T. Rowe Price wins director suit
February 1, 1999
A federal court judge has dismissed a lawsuit against T. Rowe Price Associates, giving support to mutual fund industry executives' contentions that fund directors do not lose their independence by serving on more than one mutual fund board.
U.S. District Court Judge Andre M. Davis threw out the suit which David Migdal and Linda B. Rohrbaugh filed against T. Rowe Price, Rowe Price-Fleming International, three T. Rowe Price subsidiaries and fund directors. The judge ruled that the investors could not attack the fees which T. Rowe Price charges merely by saying that fund directors lost their independence because they served on more than one board in the T. Rowe Price fund complex. The law presumes directors are independent, Davis said.
Davis made his ruling in a four-paragraph opinion dated Jan. 20. He said Migdal could try to revise his claim in the coming weeks or the case would be dismissed permanently. Lawyers for Migdal and Rohrbaugh declined to comment. The investors claim the directors lost their independence because of the pay they received and then approved "disproportionately large fees" for T. Rowe Price.
The company was pleased by the ruling, said Ed Gilltenan, a spokesperson for T. Rowe Price. The allegations in Migdal's complaint were "completely unfounded," he said.
"We continue to believe that the service by individual directors on more than one mutual fund board should not have any impact on his or her status as an independent director," Gilltenan said.
The T. Rowe Price decision marks the first substantive ruling in five cases filed last year against mutual fund advisers challenging the fees they charge funds. In each case, the investors allege that independent mutual fund directors - who are responsible for approving fees - lost their independence from the adviser because of the money they were paid for serving on fund boards. In the T. Rowe Price case, the investors contended that directors "frequently" received more than $60,000 a year for their work.
Fund industry executives and lawyers have contended that getting paid to serve on more than one fund board does not destroy directors' independence.
The T. Rowe Price ruling is consistent with the key argument which the industry has been making - directors do not lose their independence by serving on more than one fund board, said Jeffrey R. Maletta, a lawyer with Kirkpatrick & Lockhart in Washington. Federal law, longstanding industry practice and SEC pronouncements all are consistent with the practice of having a director serve on more than one board in the same fund complex, Maletta said.
"I think the industry is pretty confident of their interpretation of the law here," Maletta said.
The issues of directors, their independence and fund fees will receive a further airing later this month. The SEC is sponsoring a panel discussion on the role of independent directors in Washington on Feb. 23 and Feb. 24. The topics to be discussed include fees and expenses, distribution, disclosure and valuation of fund portfolio securities. The conference goal is to "work toward recommendations to improve the current system of fund governance," the SEC said in a statement.
In the T. Rowe Price case, Migdal's attorneys have at least three options, lawyers said. They can file a revised claim, appeal the decision or drop the case entirely.