mutual fund assets looks as if it's headed for a knock-down, drag-out court battle - with potential customers sitting on their hands until a verdict is reached. Late last month, a Massachusetts district court judge denied Signature Financial Group's motion to dismiss a lawsuit filed by State Street Bank and Trust Co. challenging the company's exclusivity to the hub-and-spoke mutual fund structure. The denial means uncertainty for both companies as they vie for a growing segment of the mutual fund marketplace. The case is not expected to come to trial for at least a year. "It points out that, although people want to do this type of business, they would rather that the problem be answered in court," said one insider familiar with the case. "The longer it's in doubt, the more business both sides lose." Under hub-and-spoke, a name copyrighted by Signature, fund families share a central investment pool but are allowed to develop their own marketing and pricing structure. The approach is intended to reduce administrative costs and make it easier to launch new funds. The lawsuit aims to weaken Signature's patent on the accounting system it uses to track multiple mutual fund families and portfolios. Signature asked the court to dismiss the lawsuit on the grounds that "no case or controversy exists between Signature and State Street," according to court documents. But the judge disagreed, citing precedent and sufficient evidence to go forward with the lawsuit. At issue is the right for companies to market fund structures such as hub-and-spoke, or master-feeder arrangements, without being held liable for infringing on Signature's patent. Under the law, both State Street and the master-feeder clients it services, could be held liable for damages, should Signature's patent be upheld in court. The battle between the two companies is so intense that no industry insider would consent to be identified for this article. But some privately said the outcome of the case could spell trouble for Signature, whose clients have been grumbling about the costs of its hub-and-spoke structure. "It basically makes it difficult for (Signature) to extract the fees that they do right now, which have been significant," an analyst said. To date, there are 166 master, or hub, funds in the country, according to Lipper Analytical Services, Summit, N.J. Signature has an overwhelming lead in the market, with 150 hubs, including ones for the fund management firm of Eaton Vance Corp. and Chase Manhattan Corp. State Street has at least two clients, but officials at the banking company declined to comment further. "State Street has brought this suit to bear because they know they need to offer a master-feeder structure in order to compete in the market today," said another industry expert. The structure has become more popular recently as many banks and investment managers seek to shed the management of their proprietary mutual funds, or at least lessen the administrative costs. Still others are turning to master-feeder structures as a way to gain easier entrance to the fund business. One current Signature client said his company would consider switching to State Street or another provider once the suit is resolved. He added that, "State Street bringing it to a head will make people understand that Signature does not have a lock on this business." State Street and Signature face competition from a number of companies, including PNC Bank Corp., KPMG Peat Marwick, and Forum Financial. These firms offer similar services to banks and money management firms. Some experts say that a protracted legal battle could strengthen the competitors' standing in the market.
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