On March 30, 2012, the United States Court of Appeals for the Eighth Circuit reversed itself and granted summary judgment to Ameriprise Financial, Inc. and its affiliates (“Ameriprise”) in a suit filed by shareholders of mutual funds advised by Ameriprise. The plaintiffs alleged that the adviser breached its fiduciary duty under Section 36(b) of the Investment Company Act of 1940 (the “1940 Act”) with respect to fees charged to the funds.
The original complaint in Gallus v. Ameriprise Financial, Inc. alleged that the adviser breached its Section 36(b) fiduciary duties by charging excessive advisory fees to the mutual funds that it managed. Among other things, the plaintiffs claimed that Ameriprise charged its institutional clients substantially lower fees than it charged the other shareholders. In addition, they alleged that Ameriprise misled the board about these arrangements to prevent them from questioning the higher fees charged to the funds. The district court granted summary judgment to Ameriprise, applying the standards set forth in Gartenberg v. Merrill Lynch Asset Management, Inc. That is, the court said that the plaintiffs failed to show a genuine issue of material fact that the fees Ameriprise charged “were so disproportionately large that they bear no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”
The Eighth Circuit reconsidered the Gallus case following the Supreme Court’s decision in Jones v. Harris Associates L.P. “Jones has altered the way in which we determine whether an adviser has breached its fiduciary duty under § 36(b),” the Eighth Circuit said. After Jones, “a process-based failure alone does not constitute an independent violation of § 36(b),” the court said. Rather, any inquiry must be “sharply focused on the question of whether the fees themselves were excessive.” In light of the Jones case, the Court of Appeals reversed the district court’s ruling, holding that while the advisory fees passed muster under the Gartenberg test, the district court erred in rejecting a comparison between fees charged to institutional clients and other mutual fund clients, and that Ameriprise allegedly misled the fund’s board. The rationale for the court’s original holding was that excessive fees are not the only way that a board can breach its fiduciary duties to its shareholders under the 1940 Act. More specifically, the court held that “the proper approach to § 36(b) is one that looks to both the adviser’s conduct during negotiation and the end result. Unscrupulous behavior with respect to either can constitute a breach of fiduciary duty.”
Gallus v. Ameriprise Financial, Inc., 2012 WL 1058976 (8th Cir., 2012); see also Court Reinstates Summary Judgment for Adviser in Excessive Fee Case (Apr. 5, 2012), Jay Baris, Luke Bagley, available at http://www.mofo.com/files/Uploads/Images/120405-Excessive-Fee-Case.pdf.