Let's start with a controversial, but immutable fact –
your investment portfolio will suffer a loss as a result of
corporate fraud or mismanagement. It is a question of when, not if,
your portfolio will suffer such a loss. This is true whether your
portfolio is invested in public equities or fixed income
instruments.
As fiduciaries, institutional investors have a responsibility to
monitor their investment portfolios, protect and maximize their
assets, and ensure that no money that should have been awarded to
their funds are left unclaimed. If investment funds are lost due to
corporate fraud or mismanagement, the institutional
investor's' trustees and management are responsible for
making best efforts to reclaim those assets if possible.
Institutional investors play a critical role in monitoring,
investigating, and recovering funds that have been lost as a result
of corporate mismanagement or fraud. What can be done to ensure
that your institution is not leaving millions behind in unclaimed
awards? How do you ensure that your beneficiaries' or
customers' interests are represented and you are exercising the
best possible portfolio monitoring practices? And most importantly,
how do you do this with the limited resources, time, and knowledge
at your disposal?
The answer is to implement best practices for portfolio monitoring.
Best practices are the equivalent of compound interest. The same
way that money multiplies through compound interest, the effects of
best practices multiply as you repeat them. They seem to make
little difference on any given day and yet the impact over months
and years can be enormous. It is only when looking back two, five,
or perhaps ten years later, that the value of good habits and the
cost of bad ones become strikingly apparent.
The following five items form the best portfolio monitoring
practices for limiting unclaimed funds and helping trustees and
management carry out their fiduciary responsibilities:
1. Implement a Securities Litigation Policy
The first step is to make sure you understand the steps! Having
a written securities litigation policy in place, much like an
investment policy, will help ensure that internal and external
stakeholders understand the process and their roles in it.
This is necessary no matter how small or large your portfolio is
and what type of securities you are invested in, from public
equities to fixed income, for separately managed accounts or pooled
investments such as mutual funds.
Here, imitation is the sincerest form of flattery. While there is
no "one size fits all" policy, you do not need to
reinvent the wheel. Peer institutions often have their policy
available online and trade groups such as NAPPA, GFOA, NCCMP, and
NCPERS are also excellent resources for sample policies.
2. Hire Some Qualified Firms
You wouldn't hire a podiatrist to perform heart surgery, and
you shouldn't rely on just anyone to help you monitor and
protect your investments. There is a pool of qualified firms that
specialize in providing portfolio monitoring and securities
litigation services to institutional investors. These firms
identify and inform funds of portfolio losses due to mismanagement
or fraud, provide advice on the appropriate action to take, monitor
securities actions impacting funds, and file claims in settled
matters.
The retention of outside portfolio monitoring law firms provides an
efficient and economically prudent means of monitoring investment
portfolios, as their services are generally offered at no
out-of-pocket expense to the institution.
Consider using the Request for Proposal (RFP) process as an
effective tool for selecting outside counsel best suited to meet
your institution's needs. You will need a clear understanding
of the goals of the RFP process, the needs of your institution, and
the services you require. Specific information from interested
firms should be requested so that you can analyze the monitoring
tools and procedures offered by various firms. Outside counsel and
consultants can be very helpful in the preparation and review of
the RFPs.
3. Maintain Independence
A portfolio monitoring agreement should not be exclusive to any
one firm. Rather, advice from multiple firms provides your
institution with a range of viewpoints. With the threat of
competition among firms, the risk of receiving poor or
self-interested legal advice is mitigated. Further, if your
institution decides to take legal action, multiple firms are forced
to compete on price, resulting in the best deal for your
institution.
Additionally, decision-making authority should always belong to
your institution. This demonstrates that your institution is
informed, actively engaged, and that the advice received from
outside counsel is disinterested and not frivolous. While your
institution may seek advice from counsel, it is ultimately the
institution's decision as to whether to bring legal action, or
any other action, in response to fraud or mismanagement that has
been detected in your portfolio's investments. In such
instances, the determination of who to retain should solely be left
to your institution.
4. Knowledge is Power
Your institution should receive regular updates from monitoring
firms that includes relevant information about your
institution's portfolio, including investment losses, the
cause(s) of any such losses, potential claims, and legal options
available. Understandability and customization options can be key
differentiators between firms or platforms.
Steps should be taken to ensure that current service providers
(e.g. custodial banks) or potential new service providers will be
able to provide accurate and accessible documentation on your
purchasing and trading histories for securities owned or previously
owned by your fund. This assists in determining your
institution's eligibility for new matters and in settlements.
Given settlement notices may not be sent until years after the
initiation of litigation, documentation must be held and maintained
for long periods in order to submit valid claims. A robust
monitoring platform should be able to maintain these records.
5. File Those Claim Forms, Or Else
Millions of dollars from class action settlements remain
unclaimed every year. To ensure your institution is not foregoing
settlement money, a designated person or entity (such as a
custodial bank) should monitor all settlements, regardless of
whether your institution is a party to the lawsuit. This ensures
that your institution is made aware of any settlements impacting
it, has time to consider all options in response (including to opt
out or file a claim), and allows you to respond in a timely fashion
to meet all eligibility requirements and deadlines.
The institution will be leaving money on the table if it cannot
accurately determine how much it lost, filing deadlines, or if
other information slips through the cracks. But, the submission of
proof of claim forms must meet strict deadlines and requires
documentary evidence to support your claim. Understanding the
intricacies of the claims process and submitting the appropriate
forms takes time and expertise. The best practice for avoiding
forfeiture of eligible claims is to designate a person or entity
(such as a custodial bank) to handle the submission of all proof of
claim forms on behalf of your institution.
Starting 2025 by following the five practices above will provide
institutional investors with the best practices for monitoring
investment portfolios, upholding fiduciary duties, and ensuring
that members' interests are adequately protected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
