Court Applies “Fiduciary Exception” to Mutual Fund Trustees’ Attorney-Client Privilege

04.10.2017

In Kenny v. Pacific Inv. Mgm’t Co. LLC (W.D. Wash.), a federal judge recently ruled that a mutual fund’s independent trustees must produce certain documents that the trustees had redacted or withheld based on attorney-client privilege. A plaintiff shareholder had subpoenaed the documents in an “excessive fee” case brought under Section 36(b) of the Investment Company Act.

Calling the issue one of first impression, the district court based its ruling on the so-called “fiduciary exception” to the attorney-client privilege. The court accepted the plaintiff’s position that this exception should apply when a beneficiary of a trust seeks information regarding a trustee’s acquisition of legal advice to “guide the administration of the trust,” as opposed to personal legal advice or advice sought in anticipation of litigation. As the district court noted, the Ninth Circuit has recognized the fiduciary exception in the ERISA context.

The court observed that the mutual fund in question is organized as a “Massachusetts business trust” and that, pursuant to the trust’s administration agreement, the trust paid the fees for the independent trustees’ legal counsel. As such, the court concluded that the fiduciary exception should apply, notwithstanding the independent trustees’ and investment adviser’s protests that the exception was never previously applied in the mutual fund governance context, and that doing so would discourage important communications between independent fund trustees and their retained counsel which, in turn, “would actually destabilize the mutual fund industry to the detriment of all shareholders.”

The independent trustees have not sought interlocutory appellate review of this ruling. The industry should all keep an eye on other 36(b) cases still in the discovery phase to see if the decision emboldens other plaintiffs.

 

©2017 Carlton Fields Jorden Burt, P.A. Carlton Fields practices law in California through Carlton Fields Jorden Burt, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.