Portfolio Monitoring: A Fiduciary Duty
By Jonathan D. Karmel
The New York Times recently reported a "barrage of lawsuits" filed
against mutual funds alleging that they are failing to claim money due
their investors from settlements of securities class action lawsuits.
More than 40 fund managers have been sued across the Country,
including Merrill Lynch, Vanguard, Wells Fargo, Janus and Dreyfus, all
accused of violating their fiduciary duty to investors by failing to
file claims for money from settlements of shareholder lawsuits.
According to the Times article, mutual funds have failed to collect $2
billion due their investors. (New York Times 1/19/05)
The problem facing institutional
investors-the failure of their fiduciaries to claim money recovered on
their behalf-begs the larger and paramount questions. Are fiduciaries
taking all of the necessary steps to determine, in the first instance,
if there are losses and, then, to act to recover these losses? In most
cases, the answer is no to both questions. Not only are fiduciaries
leaving billions of dollars of money unclaimed, they are not
exercising their fiduciary duty to recover losses attributable to
securities fraud. This later figure is estimated in the billions of
dollars and can represent the difference between a fund meeting its
investment performance goals or not. The problem, however, is easy to
remedy. More significantly, the failure to do so may be a breach of
fiduciary duty.
The duty of prudence embodied in Section
404 of ERISA requires that fiduciaries discharge their duties "with
the care, skill, prudence, and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character and with like aims." This prudent standard makes "more
exacting, the requirements of common-law trusts relating to employee
benefit trust funds." Donovan v. Mazzola, 716 F.2d 1226, 1231 (9th
Cir. 1983).
Against this background, pension fund
fiduciaries must consider whether adopting portfolio monitoring
procedures is a prudent exercise of their fiduciary responsibility. In
this regard, the Secretary of Labor wrote in a case involving the
issue of whether plan fiduciaries may serve as lead plaintiffs in
securities class-action litigation: "Not only is a fiduciary not
prohibited from serving as the lead plaintiff, the Secretary believes
that a fiduciary has an affirmative duty to determine whether it would
be in the interests of the plan participants to do so. The Secretary
has previously taken the position that it may not only be prudent to
initiate litigation, but also a breach of a fiduciary's duty to not
pursue a valid claim. See Martin v. Feilen, 965 F.2d 660, 667 (8th
Cir. 1992) (Secretary of Labor may sue a fiduciary for breach of
fiduciary duty for deciding not to pursue a derivative claim)."
Based on the above, it is consistent with
a plan fiduciary's duty of prudence to adopt portfolio monitoring and
retain a law firm under an appropriate agreement with significant
securities litigation experience and resources to effectively pursue
such claims. There is simply no reason for plan fiduciaries not to do
so. Portfolio monitoring that can identify potential losses and advise
plan fiduciaries is, in today's environment, a logical and prudent
extension of the existing monitoring of the investment performance of
pension funds. When advised of a potential loss, plan fiduciaries and
their professionals can consider the economic impact on the plan's
investments, as well as the cost to the plan in participating in
litigation against the likelihood and amount of potential recovery.
However, unless plan fiduciaries have procedures in place, working
like an antivirus software to scan its portfolio for potential losses,
then the plan fiduciaries will never have the information in the first
place to make a prudent and deliberative decision.
In short, adopting portfolio monitoring
would add another layer of protection to a plan's assets against
securities fraud that cost pension funds and their participants
hundreds of billions of dollars a year.
- Jonathan Karmel, of Karmel & Gilden,
Chicago, Illiniois, is an attorney representing Taft-Hartley Funds.
