AdvisersFundsSEC

FYI: Another 36(b) Victory for Adviser

FYI: A September 30, 2019 ruling from the US District Court for the Southern District of NY resulted in a victory for the adviser against Section 36(b) excessive fee claims brought by plaintiffs.

The court’s 111-page opinion thoroughly analyzed the six ‘Gartenberg’ factors affirmed applicable to 36(b) cases by the Supreme Court in Jones v. Harris (2010). Two of the factors had been dismissed from the case in a partial summary judgment granted to the adviser in 2018. The other four factors were considered by the court in a bench trial, after which the court concluded that only one factor — the quality of services the adviser provided to the fund — even marginally tended to support plaintiffs’ claim. All the other factors were found to weigh decisively in the adviser’s favor and the court dismissed the plaintiffs’ complaint.

While the opinion contains interesting ‘lessons learned’ about selecting and qualifying expert witnesses in securities litigation, it also contains information valuable to all funds and their advisers concerning the 15(c) process, among others:

  • what information is beneficial to provide to fund Boards to document the robustness of their review and their conscientiousness,
  • the utility of adviser profitability in assessing whether fees are excessive,
  • how profitability estimates may be calculated (including how costs can be allocated among funds),
  • the preparation of peer group fee comparisons by independent third-parties,
  • use of the ‘business judgment rule’ in assessing the Board’s conscientiousness and care, and
  • the use of fee comparisons between those the adviser charges to mutual fund clients versus those charged to institutional and sub-advised accounts.

Importantly, this was the ninth court case to conclude that comparisons of fees an adviser charges to a regulated fund client versus those charged to its institutional and sub-advised account clients are inapt, due to the greater fund governance and administrative services (such as legal, regulatory and compliance), portfolio management services, and client and shareholder services provided by the adviser to – and risks (such as legal, regulatory, operational and entrepreneurial risks, not fully covered by insurance) posed by — regulated fund clients versus institutional and sub-advised clients.

Court’s opinion: https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2015cv01014/438370/235/.

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