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Strategies for Addressing Common SEC Fair Fund Recovery Challenges
By: Michael Lange, Financial Recovery Technologies
To participate in SEC Fair Funds, public pension funds must navigate strict documentation and procedural requirements, which can make recovery opportunities more difficult – but also potentially significant if adhering to best practices. Proper planning, communication, and understanding of SEC policies are crucial for maximizing participation and successful claims.
This is an excerpt from NCPERS Winter 2025 issue of PERSist.
SEC Fair Funds may resemble typical securities class actions settlements, but their goals and the parties involved differ. Most notably, Fair Funds have specialized requirements that can make participation more difficult for investors and their fiduciaries.
As a federal agency, the U.S. Securities and Exchange Commission is focused on regulation and deterrence – not investor compensation. To participate in Fair Funds, pension funds must conform to the SEC's claim submission standards and processes.
If these hurdles are cleared, however, Fair Fund recovery opportunities can be significant. In 2024, the SEC has established 10 new funds worth more than $530 million combined, putting this year's enforcement activity well above the $236 million we observed in 2023.
The difference between a successful recovery and a rejection frequently comes down to the small details. With that in mind, let's examine the most frequent recovery challenges we see pensions face with Fair Funds, as well as best practices for navigating them.
Challenge #1: Documentation Requirements
The strongest barrier to Fair Fund participation is the SEC's requirement for third-party trade substantiation records. The agency ideally wants to see 100% documentation for every holding and trade, proven by custodial and brokerage records created at the time of the activity.
These requirements make Fair Fund participation especially difficult for older claim periods, when records are difficult to retrieve or no longer exist because the time required for preservation has passed. Recently, for example, a $152 million Fair Fund involving Weatherford International had a claim period spanning 2009-12.
Claim administrators also have not taken a uniform approach to these requirements. More recently, however, we've seen more audit requests from the SEC and more strict enforcement by administrators. Through the first half of 2024, my team has tracked more than 16,000 Fair Fund-related audits on claims that FRT has submitted on behalf of institutional investors – continuing a larger three-year trend that we expect to persist.
Solution: Alternative Documentation
When permitted, shareholders can use affidavits testifying to the reliability of system trading records, either from third-party sources (e.g., custodians and prime brokers) or even the reliability of a client's own systems. This approach is often necessary when third-party records have not been preserved over time or are otherwise difficult to obtain.
Challenge #2: Shorter Administration Timelines
Compared to securities class actions, Fair Fund administrations have tighter turnaround times and more rigorous compliance demands. For example, deadlines for responding to SEC document requests are more strictly enforced, and investors have less room for error when the documents do not exactly match data submitted on the claim form.
While it is not uncommon for courts to permit exceptions that expand participation in class action settlements -- such as accepting claims filed late if distributions have not yet occurred -- the SEC does not give investors an opportunity to “save” their claims by substantiating other holdings and trades. Instead, all claims are effectively rejected.
Solution: Proactive Communication
As a best practice, entities submitting claims on behalf of investors should work with claim administrators to understand the types of records accepted for a particular Fair Fund submission, so that they can maximize shareholders' lead times for document retrieval and optimize claim submissions. This may also enable investors to better assess whether the time required to gather the required records outweighs the potential recovery opportunity.
Challenge #3: Remittance
The SEC requires that 100% of Fair Fund payouts be distributed to the beneficial owners, without subtracting any contingent fees. This creates an operational hurdle for investors that work with a third-party filer and normally elect to pay a contingent fee out of the total pool of funds recovered from a given settlement.
As a result, some third parties that file claims on behalf of other entities have either started requiring upfront payment from or stopped servicing Fair Funds altogether.
Solution: Standard Operating Procedures
Fair Fund submission requirements and enforcement continue to evolve. Creating remittance processes that comply with SEC standards -- in ways that can be audited, if needed -- is critical, as is maintaining visibility into submitted claims throughout the Fair Fund lifecycle. Challenging administrative decisions when penalties for document audit failures appear too broad is also an option for investors.
Conclusion
Many U.S. securities class action settlements are routine, to the point that recovery programs have become table-stakes for many fiduciaries. But Fair Funds are a major exception given their strict requirements tending to exclude more claims than they accept. Establishing strong internal processes for managing Fair Fund submissions will only become more important in 2025.
Bio: Michael Lange (SVP Worldwide Litigation at Financial Recovery Technologies). A licensed attorney since 1991, Mike Lange has deep working knowledge of securities litigation, a rich network of relationships in the U.S. and abroad with lawyers, case organizers, and other players in the recovery space – all of which he brings to bear for institutional investors.
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