Since March 2010, when the United States Supreme Court embraced the Gartenberg standard for examining excessive-fee cases in Jones v. Harris Associates L.P., there has been a notable surge of cases alleging receipt of excessive fees by managers of sub-advised funds. In 2011, two such cases were brought against Axa Equitable Life Insurance Co. (“Axa Equitable”) and Hartford Investment Financial Services (“Hartford”). In each case, it was alleged that sub-advisers performed substantially all of the investment management services provided to the funds, and the limited supervisory roles of the sponsoring investment advisers did not merit retention of the majority of management fees paid by the funds.
On October 17, 2013, a similar complaint (available here) was filed by a plaintiff shareholder derivatively against Russell Investment Management Company (“RIMC”) ostensibly on behalf of ten RIMC-advised funds (the “Russell Funds”). Reminiscent of the arguments presented in the Axa Equitable and Hartford cases, the plaintiff alleged that RIMC’s responsibilities of assigning, overseeing, and evaluating the assets managed by the Russell Funds’ sub-advisers were “minimal compared to the day-to-day responsibilities of managing the Russell Funds’ portfolio.” By extension, the plaintiff argued that RIMC’s retention of $107 million of the approximately $164 million in total management fees was excessive and in violation of Section 36(b) of the Investment Company Act of 1940 (the “1940 Act”). Moreover, the plaintiff cited the legislative history of Section 36(b) to note that RIMC’s failure to share cost savings associated with the economies of scale that are inherent to sub-advisory relationships is a hallmark of an excessive fee violation. RIMC has not filed its response to the complaint as of the date of this Update.