On October 28, 2015, the U.S. District Court for the District of New Jersey issued an opinion denying the adviser’s, New York Life Investment Management LLC’s (“NYLIM”), motion to dismiss a suit in which plaintiffs allege that NYLIM breached its fiduciary duty under Section 36(b) of the 1940 Act by charging excessive fees to four mutual funds. The plaintiffs alleged that the fees were excessive because the subadvisers hired by NYLIM for each of the funds performed “substantially all of the investment advisory services required by each [f]und.” The plaintiffs asserted that, in light of the scope of the services provided by the subadvisers, the large “mark-up” retained by NYLIM out of the management fees paid by the four funds (approximately 47 percent of the aggregated fees) was disproportionate to the services NYLIM actually rendered to the funds. The plaintiffs also alleged that NYLIM had not appropriately shared economies of scale with investors because of the way the funds’ breakpoints are structured.
The district court analyzed the plaintiffs’ claims and concluded that the plaintiffs had “adequately alleged that NYLIM charged a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” In particular, analyzing the plaintiffs’ claims under the Jones/Gartenberg factors, the court found that the plaintiffs had pleaded sufficient facts with respect to three of the six Jones/Gartenberg factors and, therefore, the plaintiffs’ complaint was sufficient to withstand NYLIM’s motion to dismiss.
The NYLIM case is one of many Section 36(b) lawsuits filed within the last several years that focus on the fee split between subadvisers and a principal adviser. Many of these lawsuits have survived motions to dismiss, and the first of these cases is scheduled for trial in January 2016.