Investment Adviser’s Deputization of Director Does Not Make Adviser’s Clients Directors by Deputization
Last week, I wrote about the Second Circuit’s decision upholding the district court’s dismissal of the complaint filed in Rubenstein v. International Value Advisers. The Second Circuit followed that decision with a similar decision in Rubenstein v. Berkowitz, which I wrote about last year. The cases involved similar facts and issues, and the appellate court consolidated oral argument in the two cases.
In Berkowitz, a registered investment adviser acquired more than 10% of Sears’ stock in client accounts and filed a Schedule 13D indicating a control purpose. The RIA also had a representative serving on Sears’ board. The plaintiff alleged that the clients were subject to Section 16 on three separate bases: (1) a client forms a group with its investment adviser by giving the adviser discretionary trading authority over its account; (2) a client forms a group with its investment adviser, relating to the securities of a single issuer, when the adviser has filed a 13D relating to that issuer which reports beneficial ownership of the client’s holdings; and (3) a client holding an issuer’s securities in a managed account becomes a director by deputization if the investment adviser deputizes a representative to serve on that issuer’s board of directors.
The first two theories of liability were rejected in International Value Advisers, so they were rejected again in Berkowitz. The court also rejected the deputization argument, holding that “Rubenstein does not allege that [the adviser’s] clients agreed to or were even aware of the deputization. His complaint, therefore, fails to allege the prerequisites of a group agreement.”
These two Rubenstein cases dealt with managed accounts, not multiple investment funds sponsored and managed by the RIA, but at least some of the court’s analysis might be relevant to managed funds.
-Alan Dye, Section16.net May 25, 2020
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