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Brotherston v. Putnam Investments, LLC

United States District Court, D. Massachusetts

March 30, 2017

JOHN BROTHERSTON and JOAN GLANCY, individually and as representatives of a class of similarly situated persons, and on behalf of the Putnam Retirement Plan, Plaintiffs,
v.
PUTNAM INVESTMENTS, LLC, PUTNAM INVESTMENT MANAGEMENT, LLC, PUNTNAM INVESTOR SERVICES, INC., the PUTNAM BENEFITS INVESTMENT COMMITTEE, the PUTNAM BENEFITS OVERSIGHT COMMITTEE, and ROBERT REYNOLDS, Defendants.

          FINDINGS OF FACT, RULINGS OF LAW, AND ORDER FOR JUDGMENT

          WILLIAM G. YOUNG DISTRICT JUDGE

         I. INTRODUCTION

         On November 13, 2015, John Brotherston ("Brotherston") and Joan Glancy ("Glancy") (collectively, the "Plaintiffs"), individually and on behalf of a class of similarly situated persons and on behalf of the Putnam Retirement Plan ("Plan"), brought this class action under section 502(a) of the Employee Retirement Income Security Act of 1974 ("ERISA"), against the Plan's fiduciaries: Putnam Investments, LLC, Putnam Investment Management, LLC, Putnam Investor Services, Inc., the Putnam Benefits Investment Committee, the Putnam Benefits Oversight Committee, and Putnam's Chief Executive Officer Robert Reynolds (collectively, the "Defendants"), for breach of the fiduciary duties of loyalty and prudence in violation of 29 U.S.C. section 1104(a)(1)(A)-(B) (count I), prohibited transactions with a party in interest in violation of 29 U.S.C. section 1106(a)(1) (count II), prohibited transactions with a fiduciary in violation of 29 U.S.C. section 1106(b) (count III), failure to monitor fiduciaries in violation of 29 U.S.C. section 1109(a) (count IV), and other equitable relief based on ill-gotten proceeds in violation of 29 U.S.C. section 1132(a)(3) (count V). Second Am. Compl. ("SAC") ¶¶ 117-48, ECF No. 73.

         On January 9, 2017, the parties filed cross-motions for summary judgment pursuant to Federal Rule of Civil Procedure 56(a), Pis.' Mot. Partial Summ. J. Modification Class Certification Order, ECF No. 93; Defs.' Mot. Summ. J., ECF No. 89, along with supporting memoranda of law and statements of facts, Mem. Law Supp. Pis.' Mot. Partial Summ. J. Modification Class Certification Order ("Pis.' Mem."), ECF No. 94; Pis.' Statement Undisputed Material Facts Supp. Pis.' Mot. Partial Summ. J. ("Pis.' Facts"), ECF No. 95; Mem. Law Supp. Defs.' Mot. Summ. J. ("Defs.' Mem."), ECF No. 90; Defs.' Statement Material Facts ("Defs.' Facts"), ECF No. 91. On January 30, 2017, the parties filed memoranda in opposition to each other's motions for summary judgment, Mem. Law Opp'n Defs.' Mot. Summ. J. ("Pis.' Opp'n"), ECF No. 102; Defs.' Mem. Law Opp'n Pis.' Mot. Partial Summ. J. ("Defs.' Opp'n"), ECF No. 105, along with supplemental statements of facts, Pis.' Statement Material Facts Presenting Genuine Issue ("Pis.' Suppl. Facts"), ECF No. 103; Defs.' Resp. Pis.' Statement Undisputed Material Facts & Suppl. Statement Material Facts Dispute Opp'n Pis.' Mot. Partial Summ. J. ("Defs.' Suppl. Facts"), ECF No. 106. On February 13, 2017, the parties filed reply briefs. Reply Mem. Law Supp. Pis.' Mot. Partial Summ. J. Modification Class Certification Order ("Pis.' Reply"), ECF No. 112; Defs.' Reply Mem. Law. Supp. Mot. Summ. J. ("Defs.' Reply"), ECF No. 110. On that date, the Defendants also filed a new supplemental statement of material facts. Defs.' Resp. Pis.' Statement Material Facts Presenting Genuine Issue ("Defs.' Suppl. Facts II"), ECF No. 111. The Defendants submitted a supplemental brief on March 6, 2017. Defs.' Suppl. Br. Supp. Mot. Summ. J. Counts II and III ("Defs.' Suppl. Reply"), ECF No. 124. The Plaintiffs also submitted a supplemental brief on March 8, 2017. Pis.' Resp. Defs.' Suppl. Br. Supp. Mot. Summ. J. Counts II and III ("Pis.' Suppl. Reply"), ECF No. 127.

