for the future and are excited to execute on new growth opportunities as part of FuturePlan.”

AndCo Names New Senior Consultant

AndCo has hired Gwelda Swilley as a senior consultant. Swilley joins the firm with over 25 years of investment consulting and leadership experience. 

Swilley viously served as a senior vice president and senior consultant with Callan Associates.  Prior to joining Callan, she served as a managing consultant with Gray & Co. and held early career development consulting positions at both LCG and Watson Wyatt. Swilley will be based in Atlanta and will work to expand the company’s presence across the country. She will service all plan types within the institutional space.

Swilley received her bachelor’s degree and master’s degree in international relations and affairs from Florida State University.

Private Equity Director Joins Hirtle Callaghan

Hirtle Callaghan announced that Stephen Vaccaro has joined the firm as director of Private Equity. Vaccaro is an investment professional with more than 15 years of experience in endowment management and consulting, including the University of Pennsylvania, Princeton University, and BCG.

Vaccaro is working closely with Hirtle Callaghan’s investment team to oversee private equity investment efforts on behalf of the firm’s family, endowment, foundation, health care and pension clients. He reports to Dan McCollum, deputy chief investment officer, who leads the firm’s manager selection and is himself an endowment veteran, having joined Hirtle Callaghan from Brown University. Vaccaro also serves as a member of Hirtle Callaghan’s Investment Policy Committee and Investment Strategy Committee.

“We are excited to welcome a professional of Stephen’s caliber to the investment team at a time when private equity is an increasingly important component of our clients’ portfolios,” says McCollum. “Stephen brings an impressive track record leading private equity investments and a robust relationship network of talented fund managers. We are certain that his extensive experience at two of the world’s most prestigious university endowments will further enhance our ability to identify and access top performing private equity managers.” 

Vaccaro joins Hirtle Callaghan from the University of Pennsylvania’s Office of Investments. As a senior team member, he played an active role in investment committee discussions across public equity, private equity, real assets and absolute return strategies.

Prior to joining the University of Pennsylvania, Vaccaro was a senior team member at Princeton University’s $26 billion endowment, where he worked in private investments across buyouts, venture capital, natural resources and real estate. Before Princeton, he served as a principal in BCG’s New York and Moscow offices, where he led numerous projects for private equity firms, investment banks, global corporations, and start-up ventures. Vaccaro holds a bachelor’s degree from Vanderbilt University and a master’s degree from Yale University. He is also a CFA charterholder. 

Empower Retirement Selects Chief Product Officer

Empower Retirement appointed Tina Wilson as senior vice president chief product officer, where she will lead the product strategy and delivery of retirement plan and retail products.

The appointment will be effective on September 9, and she will report to Empower President and CEO Edmund Murphy.

In her role, Wilson will lead a team of 35 professionals responsible for product development while collaborating with teams across the organization, including technology, marketing and client experience.

“Tina will drive product vision, lead and collaborate with teams across our organization to ensure that we are a leader in providing our customers the best experience,” says Murphy. “We are in an exciting time in our company and in our industry. Our customers’ expectations are evolving and changing rapidly and we continue to innovate, bringing them a personalized customer experience.”

Wilson joins Empower Retirement from MassMutual Financial Group having led both retirement and investment product teams at MassMutual. 

She has more than 25 years of industry experience in numerous leadership roles. She holds an undergraduate degree from the University of Connecticut, has a CFA credential and is an accredited investment fiduciary.

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