A federal district court judge has ruled that an investor in a fund-of-funds may not bring lawsuits against the underlying funds for payment of excessive fees.  The court opined that the investor does not hold securities in the underlying funds and does not “enjoy any of the incidents of ownership of possession” including voting rights or the rights to receive dividends or liquidations.  The court rejected the plaintiff’s claim that the “fortunes of the … shareholders are interwoven with and completely dependent upon the efforts and success of the investments” in the underlying funds.

OUR TAKE: First, we agree with the court’s position because there lacks any direct privity between the investor and the underlying funds.  Second, we do not think this completely resolves the issue because other courts could determine that an investor does in fact exercise voting rights and the right to receive distributions through the top tier fund.  Third, we suspect the SEC may take a different view that the Court.

Curran v. Principal Management