Securities Regulation Daily Excessive fee claims may only proceed against direct recipient
Monday, February 29, 2016

Excessive fee claims may only proceed against direct recipient

By Amy Leisinger, J.D.

A federal district court dismissed claims for breach of fiduciary duty against a sub-administrator of several mutual funds but allowed claims against the administrator itself to proceed. The court found that the plaintiff shareholders and the funds in which they invest did not pay fees directly to the sub-administrator and, as such, cannot assert claims against that entity. The plaintiffs did, however, plead sufficient facts to present a plausible claim that the fees paid to the administrator were disproportionately large in relation to the services rendered, the court held (Goodman v. J.P. Morgan Investment Management, Inc., February 26, 2016, Frost, G.).

Excessive and duplicative fees. Shareholders in certain JP Morgan mutual funds filed a complaint alleging that an affiliated administrator to the funds breached its fiduciary duty under Investment Company Act Section 36(b) by charging the funds substantially greater fees than other unaffiliated funds. The plaintiffs also alleged that a sub-administrator received a portion of the inflated fees from the administrator and that, together, the entities provided services overlapping with some also provided to the funds by other entities (including other affiliates) so that the funds paid duplicative fees.

To demonstrate the overcharging, the plaintiffs compared the fees paid under the affiliated funds’ agreements to the fees that would be paid under different agreements with similar but unaffiliated funds and the rates charged to unaffiliated funds by other administrators. The fees charged bear no reasonable relationship to the services rendered and could not have been the product of negotiation at arm’s length, the plaintiffs alleged.

Sub-administrator not directly paid. The court noted that Section 36(b) does not permit a fiduciary duty claim against any person or entity other than one that actually received advisory fees. The plaintiffs argued the language and intent of Section 36(b) permits a claim against indirect recipients of fees, but the court found the plain language of the statute establishes a direct relationship—“the payor can sue the payee.” The plaintiffs do not allege that they or the funds paid the sub-administrator any fees; the administrator contracted with and paid the sub-administrator and, as such, the sub-administrator does not qualify as a recipient, the court found. The party that owes a fiduciary duty to the payor is the payee, and the claims against the sub-administrator must be dismissed, the court held.

Excessive fee allegations sufficient. To show that a fee is disproportionately large and could not have been the product of arm's length bargaining, a plaintiff must allege facts pertaining to the Gartenberg factors, including, among other things, the nature and quality of the services provided, fall-out benefits to the adviser, and fee comparisons. Courts have allowed claims to proceed when the plaintiffs have alleged specific facts about the size of fees and their relationship to the services rendered, and, in this case, the plaintiffs have pleaded a notable disparity in fees for servicing affiliates in comparison with unaffiliated funds. The administrator contends that the comparisons made do not pertain to similar services and that any difference in fees can be justified by the differences in services, but whether the fees are disproportionate is an inquiry that depends on more extensive evidence and should not be decided on a motion to dismiss, the court concluded.

The case is No. 2:14-cv-414.

Attorneys: Michael J. Boyle, Jr. (Meyer Wilson Co., LPA) and Ana M. Cabassa-Torres (Zwerling, Schachter & Zwerling, LLP) for Campbell Family Trust. Steven Walter Tigges (Zeiger, Tigges & Little LLP) and David Y. Chen (Goodwin Procter LLP) for J.P. Morgan Investment Management, Inc. and J.P. Morgan Funds Management, Inc.

Companies: J.P. Morgan Investment Management, Inc.; J.P. Morgan Funds Management, Inc.

MainStory: TopStory FiduciaryDuties InvestmentAdvisers InvestmentCompanies OhioNews

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