On July 13, 2015, the United States District Court for the Eastern District of Pennsylvania issued a decision on the defendants’ motion to dismiss in the case of Curd v. SEI Investments Management Corp., Civ. Action No. 13-7219. In 2013, plaintiffs Steven and Rebel Curd filed suit in the District Court on behalf of five mutual funds (the “Funds”) managed by SEI Investments Management Corporation (the “Investment Adviser”), alleging that the Investment Adviser and SEI Investments Global Funds Services (the “Administrator”), the Funds’ administrator, violated Section 36(b) of the 1940 Act by charging excessive management and administrative fees.

The defendants submitted a motion to dismiss the plaintiffs’ claims against the Investment Adviser on the grounds that the plaintiffs failed to allege sufficient facts to satisfy the requirements of the multi-factor Gartenberg test used to evaluate Section 36(b) claims and that the plaintiffs’ allegations were untimely because they did not allege facts occurring during the relevant damages period. The defendants also moved to dismiss the plaintiffs’ claims against the Administrator, claiming that the plaintiffs failed to establish that the Administrator was a party against which a Section 36(b) claim could be brought.

On July 13, 2015, the District Court denied the defendants’ motion to dismiss with respect to the claims against the Investment Adviser but granted the defendants’ motion to dismiss the claims against the Administrator.

In denying the defendants’ motion to dismiss the claims against the Investment Adviser, the court, citing prior case law under Section 36(b), indicated that a plaintiff’s excessive fee claim may survive a motion to dismiss even if it does not specifically address all of the Gartenberg factors, provided that, “when taken as a whole, the complaint demonstrates a plausible claim for relief under [Section] 36(b).” The court noted that the plaintiffs did allege facts relevant to all of the Gartenberg factors, noting in particular the plaintiffs’ claims regarding the nature and quality of the services provided by the Investment Adviser and the Investment Adviser’s failure to share cost savings resulting from realized economies of scale.

Regarding the nature and quality of the services provided by the Investment Adviser, the court noted that the plaintiffs alleged the following facts: The Funds are managed under a “manager-of-managers” arrangement whereby the Investment Adviser subcontracts portfolio management responsibilities for the Funds to outside sub-advisers but retains 40% of the investment advisory fees even though the Investment Adviser is left “largely without any asset management responsibilities.” The Funds pay the Investment Adviser a monthly investment advisory fee based on a percentage of the Funds’ average daily net assets. Accordingly, the fees are not based on the Investment Adviser’s quality of services nor on the cost of providing such services. The Funds have also demonstrated poor performance. For the 2013 fiscal year, each of the Funds underperformed its primary benchmark for the five- and ten-year periods, and three of the Funds underperformed their primary benchmark for the one-year period. The court concluded that these facts raised a plausible claim that the Investment Adviser charges investment advisory fees “that are disproportionately large in comparison to the services it provides . . . and could not have been the product of arm’s length bargaining.”

Regarding the failure of the Investment Adviser to share cost savings resulting from realized economies of scale, the court noted that the plaintiffs alleged the following facts: Although the Funds’ assets had grown significantly (e.g., the assets of one Fund increased from $640 million in 1997 to $2.3 billion in 2015), the Funds’ investment advisory fees remained set at a constant percentage of average daily net assets. In addition, the Funds’ investment advisory fee schedules did not contain breakpoints, which would allow for cost savings resulting from realized economies of scale to be passed along to Fund shareholders. Accordingly, the plaintiffs claimed, “[the Investment Adviser] profits from economies of scale without sharing the benefits with the [Funds] and, in turn, investors.” The court concluded that these facts supported a plausible claim for relief under Section 36(b).

On the defendants’ claim that the plaintiffs’ suit was time barred, the Court noted that Section 36(b) provides that “[n]o award of damages shall be recoverable for any period prior to one year before the action was instituted.” The Court determined that the plaintiffs’ suit was instituted on December 11, 2013 when the plaintiffs filed their initial complaint. Accordingly, the Court determined that the plaintiffs could not recover any damages for excessive fees charged before December 11, 2012. Because the plaintiffs’ claims relied on financial and performance information from the Funds’ fiscal years ended August 31, 2013 (for one Fund) and September 30, 2013 (for the other four Funds), the Court determined that the plaintiffs alleged facts relating to fees charged during the appropriate damages period and that the suit was not time barred.

While the Court denied the motion to dismiss the claims against the Investment Adviser, the Court was not particularly sanguine about the plaintiffs’ overall case, noting that additional facts would be necessary for the Court to evaluate the strength of the plaintiffs’ Section 36(b) claims under a fact-intensive review of the Gartenberg factors. The Court stated that while the plaintiffs’ allegations were sufficient to survive a motion to dismiss, they “may well not survive summary judgment.”

In granting the defendants’ motion to dismiss the claims against the Administrator, the court noted that Section 36(b) authorizes an action against three categories of persons: a fund’s investment adviser; an affiliated person of a fund’s investment adviser; and certain persons enumerated in Section 36(a), which include a fund’s officers, directors, advisory board members, depositor and principal underwriter. The Court concluded that (1) the Administrator was not the Funds’ investment adviser, (2) the plaintiffs failed to allege facts indicating that the Administrator was an affiliated person of the Funds’ investment adviser under the 1940 Act’s definition of that term, and (3) the Administrator was not otherwise one of the enumerated persons in Section 36(a).