ProQuest (International Financial Law Review) (March 2012) -- Why a New York Court of Appeals decision to allow investor litigation against financial advisers may mean higher advisory fees for institutional investors

Institutional investors may have to pay higher advisory fees following the New York Court of Appeals December 20 decision to allow investor-initiated litigation against financial advisers.

In Assured Guaranty (UK) v. J.P. Morgan Investment Management, New York's highest court affirmed the Martin Act, the state's blue sky law, does not vest the attorney general with exclusive ability to file claims against investment advisers, when damages are sought on grounds of negligence or breach of fiduciary duty.

"This is opening up a new avenue to New York litigants, so we can expect more claims being made that will increase costs to investment firms generally," said Kevin Carroll, managing director and associate counsel at the Securities Industry and Financial Markets Association (SIFMA). "Those costs are likely to be passed on to investors in higher cost services."

Investment company costs are also expected to increase as investment advisers purchase liability insurance or conduct more extensive written analyses and documentations of investment decisions, along with internal audits, as a precautionary measure against litigation.

Preventive measures like those might not improve the advice given to clients, but will add to client fees and erode investor returns, according to an amicus brief submitted by SIFMA, The Clearing House, The American Bankers Association and the New York Bankers Association.

Levin, Papantonio, Thomas, Mitchell, Rafferty & Proctor partner Peter Mougey, former president of the Public Investors Arbitration Bar Association, which filed an amicus brief in favor of the plaintiff, said investors will not see higher costs as a result of the decision.

"The argument that costs will be passed on to investors is the off-key drum beat used in front of every government agency against investor...