The following article appeared in the November 2005 SCAS Alert:

A Call for Clarity

When it comes to filing claims in securities class action settlements, the question that comes up over and over again is also the most basic one:

Whose responsibility is it?

There will be over $7 billion in final securities class action settlements in 2005--who is responsible for recovering that money for the underlying accountholders of institutional investors and asset managers? Is it the clients themselves? The investment adviser? The custodian? None of them? All of them? The unsettling answer is that no one knows definitively, and this uncertainty combined with the threat of lawsuits, ambiguous messages from the SEC, and an increasing barrage of questions from clients is causing institutions a fair amount of heartburn.

This question was, not surprisingly, a topic of discussion at the securities class action panel that was part of the ISS annual conference on Oct. 19-21. After debating who, if anyone, has the fiduciary duty to file claims in securities class action settlements, the panel consisting of Baron & Budd's Randall Pulliam, Mintz Levin's Peter Saparoff, and the Investment Adviser Association's Karen Barr tried to answer an equally important off-shoot of this issue: Given the current state of confusion, what will need to occur for there ever to be clarity?

Our panelists offered different opinions on this. Mr. Saparoff offered the most startling solution, stating that he expects that eventually “some state securities regulator or attorney general will find an egregious case with millions of dollars not claimed and then pursue a criminal case,” which will in turn create enormous pressure for the SEC to engage in rule-making.

Ms. Barr, general counsel of the IAA, optimistically stated that she believed that “eventually, everyone will take care of this by contract.” In the meantime, Ms. Barr urged investment advisers to go back to each of their clients to clarify these duties and responsibilities. Ms. Barr added that to the extent the SEC is imposing expectations upon investment advisers in this area (as it has done implicitly through its “fact-finding” and deficiency letters), “we think the SEC should have done a notice-and-comment rulemaking rather than a back-door rulemaking through the inspection process.”

Finally, Mr. Pulliam, whose law firm filed the forty-plus lawsuits against mutual fund advisers in January 2005 over their alleged failure to file claims, stated that he expects the ultimate solution will be a “combination of litigation and regulation.” He added that he is “cautiously optimistic that the SEC will continue down the road to expressly say that all investment advisers have an obligation to [file claims.]”

I agree with the common thread coming from these panelists--the ultimate solution to the current confusion is for the SEC to engage in rule-making to clearly determine who is, and who is not, responsible for filing claims in securities class action settlements. My sense is that the uncertainty that surrounds responsibilities in this area is one of the primary reasons that billions of settlement dollars are now being left on the table each year by institutional investors.

Clear rules will help blow the smoke away from what should be a “no-brainer” way for institutional investors to help themselves and their accountholders. As Mr. Saparoff stated, “It's not a just a duty; it's good business. For every penny spent [on filing claims], you get a dollar back.”