On March 9, 2018, the U.S. District Court for the Southern District of Ohio (the Court) granted the defendants’ motion for summary judgment in a suit brought under Section 36(b) of the Investment Company Act of 1940, as amended (the 1940 Act), against J.P. Morgan Investment Management Inc. (the Adviser) and J.P. Morgan Funds Management, Inc. (the Administrator) (together, the Defendants), the investment adviser and administrator, respectively, to the JPMorgan Funds. The plaintiffs, shareholders of various JPMorgan Funds, alleged that the Adviser breached its fiduciary duty by charging excessively high investment advisory fees to the Funds and that the Administrator breached its fiduciary duty to seven Funds by charging excessively high administrative fees to the Funds. The plaintiffs alleged that the fees the Adviser and Administrator charged the Funds violated Section 36(b) because such fees are higher than the fees the Adviser and Administrator charge for advisory and administrative services provided to other funds for which the Adviser and Administrator serve as sub-adviser and sub-administrator, respectively.
Under Section 36(b) of the 1940 Act, investment advisers owe a fiduciary duty with respect to the compensation they receive for providing investment advisory services to registered funds, and fund shareholders have an express private right of action to enforce this duty against investment advisers and their affiliates that receive compensation from funds. In such cases, plaintiffs have the burden of proof to show, by a preponderance of the evidence, that investment advisory fees are excessive, i.e., “that the fees are 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.”
To determine whether an advisory fee is excessive, courts consider the fee in light of the factors initially set forth in the 1982 decision of the U.S. Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc., which were cited with approval by the U.S. Supreme Court in its 2010 decision Jones v. Harris Associates, LP.
The Court’s Application of the Gartenberg Factors
- Comparative Fee Structures: The plaintiffs failed to demonstrate that the fees the Defendants charged for advisory and administrative services to the Funds were so disproportionately large so as to be outside of the range of what would have been negotiated at arm’s length because the fee comparisons to funds sub-advised by the Adviser were not materially similar and the comparisons to fees charged by other administrators were not supported by sufficient evidence.
- Economies of Scale: The Court would not second-guess the benefits being shared with the Funds’ investors based on amounts returned to investors through fee waivers, stating that there was no indication that the Funds’ board could not have agreed to the fee waiver structure after good-faith negotiations.
- The Funds’ Fees and Performance: The Adviser’s services to the Funds, although similar in certain respects to the services provided to the sub-advised funds, require additional risk and scale. In addition, the comparative data reviewed by the Funds’ board showed that the performance of all of the Funds was at least favorable, and the Defendants presented “undisputed evidence” that the Funds’ fees fell within the range of those comparators. As such, the plaintiffs failed to meet their burden of showing that the nature and quality of the Defendants’ services rendered the Funds’ fees excessive.
- The Board of Directors: Despite the plaintiffs’ argument that the decision-making process of the Funds’ board should be discounted because the Defendants failed to provide complete or accurate information to the board, the board’s approval of the Funds’ agreements with the Defendants is entitled to considerable weight. No irregularities or deficiencies were identified in the board’s decision-making, and the plaintiffs failed to provide facts to support the claim that the board did not engage in a good-faith process designed to guard against excessive fees when it reviewed the advisory and administration agreements.
The order granting summary judgment was issued under the captions Goodman, et al. v. J.P. Morgan Investment Management, Inc., et al., Case No. 2:14-cv-414, and Campbell Family Trust, et al. v. J.P. Morgan Investment Management, Inc., et al., Case No. 2:15-cv-2923.