In a recent ruling, a federal district court judge in California ordered the independent trustees of a mutual fund to produce certain documents previously withheld or presented in redacted form in reliance on the attorney-client privilege.
The decision applies an exception to the common understanding of attorney-client privilege in a manner that is unprecedented within the mutual fund industry. If the decision is followed, fund trustees may no longer be able to rely on attorney-client privilege in previously accepted circumstances and should reassess attorney communication procedures in light of the ruling.
In the case, plaintiff, a shareholder in a fund organized as a Massachusetts “business trust,” sued the investment adviser and distributor of the fund, alleging that defendants breached their fiduciary duty to shareholders under Section 36(b) of the Investment Company Act by charging excessive fees. In connection with this litigation, plaintiff issued subpoenas to the independent trustees of the fund who were not parties in the lawsuit. In response, the trustees withheld or redacted over 200 documents by asserting the “attorney-client privilege,” which protects confidential communications made between a client and his or her attorney relating to legal advice. The independent trustees withheld the communications on the basis that they constituted confidential legal advice obtained in connection with board and committee meetings, board governance matters, and the annual review and approval of the fund’s advisory and administrative agreements and distribution and servicing plans.
Plaintiff then filed a motion to compel the independent trustees to produce the documents by arguing that a trust law-based “fiduciary exception” to the attorney-client privilege be applied. The fiduciary exception prohibits the use of the attorney-client privilege to withhold information from a trust beneficiary when a trustee obtains legal advice pertaining to the administration of the trust. For the privilege to apply, the trustee must have received the legal advice for “personal protection or independent personal purpose.” Plaintiff argued that the fiduciary exception should apply to the withheld communications because the independent trustees have a fiduciary duty to the fund’s shareholders, and the independent trustees sought legal advice in managing the fund rather than for personal legal advice or in connection with or in anticipation of any litigation. In further support of his argument, plaintiff noted that the legal advice at issue was paid for by the trust rather than the independent trustees.
Defendants and the independent trustees argued that the fiduciary exception should not apply to the withheld communications because it has never previously been recognized in the context of the mutual fund industry with respect to communications between non-party independent trustees and their external counsel or in the hundreds of lawsuits previously filed under Section 36(b) since its enactment 45 years ago. Furthermore, defendants and the independent trustees argued the detrimental effect the application of the fiduciary exception would have on the mutual fund industry given the unique nature of an independent trustee’s role and the importance of independent trustees being able to freely communicate with their counsel.
The judge agreed with plaintiff’s arguments and held that the fiduciary exception be applied. In this regard, the judge found that defendants and the independent trustees failed to explain why the trustees, in acting as fiduciaries to the fund’s shareholders, should not disclose to them attorney communications that were paid for by the fund for the benefit of the fund and its shareholders. Accordingly, the judge agreed that the communications were not protected by attorney-client privilege and ordered the independent trustees to produce the documents withheld. The decision did not consider the differences recognized in Massachusetts between a common-law trust interpreted under the commonwealth’s trust act and a “business trust or unincorporated association” organized under a completely distinct and unrelated statute.