In 2014, the adviser and administrator to the SEI Funds asked a Pennsylvania federal district court to dismiss a lawsuit in which plaintiffs had claimed that the adviser and administrator defendants had breached their fiduciary duties to the SEI Funds by charging excessive management and administrative fees, in violation of Section 36(b) of the 1940 Act. The plaintiffs in the case claimed that that the adviser’s retention of approximately 40% of the management fee was excessive in view of the fact that the adviser relies on a manager-of-managers approach and, therefore, relies on subadvisers for day-to-day management of each of the SEI Funds. In their motion to dismiss, the adviser and the administrator defendants argued that plaintiffs had failed to allege sufficient facts to satisfy the Gartenberg test.
In the last few years, more than ten Section 36(b) lawsuits have been filed that focus on the relationship between advisory and subadvisory fees.
In a July 13 decision, the court rejected the defendants’ motion to dismiss, first noting the relatively low threshold required to survive a motion to dismiss. The court went on to hold that the plaintiffs had alleged “facts relevant to all of the Gartenberg factors” and that, while not all of the plaintiffs’ allegations were sufficient to state a claim on their own, taken together, the allegations “raise a plausible inference that [the adviser’s] fees are so disproportionately large that they bear no reasonable relationship to the services provided to the SEI Funds and could not have been the product of arm’s length bargaining.” In particular, the court stated that it found the plaintiffs’ allegations about both the nature and quality of the services provided to the SEI Funds and the adviser’s failure to share cost savings realized by economies of scale through fee breakpoints demonstrated a plausible claim under Section 36(b).
Nevertheless, the court dismissed the lawsuit with respect to the funds’ administrator because Section 36(b) authorizes claims only against advisers, their affiliated persons and certain persons enumerated in Section 36(a) (e.g., an officer, director or principal underwriter of a fund). Because the plaintiffs had failed to allege that the administrator was an affiliated person of the adviser or among the persons enumerated within Section 36(a), the court dismissed the plaintiffs’ Section 36(b) claims against the administrator.