Introduction Over the past few years, we’ve seen a resurgence in the number of shareholder suits against mutual fund investment advisers for excessive fees under section 36(b) of the Investment Company Act. Currently, lawsuits are pending against 14 investment advisers (and, in many cases, affiliated entities) in federal courts throughout the United States. The United States District Court for the Eastern District of Pennsylvania recently pared back one of those suits.

Summary of Decision In Curd v. SEI Investments Management Corp., shareholders in five SEI mutual funds brought an action for excessive fees under section 36(b) against SEI Investment Management Corporation (the funds’ investment adviser) (“SIMC”) and SEI Investments Global Funds Services (the funds’ administrator) (“SIGFS”). The lawsuit is one of several so-called “manager of managers” suits brought against investment advisers. In these suits, plaintiffs allege that the investment adviser subcontracts investment management duties to one or more sub-advisers and is left largely without any asset management duties, but nevertheless retains some portion of the investment advisory fees paid by the funds. In plaintiffs’ view, the retained fees are excessive in light of the delegation of duties to the sub-advisers. In SEI, plaintiffs also alleged that SIMC and SIGFS failed to use breakpoints – i.e., reductions in the fees charged as the assets in the funds grew – which also resulted in the fees being excessive.

SEI moved to dismiss the Amended Complaint for failure to state a claim for excessive fees under section 36(b). Consistent with what we’ve seen in similar actions, the court denied the motion with respect to the adviser. The court held that the Amended Complaint alleged facts relevant to all of the so-called Gartenberg factors – referring to a set of six factors identified by the Second Circuit in Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982), and adopted by the Supreme Court in Jones v. Harris Associates L.P., 559 U.S. 335 (2010) – that taken together were sufficient to “raise a plausible inference that SIMC’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” (incorporating the standard for proving section 36(b) violations). The court found particularly compelling the plaintiffs’ allegations about the nature and quality of the services provided by SIMC, and SIMC’s failure to share cost savings realized by economies of scale. The court also rejected SEI’s argument that the claim was untimely, holding that plaintiffs had alleged facts concerning the fees received during the appropriate damages period established by section 36(b).

But the court granted SEI’s motion with respect to the claim against the administrator. Section 36(b) defines with specificity the categories of persons against whom an action under the statute may be asserted. The court held that plaintiffs had not alleged any facts demonstrating that SIGFS qualified as or fell within any of the specifically enumerated individuals or categories of persons potentially liable under section 36(b).

Conclusion Investment advisers have in large part been unsuccessful in obtaining dismissal of the “manager of managers” ilk of excessive fees actions through motions to dismiss, and the SEI decision continues that trend. Although a handful of motions to dismiss remain pending – and the industry holds out hope that it can find success in those motions – several cases have moved to the discovery phase and at least one case has briefed summary judgment motions. Whether courts will be more amenable to dismissal of these cases on a developed factual record remains to be seen.

Read the court’s decision in Curd v. SEI Investments Management Corp., Civ. Action No. 13-7219 (E.D. Pa. entered July 14, 2015).