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.
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