Institutional investors may have to pay higher advisory fees
following the New York Court of Appeals December 20 decision to
allow investor-initiated litigation against financial
Assured Guaranty (UK) v. J.P. Morgan Investment
Management, New Yorks highest court affirmed the
Martin Act, the states blue sky law, does not vest the
attorney general with exclusive ability to file claims against
investment advisers, when damages are sought on grounds of
negligence or breach of fiduciary duty.
This is opening up a new avenue to New York litigants,
so we can expect more claims being made that will increase
costs to investment firms generally, said Kevin Carroll,
managing director and associate counsel at the Securities
Industry and Financial Markets Association (SIFMA). Those
costs are likely to be passed on to investors in higher cost
Investment company costs are also expected to increase as
investment advisers purchase liability insurance or conduct
more extensive written analyses and documentations of
investment decisions, along with internal audits, as a
precautionary measure against litigation.
Preventive measures like those might not improve the advice
given to clients, but will add to client fees and erode
investor returns, according to an amicus
brief submitted by SIFMA, The Clearing House, The American
Bankers Association and the New York Bankers Association.
Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor
partner Peter Mougey, former president of the Public Investors
Arbitration Bar Association, which filed an
amicus brief in favor of the plaintiff, said investors will
not see higher costs as a result of the decision.
The argument that costs will be passed on to investors
is the off-key drum beat used in front of every government
agency against investor protection, like Dodd-Frank, across the
country, said Mougey.
Mougey pointed to states like California and Florida with
higher fiduciary standards but average investor costs as an
argument in support of allowing investor brought claims against
Another lawyer preferring to remain anonymous said New
Yorks position as the US financial epicenter will
encourage all investment advisers to raise their fees to combat
potential litigation costs.
Columbia Law School professor John Coffee thinks the
litigation costs to result from the decision have been
Some have said this will open the flood gates,
Coffee said. I think thats exaggerated. There
probably will be a successful effort made by financial
institutions to put arbitration clauses in agreements with
Most broker-dealers already have mandatory arbitration
provisions with their customers, so there would not be much of
a change in broker costs because securities arbitration
requirements do not hinge on whether claims are made under
common law restrictions of negligence and fiduciary duties or
the Martin Acts restriction on securities fraud.
Investment adviser costs may be different, though.
Investors might become more confident in the capital markets
as a result of newfound right to file claims of negligence
against investment advisers, perhaps increasing investment
despite potential higher costs.
I think if investors saw there was legislation and
oversight of our markets to the point there wasnt fraud
du jour every few years, investors would have more
confidence, Mougey said. Everyone is
Coffee does not expect increased investment as a result of
the decision because investors have not yet won damages in a
claim against an adviser.
Investors dont look at formal changes in the
law; they look at whether there is significant difference in
outcome, said Coffee.
A decision on whether J.P. Morgan was negligent in its
investment of funds guaranteed by Assured is currently before
the state Supreme Court. Market effects of the NY Court of
Appeals decision to hear the case could be determined by the
presence, and amount of, awarded damages.