Observing that § 36(b) of the Investment Company Act (ICA) “creates a private right of action for all ‘security holders’ in the registered investment company, including persons who possess an interest in a mutual fund that is acquired through a fund of funds[,]” the U.S. District Court for the Southern District of Iowa recently held that shareholders in a “fund of funds” had standing to bring excessive advisory fee claims under § 36(b) on behalf of the fund’s underlying funds. The court, in Curran v. Principal Management Corporation (June 8, 2010), also held that the plaintiffs sufficiently stated a claim against the investment adviser for excessive advisory fees with respect to the fund of funds and each of the underlying funds; each were part of the same family of funds and shared the same investment adviser.
With respect to the standing issue, the court analyzed the language of § 36(b), the legislative history of the ICA, case law, and the “analogous” § 16(b) of the Securities Exchange Act. As to § 16(b) comparison, the court observed that neither statutory provision places any “significant restriction on the type of security adequate to confer standing,” and that “‘any security’ will suffice.”
In analyzing the excessive fee claims, the court applied the Supreme Court’s recent adoption of the Second Circuit’s Gartenberg standard for § 36(b) actions. The court found that the plaintiffs were not required to make a “conclusive showing” of each of the Gartenberg factors, but could “state a § 36(b) claim by alleging any combination of facts that plausibly support an inference that a particular fee, given all of the surrounding facts and circumstances, is disproportionately large to the services rendered in exchange for that fee.” According to the court, plaintiffs’ allegations in this regard supported a reasonable inference that the adviser collected excessive fees.