In a recent, ground-breaking federal district court case, Robert Kenny v. PIMCO (Western District of Washington, Case No. C14-1987-RSM), Chief District Judge Ricardo Martinez issued a court order on November 21, 2016, that required the independent mutual fund trustees of the PIMCO Total Return Fund to divulge all of their confidential deliberations concerning their PIMCO advisory contract review. In so doing, Judge Martinez applied the “fiduciary exception” to the attorney-client privilege because he found the independent trustees owed a fiduciary duty to the beneficiaries of the trust—the mutual fund shareholders. Judge Martinez held that the attorney-client privilege for independent mutual fund trustees only protects personal advice and advice concerning potential or actual litigations.
The Kenny v. PIMCO case is extraordinarily important because in effect independent trustees of mutual funds going forward should expect no protection from the attorney-client privilege, except concerning matters personal to them, such as their potential liabilities, indemnification, d&o/e&o insurance, litigations (actual and potential), and perhaps, trustee compensation.
Judge Martinez relied heavily upon a US Supreme Court case, US v. Jicarilla, 564 US 162 (2011), involving a trust which he likened to the PIMCO Total Return Fund which was structured as a Massachusetts business trust. By invoking common trust case law, Judge Martinez reasoned that the mutual fund trustees have a fiduciary duty to all trust beneficiaries which in this case are the mutual fund shareholders and concluded that withholding information from fund shareholders would be a breach of that fiduciary duty. Interestingly, some mutual funds and almost all closed end funds are structured as corporations to which trust law does not apply. For those funds that are structured as corporations, partnerships and limited liability companies, the attorney-client privilege may still protect the deliberations of the board members who are generally directors, not trustees.
The Kenny v. PIMCO case can be expected to be aggressively used by plaintiffs’ counsel in all future 36b cases that challenge allegedly excessive advisory fees. Going forward, the independent mutual fund trustees will have no protection from the attorney-client privilege in those litigations, unless Kenny v. PIMCO is overturned or modified which is unlikely. Rather, it is expected that the ten federal circuits will endorse the holding in Kenny v. PIMCO which over time will have a chilling effect on independent mutual fund trustee deliberations.