Management fees for several JPMorgan mutual funds were not excessive as a matter of law, a federal district court in Ohio concluded after a review of the Gartenberg factors. In considering the quality of services rendered versus fee amounts, the court weighed in the adviser’s favor that the funds performed better than peers, the fees were in line with peers, and the funds gave back millions of dollars through fee waivers (Goodman v. J.P. Morgan Investment Management, Inc., March 9, 2018, Sargus, E.).
Alleged breach of fiduciary duty. Shareholders alleged on behalf of three JPMorgan bond funds that a JPMorgan entity charged excessive advisory and administrative fees in breach of its fiduciary duty under Section 36(b) of the Investment Company Act. To determine whether the fees were excessive, the court conducted a Gartenberg inquiry. As detailed in Jones v. Harris, Gartenberg examines whether the fees charged were so disproportionately large that they bore no reasonable relationship to services rendered and could not have been the product of arm’s-length bargaining.
The court noted that although all Gartenberg factors must be considered on a summary judgment motion, two factors were especially telling as to whether the fees were excessive. The fees fell within the range of comparators and were not disproportionately large, and the funds’ performance was generally favorable and in line or better than the performance of peers.
Fee amounts vs. services rendered. The court allowed that the fee comparison could include subadvised funds in addition to independent funds. However, the court concluded that the fee comparisons urged by the plaintiffs were not materially similar. A subadviser’s fee is just part of fee charged by that fund’s adviser, and advisers are paid higher fees than subadvisers. The court concluded that because the fee comparisons were not materially similar and did not create a genuine issue of material fact, plaintiffs did not show that advisory fees were beyond the range of arm’s-length bargaining.
On the economies of scale factor, the court declined to second-guess the amount returned through fee waivers, finding no indication that the board could not have agreed to the fee waiver structure after good-faith negotiations.
Regarding the quality of services, the court accepted the evidence of JPMorgan’s expert witness that even if some services as adviser and subadviser are the same, the risk undertaken and scale of service are different. The court also accepted Lipper data showing that the performance of all funds was at least "generally favorable" if not superior, and certainly within the range of acceptable results.
Board approval. Rejecting plaintiffs’ urging that the board’s decision-making process should be discounted because defendants didn’t provide complete or accurate information to the board, the court decided the board’s approval was entitled to considerable weight. Noting that Section 36(b) does not create a duty that advisers and administrators receive the lowest possible fee amount, the court found no irregularities or deficiencies in the board’s conduct or decision-making, and no evidence that any flaws would have made a legally significant difference. Therefore, the court concluded there was no reasonable inference that the amounts paid were outside of arms-length range.
Having concluded that there was no genuine issue of material fact, the court granted summary judgment to JPMorgan.
Excessive fees actions debated in Congress. The decision comes as legislation is under consideration to heighten pleading and evidence standards for breach of fiduciary duty actions under the Investment Company Act. The Mutual Fund Litigation Reform Act (H.R. 4738), sponsored by Rep. Tom Emmer (R-Minn), takes aim at what he calls "sue and settle" excessive fee actions. The bill would require a security holder suing the adviser of an investment company, on behalf of the investment company, for breach of fiduciary duty, to plead such facts with particularity and to prove the breach of fiduciary duty by clear and convincing evidence.
The bill has been opposed by NASAA. The association believes it would go far beyond the Gartenberg standard, and that the proposed pleading requirement would hinder suits because investors may lack discovery tools at the early stages of litigation to uncover facts needed to meet the particularity requirement. Also opposed is House Financial Services Committee Ranking Member Maxine Waters (D-Calif), who has noted that the Gartenberg standard is already hard to satisfy and that suits rarely reach the trial stage.
The case is No. 2:15-cv-02923-EAS-KAJ.
Attorneys: David P. Meyer (Meyer Wilson Co., LPA) for Nancy Goodman. Steven Walter Tigges (Zeiger, Tigges & Little LLP) and Charles A. Brown (Goodwin Procter LLP) for J.P. Morgan Investment Management, Inc.
Companies: J.P. Morgan Investment Management, Inc.
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