November 28, 2016 Practice Points

Notable Developments in Excessive Fee Litigation

Forthcoming trial decisions in Russell and Hartford may provide guidance as to the future of litigation under Section 36(b).

By Aaron T. Morris

There have been two notable developments in “excessive fee litigation” under Section 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty on mutual fund advisers with respect to the fees they receive from the funds they manage.

First, in Russell Inv. Mgmt. Co. S’holder Litig., No. 1:13-cv-12631 (D. Mass.), the district court granted partial summary judgment in favor of the adviser. The plaintiff alleged that the mutual fund fees at issue were excessive because the adviser to the funds delegated all asset management responsibilities to third-party subadvisers, but retained a disproportionate amount of the fees (purportedly “290 percent greater” than the fees received by the subadvisors). The adviser offered evidence at summary judgment that the mutual fund board that approved the fees consisted of a super-majority of disinterested and well-qualified directors who received a broad range of information about the fees from the adviser, independent counsel and third-party experts. The adviser also presented evidence that the funds’ fees and performance were in line with peers, and that the adviser performed significant services for the funds in addition to the services provided by the subadvisers.

On November 15, 2016, Judge William G. Young of the District of Massachusetts, ruling from the bench, stated that the board’s decision with respect to fees was entitled to deference as a matter of law but that the plaintiff “probably squeak[s] by summary judgment” on three discrete issues: (1) fall-out benefits (alleged ancillary benefits to the adviser received as a result of managing the funds), (2) the adviser’s profitability in managing the funds and (3) the nature and quality of the adviser’s services. The case will proceed to trial, likely in March 2017.

Second, in Kasilag v. Hartford Inv. Fin. Svcs., LLC, No. 11-1083 (D.N.J. 2016), the parties completed a four-day bench trial on November 16, 2016. As in Russell, the court had granted partial summary judgment in favor of the adviser prior to trial, finding that the board’s process was sound and its decision to approve the fees at issue would be entitled to deference. At trial, the parties presented competing experts in economics and the financial industry, who testified primarily about the relationship between the adviser and subadviser, as well as competing accounting experts, who testified about the adviser’s treatment of subadvisory fees as an expense. The adviser also offered its chief investment officer, who testified broadly about the adviser’s management fee pricing, services and the funds’ performance. Closing arguments are set for January 2017, and a decision is expected in spring 2017 or thereafter.

Following the plaintiffs’ loss at trial in Sivolella v. AXA Equitable Life Ins. Co., No. 3: 11-cv-4194 (D.N.J.) in August 2016, the summary judgment rulings in Russell and Hartford do not bode well for the several other pending Section 36(b) cases asserting a similar theory of liability. The forthcoming trial decisions in Russell and Hartford may provide guidance as to the future of litigation under Section 36(b), at least with respect to the particular liability theory at issue in these cases.

Aaron T. Morris is an associate with Skadden Arps in Boston, Massachusetts.

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Aaron T. Morris – November 28, 2016