United States: Section 36(b) Plaintiffs' ‘Retained Fee' Theory Rejected In Kasilag Verdict For Defendants

Last Updated: April 6 2018
Article by Marissa Parker and Keith R. Dutill

Echoing last year's opinion in Sivolella,1 finding no liability for allegedly excessive fees charged by Axa advisers to mutual fund investors (see September 2016 Fund Alert), the District of New Jersey again ruled in favor of adviser defendants, this time Hartford Investment Financial Services LLC and Hartford Funds Management Company LLP ("Hartford").2 After a four-day bench trial, the Kasilag court rejected plaintiffs' "retained fee" theory and found no breach of fiduciary duty under Section 36(b)3 for investment advisory fees charged in relation to services rendered to six Hartford mutual funds. Continuing to reinforce the "high bar" of Section 36(b), Kasilag joins the unbroken line of fully-tried 36(b) cases resulting in judgments in favor of investment advisers who delegate a portion of mutual fund duties to subadvisers.

The backdrop of Kasilag is similar to many other 36(b) cases: The plaintiffs claimed that Hartford's fees were disproportionate and excessive relative to the duties directly performed by Hartford under the investment management agreements ("IMAs") between Hartford and the funds as compared to the duties delegated to and performed by subadvisers. Before trial, the Court determined that approval of the advisers' fees by the undisputedly independent trustees of the funds' boards warranted considerable weight under Jones v. Harris Associates.4 Thus, the Court intended for the trial to focus on the remaining Gartenberg5 factors: (1) the nature and quality of services provided by the adviser, (2) the profitability of the mutual fund to the adviser, (3) "fall out" benefits, (4) the economies of scale realized by the adviser, and (5) comparative fee structures of similar funds. Notably, at trial, the plaintiffs never challenged factors 3 through 5. Still, the Court considered all of these factors to analyze the ultimate guidepost of liability under 36(b): whether the investment adviser's fee is so disproportionate that it does not bear a reasonable relationship to the services rendered by defendant and could not have been negotiated at arm's length. In ruling for Hartford, the Court applied the established standard set by Section 36(b), which "raises the bar for Plaintiffs" by shifting the burden of proof from the defendant fiduciary to the party claiming breach.

Kasilag is significant for rejecting the "retained fee" theory, the "crux of Plaintiffs' case." Specifically, plaintiffs argued that the Court should consider the services performed by the adviser as separate and apart from those performed by subadvisers. The Court found that the theory ignored the practical realities of how and why advisers hire and pay subadvisers, crediting Hartford in its explanations of the role and risks it faced under the IMAs and the contractual delegation of certain duties to subadvisers as specifically contemplated under the funds' IMAs. Moreover, the Court found that Hartford paid the subadvisers from Hartford's assets (not fund assets) and therefore properly treated those payments as expenses to the adviser, consistent with generally accepted accounting principles. Accordingly, the Court considered all services provided under the IMAs in exchange for the fees paid to Hartford, whether Hartford performed the services or hired others to fulfill those obligations. This ruling reinforces the argument that the comparison of profit margins of an adviser versus those of a subadviser is irrelevant.

Other rulings by the Court vindicated industry data on performance and rejected plaintiffs' unsupported measures of profitability. Over plaintiffs' strong objections, the Court found that Lipper performance data was reliable and admissible to assess funds' performance, both directly for peer comparison and as used by Hartford's expert. The Court rebuffed plaintiffs' suggested comparison of fund performance against its respective benchmark, explaining that failure to hit a benchmark is not a strong indicator of poor performance because benchmarks, unlike funds, do not have to account for operating costs. The Court also summarily denied plaintiffs' profitability model because it advocated a cost-plus approach, emphasizing that 36(b) has never required a cost-plus method of analyzing adviser profits, and reiterating the long-standing view that a 36(b) claim cannot be premised on the argument that the adviser "just plain made too much money."

For investment advisers, Kasilag reinforces the argument that fiduciary duties under Section 36(b) are more circumscribed and particularized than those under common law. Section 36(b)'s fiduciary obligation can thus be deemed to attach to all compensation approved and paid for services provided under a fund's IMA, whether performed by the adviser or subcontracted to another. Accordingly, with the rejection of the "retained fee" theory, there are strong arguments that a 36(b) analysis should continue to be guided by all of the Gartenberg factors, evaluating all of the services rendered and the total amount of fees paid, rather than on a piecemeal basis. Relatedly, Kasilag affirms that a sound 15(c) process undertaken by a disinterested board should carry significant weight when analyzing fees for 36(b) purposes.

Footnotes

1. Sivolella v. AXA Equitable Life Insurance Company, Civil Action No. 11-cv-4194 (PGS)(DEA), 2016 WL 4487857 (D.N.J. Aug. 25, 2016)

2. Kasilag v. Hartford Investment Financial Services, LLC, Civil Action No. 11-cv-1083 (RMB/KMW), ECF No. 262 (D.N.J. Feb. 28, 2017).

3. Section 36(b) of the Investment Company Act of 1940 provides that the investment adviser of a registered fund has a fiduciary duty with respect to the receipt of compensation for services, and provides shareholders with a derivative right of action against a fund adviser that receives excessive compensation.

4. Jones v. Harris Associates, L.P., 559 U.S. 335 (2010).

5. Gartenberg v. Merrill Lynch Asset Management Inc., 694 F.2d 923 (2d Cir. 1982).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions