U.S. lawsuit against activist ValueAct puts mutual funds on alert

Tue Apr 12, 2016 6:31pm EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Michael Flaherty and Ross Kerber

NEW YORK/BOSTON (Reuters) - The U.S. government's lawsuit against ValueAct Capital targets one activist investor but could call into question routine practices across the $16 trillion mutual fund industry, according to attorneys and industry representatives.

The U.S. Department of Justice last week alleged that the hedge fund improperly classified two company investments as passive - and therefore exempt from disclosure requirements - while taking an activist role with executives. ValueAct disputes the claim.

Some communications the government cites as evidence are similar to discussions that are increasingly common between traditional, buy-and-hold funds and companies in their portfolios.

The case comes as active and passive investors work more together to pressure management at underperforming companies. Activists court passive shareholders before launching such a campaign, and passive investors recruit activists to agitate, several activist managers told Reuters.

Traditional funds may need to reassess their compliance with disclosure laws, according to a memo to clients from Davis Polk, a New York law firm with expertise in financial services.

"Such an institution will have to examine whether it can claim to have a truly 'passive' intent," said the memo, issued in response to the ValueAct case.

Those firms could include, for instance, T. Rowe Price Group (TROW.O: Quote), BlackRock Inc (BLK.N: Quote) and Vanguard Group. Spokespeople at those companies declined to comment, and representatives of seven additional fund firms contacted by Reuters declined to comment or said executives were unavailable. The Justice Department also declined to comment.

An industry trade group said the case could restrain shareholders from addressing important issues with corporate executives and board directors.   Continued...

Graphic on shareholder outreach initiatives.