The U.S. government's lawsuit against ValueAct Capital targets one activist investor but could call into question routine practices across the $16 trillion mutual fund industry, according to attorneys and industry representatives.
The U.S. Department of Justice last week alleged the hedge fund improperly classified two company investments as passive -- and therefore exempt from disclosure requirements -- while taking an activist role with executives. ValueAct disputes the claim.
Some communications the government cites as evidence are similar to discussions that are increasingly common between traditional, buy-and-hold funds and companies in their portfolios.
The case comes as active and passive investors work more together to pressure management at underperforming companies. Activists court passive shareholders before launching such a campaign, and passive investors recruit activists to agitate, several activist managers told Reuters.
Traditional funds may need to reassess their compliance with disclosure laws, according to a memo to clients from Davis Polk, a New York law firm with expertise in financial services.
"Such an institution will have to examine whether it can claim to have a truly 'passive' intent," said the memo, issued in response to the ValueAct case.
Those firms could include T. Rowe Price Group, BlackRock Inc. and Vanguard Group. Spokespeople at those companies declined to comment, and representatives of seven additional fund firms contacted by Reuters declined to comment or said executives were unavailable. The Justice Department also declined to comment.
An industry trade group said the case could restrain shareholders from addressing important issues with corporate executives and board directors.
"The DOJ case could have a chilling effect on dialogs between companies and their shareholders," said Amy Borrus, deputy director at the Council of Institutional Investors, a Washington D.C.-based nonprofit whose members include pensions, endowments and major mutual funds.
Competition for better returns has led some big mutual fund firms to take a more active role, weighing in on issues such as CEO pay and corporate governance. Vanguard Chairman and CEO William McNabb, in a speech last June in New York, described how the firm increasingly addresses matters of concern with companies in its portfolio.