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District Court Grants Summary Judgment in Section 36(b) “Manager-of-Managers” Excessive Fee Suit

On October 9, 2018, the U.S. District Court for the District of New Jersey granted defendant New York Life Investment Management, LLC’s motion for summary judgment in an excessive fee suit brought under Section 36(b) of the Investment Company Act of 1940 by shareholders of four mutual funds managed by New York Life. New York Life managed the funds using a “manager-of-managers” structure, with sub-advisers providing portfolio management services. The plaintiffs alleged that New York Life’s advisory fees were excessive because New York Life delegated “substantially all of its responsibilities” under its management agreements to sub-advisers and subadministrators while retaining a substantial portion of the fees paid under those agreements.

Following the initiation of the case, two of the four funds in question were reorganized and ceased to exist—one fund was reorganized into another fund in the same complex and another was reorganized into a newly organized fund in another complex for which New York Life does not serve as investment adviser. New York Life moved for summary judgment with respect to all claims relating to these funds, asserting that the plaintiffs lacked standing to maintain the Section 36(b) action. In granting New York Life’s motion for summary judgment with respect to the two funds that were reorganized, the Court noted that, under Section 36(b) case law, to have standing a shareholder plaintiff must be a security holder from the time the case is initiated throughout the pendency of the litigation. The Court held that the plaintiffs were no longer security holders of the funds that underwent reorganizations and that no exceptions to the general standing rules applied because the reorganizations resulted in the shareholders becoming investors in different funds.

With respect to the other two funds, the Court reviewed the allegations and evidence in accordance with the sixfactor framework set forth in Gartenberg v. Merrill Lynch Asset Management, Inc., and determined that all factors tipped in favor of New York Life. The plaintiffs’ case primarily rested on assertions that the funds’ board was not sufficiently independent and conscientious in reviewing the funds’ advisory fees, but the Court determined that the plaintiffs had failed to present evidence that would lead a reasonable jury to find in the plaintiffs’ favor on this point. Accordingly, the Court granted New York Life’s motion for summary judgment with respect to these funds.

The opinion was issued under the caption Redus-Tarchis v. New York Life Investment Management, LLC,  Case No. 14-7991.

© 2019 Vedder Price


About this Author

Vedder Price P.C. attorneys provide a full range of services to a diverse financial services clientele. Attorneys practicing in the firm’s Investment Services Group are experienced in all aspects of investment company and investment adviser securities regulations, broker-dealer regulatory and compliance matters, derivatives and financial product matters, and ERISA and tax matters. Clients include mutual fund complexes, hedge and other private funds, money managers, broker-dealers, independent directors, and many other types of institutions such as banks, savings and loans,...