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Second Circuit Affirms Dismissal of Mutual Fund Class Action, Applies SEC Guidance on Industry Concentration

In a decision ratifying the mutual fund industry’s long-standing treatment of portfolio concentration, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action against the Sequoia Fund on September 9. In Edwards v. Sequoia Fund, Inc., the shareholder-plaintiffs alleged that the Fund violated its industry concentration policy when healthcare stocks grew to comprise more than 25% of the Fund’s assets in 2015, due to strong growth in the value of its holdings in Valeant Pharmaceuticals, Inc. The Fund’s healthcare position grew to more than 25% due solely to increases in Valeant’s share price, not because of any additional share purchases. Applying SEC guidance from 1983, the Second Circuit affirmed the trial court’s holding that such “passive” increases in concentration cannot constitute a policy violation, defeating the plaintiffs’ claims. The Fund is represented by a Ropes & Gray litigation team.

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The AXA Decision and Excessive Fee Litigation: Takeaways for the Investment Management Community


Time to Read: 1 minutes Practices: Investment Management

In this video, Rob Skinner, Ropes & Gray business & securities litigation partner, examines the decision in AXA’s excessive fee litigation, its impact on pending and future 36(b) cases, and key takeaways from the AXA decision for fund boards and advisors. In the AXA decision, the court rejected the plaintiff’s theory that advisory fees should be no higher than the fees that the advisor pays sub-advisors to handle a portion of the services provided to the funds. “The AXA case reminds us that the best defense to this theory is a robust board process, a fully informed board, and a candid discussion about those services differentials and why it is that the advisory fee and the sub-advisory fee are, of course, not the same,” said Mr. Skinner. While the AXA decision does not create any new law or provide a checklist for boards to follow, it is a prime example of how important a robust process combined with a fully informed board can be in order for fees to “pass muster” in the event of litigation, according to Mr. Skinner.
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