Investment Management Alert
April 2009
Authors:
Chicago
John W. Rotunno
john.rotunno@klgates.com
+1.312.807.4213
Kenneth E. Rechtoris
kenneth.rechtoris@klgates.com
+1.312.807.4210
Todd E. Pentecost
todd.pentecost@klgates.com
+1.312.807.4275
Washington, D.C.
Jeffrey B. Maletta
jeffrey.maletta@klgates.com
+1.202.778.9062
Nicholas G. Terris
nicholas.terris@klgates.com
+1.202.778.9408
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Eighth Circuit Upholds Gartenberg, Requires
Comparison with Institutional Account Fees
Close on the heels of the Supreme Court’s decision to grant review of a case
addressing the substantive standard in excessive fee cases under Section 36(b) of the
Investment Company Act of 1940 (ICA) (Jones v. Harris Associates L.P., 527 F.3d
627 (7th Cir. 2008)), the Eighth Circuit Court of Appeals has weighed in with its
view of the statute in Gallus v. Ameriprise Financial, Inc., No. 07-2945, 2009 WL
928920 (8th Cir. April 8, 2009). In the most significant aspect of its decision, the
Eighth Circuit concluded that a lower court had erred in rejecting, for purposes of a
Section 36(b) analysis, a comparison between fees charged to an investment
adviser’s institutional clients and those charged to its investment company clients.
In Ameriprise, the district court had granted summary judgment in favor of the
investment adviser, holding that no Section 36(b) violation had occurred because the
adviser’s fee “passed muster” under the standard articulated in Gartenberg v. Merrill
Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982), for evaluating whether
an advisory fee is so high as to violate the statute. Nonetheless, the Eighth Circuit
reversed summary judgment and remanded the case to the district court for further
proceedings. Ameriprise appears to be the first published Court of Appeals decision
overturning a district court grant of summary judgment for a defendant on a Section
36(b) claim. In doing so, the Eighth Circuit took sides on important issues that have
divided the other four federal Circuit Courts to have substantively interpreted Section
36(b).
The Eighth Circuit acknowledged that under Gartenberg, “the relevant test for a fee
is whether it ‘represents a charge within the range of what would have been
negotiated at arm’s-length in light of all the surrounding circumstances,’” and
concluded that the Gartenberg factors provide a “useful framework for resolving
claims of excessive fees....” Ameriprise accordingly disagreed with the Seventh
Circuit’s decision in the Jones case, where the Seventh Circuit disapproved of
Gartenberg and held that if an adviser “make[s] full disclosure and plays no tricks,” a
court should refrain from engaging in an evaluation of the reasonableness of an
advisory fee approved by investment company directors.
However, the Eighth Circuit diverged from other decisions interpreting Gartenberg
on the question of whether courts evaluating a Section 36(b) claim should consider a
comparison of investment advisory fees charged to investment companies and those
charged to institutional investors. The Court noted that the plaintiffs in the
Ameriprise case had challenged the veracity and completeness of the adviser’s
comparative fee information and the extent to which the fund’s directors were able to
properly evaluate that information. It concluded that “[a]lthough the district court
properly applied the Gartenberg factors” in determining whether the advisory fee
“itself constituted a breach of fiduciary duty,” the district court had erred “in
rejecting a comparison between the fees charged to Ameriprise’s institutional
Investment Management Alert
clients and its mutual fund clients.” The Eighth
Circuit opined that such comparisons are particularly
appropriate where “the investment advice may have
been essentially the same for both accounts.” In this
respect, Ameriprise comports with the view
expressed in Jones by Seventh Circuit Judge Posner,
dissenting from the denial of rehearing en banc, but
is contrary to a number of district court holdings and
is in tension with language in Gartenberg that the
Eighth Circuit characterized as dicta.
Ameriprise also concluded that the proper approach
to Section 36(b) is one that looks at both process and
result; that is, at both the adviser’s conduct during
fee negotiations and to the resulting fees. According
to the Eighth Circuit, “[u]nscrupulous behavior with
respect to either can constitute a breach of fiduciary
duty.” In this respect, Ameriprise borrows both
from Gartenberg (with its focus on the amount of an
advisory fee) and Jones (with its allusions to candor
in negotiations and instances in which a board
“abdicate[s]” its responsibility).
The Eighth Circuit’s emphasis on process is
consistent with the uncontroversial proposition
(which finds support in the statutory text of Section
36(b)(2)) that the deliberations of an investment
company board furnished with less than all material
information are not entitled to the same great weight
as the deliberations of a fully informed and
independent board. Consequently, it should not be
assumed that the Ameriprise decision means that
Section 36(b) establishes a right of action for
damages against an adviser for alleged misconduct
that does not actually result in excessive fees.
Although Section 15(c) of the ICA imposes certain
obligations on an investment adviser to furnish
information during the advisory contract approval
process, the text of Section 36(b) creates a limited
duty only “with respect to the receipt of
compensation for services, or of payments of a
material nature.” And, as Ameriprise recognizes,
under the express terms of the statute, a Section
36(b) plaintiff’s recovery is “limited to the actual
damages resulting from the breach of fiduciary
duty.” Thus, “[i]n order to state a claim under
§ 36(b), one must allege excessive fees, rather than
fees that might simply be described as ‘improper.’”
Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 118
(2d Cir. 2007).
In light of the Supreme Court’s impending review
of Jones, the Eighth Circuit’s Ameriprise decision
may not have significant enduring precedential
impact, but it does add to the spectrum of opinions
available to the Justices.
For further information on the Ameriprise decision
or other investment company litigation matters,
please contact:
John W. Rotunno, Kenneth E. Rechtoris or Todd E.
Pentecost in our Chicago office and Jeffrey B.
Maletta or Nicholas G. Terris in our Washington,
D.C. office.
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This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2009 K&L Gates LLP. All Rights Reserved.
April 2009
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