         After carefully reviewing the record and hearing oral arguments, the Court concluded that there were genuine issues of material fact in dispute as to counts I, IV, and V, as well as the Defendants' fifth affirmative defense. On March 3, 2017, the Court issued an order denying summary judgment on these counts. Order, ECF No. 120. The Court also denied the Plaintiffs' request for modification of the class certification order. Id.

         By agreement of the parties, the Court held a case stated hearing on February 28, 2017 on counts II and III.[1] It now makes the following findings of fact and rulings of law.

         II. FINDINGS OP FACT

         A. The Parties

         Putnam Investments, LLC ("Putnam") is an asset management company located in Boston, Massachusetts. Defs.' Facts ¶ 1. Putnam is the sponsor of Plan. Pis.' Facts ¶ 11; Defs.' Facts ¶ 1. Putnam, through its Chief Executive Officer ("CEO") and Board of Directors, has the authority to amend any or all provisions of the Plan as well as to select the investment options available to participants of the Plan. Pis.' Facts ¶ 13; Defs.' Suppl. Facts ¶ 13.

         Brotherston is a Westford, Massachusetts resident and a participant in the Plan. SAC ¶ 12; Defs.' Facts ¶ 8. From November 13, 2009 to the present ("Relevant Period"), Brotherston has invested in over thirty different investment options offered within the Plan. SAC ¶ 12; Defs.' Facts ¶ 9. Glancy is a Peabody, Massachusetts resident and was a participant in the Plan until the first quarter of 2010. SAC ¶ 13; Defs.' Facts ¶ 16. Glancy invested in fourteen funds offered by the Plan from November 2009 through March 2010. SAC ¶ 13; Defs.' Facts ¶ 17.

         The Plan is a 401(k) employee pension, defined-contribution plan and is open to eligible current and former employees of Putnam and its wholly-owned domestic subsidiaries. Pis.' Facts ¶ 12; Defs.' Facts ¶ 25; Defs.' Suppl. Facts ¶ 12. Plan participants can invest a percentage of their pre-tax earnings, and Putnam matches contributions up to five percent of the participant's salary. Defs.' Facts ¶ 47.

         Putnam Investment Management, LLC ("Putnam Management"), a wholly-owned subsidiary of Putnam, provides investment management services to Putnam mutual funds. SAC ¶ 24; Pis.' Facts ¶¶ 28-29; Defs.' Facts ¶ 2. Putnam Management is a participating employer in the Plan. Pis.' Facts ¶ 29; Defs.' Suppl. Facts ¶ 29. Putnam Investor Services, Inc. ("Putnam Services") is a wholly-owned subsidiary of Putnam and provides investor servicing functions to Putnam mutual fund investors. Defs.' Facts ¶ 3. Putnam Services is a participating employer in the Plan. Pis.' Facts ¶ 32; Defs.' Suppl. Facts ¶ 32.

         The management of the Plan is assigned to a set of committees. Pis.' Suppl. Facts ¶ 4; Defs.' Suppl. Facts II ¶ 4. The Putnam Benefits Investment Committee ("PBIC") is responsible for controlling and managing the investments made available by the Plan. Pis.' Facts ¶ 15; Defs.' Suppl. Facts ¶ 15. The Putnam Benefits Administration Committee ("PBAC") establishes procedures for Plan participants to determine the investment of their individual accounts. Defs.' Suppl. Facts ¶ 15. Both PBAC and PBIC are overseen by the Putnam Benefits Oversight Committee ("PBOC"), which has the authority to appoint and remove PBIC members. Pis.' Facts ¶ 16; Defs.' Suppl. Facts ¶ 16. PBOC members are appointed by and report to Putnam senior management. Pis.' Facts ¶ 17; Defs.' Suppl. Facts ¶ 17. Robert Reynolds is Putnam's CEO. Pis.' Facts ¶ 22.

         B. Challenged Transactions and Fees

         The Plan invests predominately in mutual funds owned and managed by Putnam. Pis.' Facts ¶ 26; Defs.' Suppl. Facts ¶ 26. Between 2009 and 2015, over 85% of the Plan's assets were invested in Putnam mutual funds. Pis.' Facts ¶ 26; Defs.' Suppl. Facts ¶ 26. These Putnam mutual funds pay management fees to Putnam from the assets of each mutual fund as compensation for the provision of investment management services and as reimbursement for certain investment management-related expenses. Pis.' Facts ¶ 28; Defs.' Suppl. Facts ¶ 28.

         The Plan invests in Putnam mutual funds by acquiring two distinct classes of shares: Y shares and R6 shares. Pis.' Suppl. Facts ¶¶ 72-73; Defs.' Suppl. Facts II ¶¶ 72-73. At the end of 2009, the Plan owned Y shares in almost sixty Putnam mutual funds. Pis.' Facts ¶ 34; Defs.' Suppl. Facts ¶ 34. On July 2, 2012, Putnam introduced an R6 share class for twenty Putnam mutual funds, and converted these twenty funds from class Y to class R6 shares effective April 1, 2013. Pis.' Facts ¶ 35; Defs.' Suppl. Facts ¶ 35. By the end of 2015, the Plan had converted its investments in twenty-five Putnam mutual funds from Y shares to R6 shares, the lower cost option of the two classes of shares. Pis.' Facts ¶¶ 36-37; Defs.' Suppl. Facts ¶¶ 36-37.

