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Investors are Paying Attention to Class Action Settlements. Are Their Advisers?


Overall, we are watching asset recovery trends continue upwards. In 2019, more than 460 securities class action cases were filed across eight jurisdictions globally. The U.S. – the world’s most active market – accounted for a record 428 of those cases, marking the third consecutive year U.S. filings exceeded 400. In 2020, a challenging year on all fronts, just 350 securities class actions were filed in the U.S. – an 18 percent decrease in filings from 2019. The decline, however, is primarily attributable to a drop in merger objection cases. Further, despite that dip in filings in 2020, investors still saw the highest median settlement awards recorded in a full decade, keeping with the trend of increasing annual median settlement values (and thus increasing individual case settlement values). Recoveries to investors were material in both years – over $4 billion in 2019 and more than $6 billion in 2020.

As investors look for unprecedented recoveries and more countries embrace group proceedings, there is every indication the securities class action market will continue to grow, and investors are paying attention. Here’s why.

Class Action asset recovery holds enormous financial potential for investors. Advisers are increasingly asked to offer a solution to recover monetary losses tied to class action settlements. And, with today’s global environmental, social and governance issues frequently litigated through the securities class action mechanism, many investors view participation in settlement opportunities as a means to execute on their ESG missions, in addition to recovery of significant monetary opportunities.

Beyond ESG and financial gains potential, investment advisers are recognizing what engaged institutional investors like pension funds have long known: recovering investment assets through the securities class action settlement process is part of their stewardship obligation for customer funds.

How Do Advisers Determine Their Obligations in the Class Action Claims Filing Context?

Courts and regulators have acknowledged a fiduciary duty to provide investors notice of their right to participate in a class action settlement but have stopped short of outlining precise obligations financial institutions have in the class action portfolio-monitoring and claim contexts.

How, then, do financial institutions evaluate their obligations in response to global class action opportunities? It comes down to meeting regulatory and contractual requirements and staying competitive.

For institutional investors such as RIAs, private equity managers, pension funds, and hedge funds, obligations may be evaluated in the context of stated fiduciary duties. The SEC’s 2019 Interpretation Regarding Standard of Conduct for Investment Advisers defines fiduciary duty of care to encompass advice and monitoring for the investment throughout the course of the relationship. Many institutions view their obligations to recover assets in active class action matters as inextricably linked to this responsibility. Further, under recent updates to standard of care obligations, advisers should consider whether the recovery of an investor’s financial assets is on equal standing to the investor’s right to vote on corporate actions. Where real-dollar asset recovery opportunities exist, investors expect comparable levels of care and service will be deployed on their behalf.

Customer contractual obligations also drive adviser evaluations of their obligations in the class action claims filing and recovery context. As you would expect, each adviser client brings unique contractual requirements to its consideration of how to be compliant in this space.

Perhaps the most compelling intelligence on the duties owed to investors is rooted in the expectations of the investors themselves. According to a 2020 survey by Broadridge Financial Solutions,1 94% of North American investors expect their advisers to behave like fiduciaries. Investor expectation in this regard is increasing from already high levels over the past decade. An SEC study conducted by RAND in 2008 reported that between 42% and 59% of investors assume their adviser is required by law to act in their best interests, regardless of the category of adviser or the actual legal requirements or regulatory schema to which the adviser is subject.

Thus, customer expectation on its own is a significant driver of participation in global class action asset recovery. Financial institutions that hire Broadridge to manage class action recovery report that their competitors are offering such services. And for many, that is enough to end the evaluation, driving a commitment to global class action services to stay competitive and avoid attrition.

Benefits of a Proactive Approach

While the securities class action recovery environment is shifting, some segments have remained somewhat reactive. Accordingly, as advisers move more into this space, they also recognize that growing volumes, recoveries, and complexities warrant a centralized, proactive approach.

A well-defined investment recovery policy, proven processes, and fulsome reporting will promote efficiency, security, and accountability in class action claims. This is especially important where internal stakeholders across IT, data management, operations, finance, and legal/compliance all have an interest in recoveries obtained via class action claims. Further, if an entity is providing shareholder communications, account reporting and class action services via multiple providers, centralizing these services with one provider may promote best InfoSec and data privacy practices, as well as serve the needs for stakeholder reporting and predictability. Given the evolving global data privacy landscape, security and transparency are critical for institutions managing personally identifiable information and private financial information.

For the investment adviser, class action asset recovery efforts enhance client trust, build loyalty, and promote client retention and referrals. Recoveries in this context can support performance indicators, adding to an adviser’s assets under management, a key indicator of success, or directly increasing client account returns. And clients not only stand to receive substantial monetary recoveries, but they can rest assured their hard-fought investments are returned to them, rather than being distributed elsewhere without their consent.

Ready for Next: Preparing for Proactive Class Action Recovery

As investors recognize the potential for asset recovery and the demand for class action recovery services grows, advisers can expect to receive more requests to support these services. Fortunately, they do not have to build internal workflows, invest in technology or add headcount to stay compliant and competitive in this space. But they do have to choose the right partners.

Where possible, advisers should centralize services with a proven partner that has the right blend of data security, global Fintech gravitas, shareholder engagement focus, and class action experience. Look for a partner who understands the intricacies of complex securities litigation and claims management, and who can conduct informed and valid cost/benefit analyses of participation in class action asset recovery opportunities when appropriate.

Today’s investors are increasingly interested in working with financial advisers who are committed to advocating aggressively to maximize their investment performance. Fund managers, custodian banks, broker-dealers and other advisers have a unique opportunity to stay competitive and meet a growing need in the class action space, creating meaningful market differentiation, building client loyalty, and outpacing the competition.

1. Broadridge Investor Survey, June 2020.

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