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Advisers Face Lawsuits Over Fees Charged to Subadvised Funds

SEI Investments Management Corporation and Russell Investment Management Company are the latest investment advisers to face lawsuits alleging they violated their fiduciary duties under Section 36(b) of the Investment Company Act by charging excessive fees while managing subadvised funds. In both suits, the plaintiffs allege the advisers are charging excessive fees because the advisers delegate most of the day-to-day management responsibilities to the subadvisers but retain the majority of the advisory fees.

The SEI suit was brought in federal court in Pennsylvania in December 2013 by two plaintiffs on behalf of five funds managed by SEI. Plaintiffs allege that for the 2012 fiscal year, SEI retained $10.3 million of the $27 million in management fees paid by the five funds. At the same time, plaintiffs allege that SEI’s role was limited to general oversight and supervision of the subadvisers. As a result, plaintiffs assert that the investment management fees are disproportionate relative to the services rendered. Plaintiffs also allege that while the funds have grown in size, SEI has not passed on the benefits of economies of scale to investors in the form of lower management fees. While the funds at issue have charged the same fees for as many as 17 years, the funds have experienced asset growth through additional investments of as much as 307%.

In the Russell suit, brought in October 2013 in federal court in Massachusetts, the plaintiff brought suit on behalf of ten subadvised funds managed by Russell. The plaintiff alleges that for the 2012 fiscal year, Russell retained $107 million of $164 million in investment management fees paid by the ten funds in question while subcontracting with others to provide the services at a lower fee than that charged to the funds in question. The plaintiff alleges that this left Russell without any substantive asset management responsibilities. The complaint alleges that Russell’s responsibilities are minimal compared with the day-to-day responsibilities of managing the portfolio and as such Russell’s fees should be proportionately smaller than the fees paid to the subadvisers. As in the SEI suit, the plaintiffs also allege that the cost savings experienced by economies of scale in the funds were not shared with the funds.

Sources: Steven Curd and Rebel Curd v. SEI Investments Management Corporation, Case 2:13-cv-07219-AB (December 11, 2013); Fred McClure v Russell Investment Management Company, Case 1:13-cv-12361 (October 17, 2013); SEI Latest Firm Hit With Excessive-Fee Lawsuit, Beagan Wilcox Volz, Ignites (December 16, 2013); Russell Latest to Face New Breed of Excessive-Fee Suit, Beagan Wilcox Volz, Ignites (October 24, 2013). 

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume IV, Number 44


About this Author

Susan Hoaglund, Investment Management Attorney, Godfrey Kahn law firm

Susan Hoaglund is a member of the Investment Management Practice Group. Susan provides advice to investment advisers, investment companies, broker-dealers and banks regarding legal, regulatory and compliance matters.

Chris Cahlamer Investment Management Attorney

Chris Cahlamer is the team leader of the firm’s Investment Management Practice Group, where he practices in investment management and securities law, focusing on investment companies, investment advisers, regulatory examinations, new product development, SEC compliance and reporting obligations, CCO support, private fund formation and operation, investment company reorganizations, investment advisor mergers and acquisitions, and general corporate and board fiduciary issues.

Chris earned his law degree, summa cum laude, at Marquette University Law School. While there, he received the Corporate Practice Institute Award and served as senior articles editor on the Marquette Law Review. He completed his undergraduate education at St. Norbert College, graduating as a member of the honors program and earning his bachelor’s degree, summa cum laude, in international economics and political science.

Chris is a member of the State Bar of Wisconsin and the American Bar Association.

Carol A. Gehl, Securities Law Attorney, Godfrey and Kahn law firm

Carol Gehl is a shareholder and the team leader of the Securities Practice Group in the Milwaukee office.

Carol’s practice is focused on investment management entities, including mutual funds, hedge funds, investment advisers and broker-dealers throughout the nation. During the last number of years, Carol has facilitated the organization of numerous mutual funds, hedge funds and investment advisers; assisted in SEC and FINRA examinations of regulated entities; provided ongoing advice to mutual fund Boards of Directors; and assisted with several mergers of investment advisers and...