         Both classes of shares charge the same investment management fees. Pis.' Facts ¶ 37; Defs.' Suppl. Facts ¶ 37. The difference in expense ratios between the two classes of shares is explained, in part, by certain servicing fees charged by R6 shares that are lower than those charged by Y shares. Pis.' Facts ¶ 37; Defs.' Suppl. Facts ¶ 37. The expense difference between both classes of shares is also attributable, in part, to the fact that Y shares of Putnam mutual funds offer additional fee payments to certain financial intermediaries. Pis.' Facts ¶ 38; Defs.' Suppl. Facts ¶ 38. These additional fees charged by Y shares are often, but not always, in the form of revenue sharing payments. Pis.' Facts ¶ 38; Defs.' Suppl. Facts ¶ 38.

         Revenue sharing refers to the practice by which investment managers might opt to compensate certain financial intermediaries, like record-keepers, in recognition of services provided that the investment managers would otherwise have to perform themselves. Pis.' Facts ¶ 39; Defs.' Suppl. Facts ¶ 39. Whether revenue sharing payments are made is contingent on a negotiated agreement between investment managers and financial intermediaries. Pis.' Facts ¶ 43; Defs.' Suppl. Facts ¶ 43. Revenue sharing payments can be made in one of three ways: (i) the payments can be applied directly to administrative expenses; (ii) the payments can be deposited in a plan expense account from which administrative expenses are paid, with the leftover paid to the plan's participants; or (iii) payments can be allocated to participant accounts and administrative expenses paid some other way, such as pro rata or as a per-participant fee. Pls.' Facts ¶¶ 45-47; Defs.' Suppl. Facts ¶¶ 45-47.

         Great-West Life & Annuity Insurance Company ("Great-West") is responsible for providing recordkeeping services to Putnam on behalf of the Plan. Pis.' Facts ¶¶ 50-51; Defs.' Suppl. Facts ¶¶ 50-51. Pursuant to the 2008 contract between Putnam and Great-West, Putnam would not pay revenue sharing fees to Great-West. Pis.' Facts ¶ 50; Defs.' Suppl. Facts ¶ 50. Instead, Great-West would receive a yearly adjustable recordkeeping fee of $38.54 per participant, billable directly to Putnam.[2]Engstrom Decl., Ex. 38, Putnam Retirement Plan Recordkeeping Agreement Effective July 30, 2008, at 17, ECF No. 97-38. In 2013, Great-West contacted Putnam inquiring about revenue sharing payments related to Putnam funds held within the Plan. Pis.' Facts ¶ 53; Defs.' Suppl. Facts ¶ 53. Putnam concluded that paying revenue sharing fees to Great-West would constitute a prohibited transaction under ERISA due to Great-West's affiliation with Putnam. Pis.' Facts ¶ 54; Defs.' Suppl. Facts ¶ 54.

         Putnam currently pays revenue sharing of up to twenty-five basis points in connection with class Y shares of Putnam mutual funds held by third party plans, and has paid revenue sharing in that same range since 2009. Pis.' Facts ¶ 48; Defs.' Suppl. Facts ¶ 48. From 2009 to the present, Putnam has not made revenue sharing payments to the Plan or the Plan's record-keeper, Great-West, in connection with Y shares of Putnam mutual funds held by the Plan. Pis.' Facts ¶ 51; Defs.' Suppl. Facts ¶ 51. It is undisputed that the Plan does not receive revenue sharing payments from Putnam entities. Pis.' Facts ¶ 61; Defs.' Facts ¶¶ 53-54; Defs.' Suppl. Facts ¶ 61.

         III. RULINGS OF LAW

         The Plaintiffs claim that the payment of fees by Putnam mutual funds to Putnam constitutes a prohibited transaction under 29 U.S.C. section 1106 ("Section 1106"). SAC ¶¶ 124-134; Pis.' Mem. 13-14. Count II is brought under various subsections of Section 1106(a)(1), which provides in relevant part:

A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect . . . (C) furnishing of goods, services, or facilities between the plan and party in interest; (D) transfer to, or use by or for the benefit of a party in interest, of any assets of the plan.

29 U.S.C. § 1106(a)(1). Count III is brought under Section 1106(b), which provides in relevant part:

A fiduciary with respect to the plan shall not- (1) deal with the assets of the plan in his own interest or for his own account . . . (3) receive any consideration for his own personal account from any party dealing with such plan in ...

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