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District Court Issues Tentative Ruling Granting Partial Summary Judgment in Section 36(b) Excessive Fee Suit

On October 25, 2018, the U.S. District Court for the Central District of California issued a tentative ruling granting in part and denying in part defendant Metropolitan West Asset Management, LLC’s (MetWest) motion for summary judgment in an excessive fee suit brought under Section 36(b) of the Investment Company Act of 1940 by a shareholder of the Metropolitan West Total Return Bond Fund. The plaintiff alleged that MetWest charged excessive advisory fees to the Fund in light of the firm providing substantially similar services for a lower fee as a sub-adviser to unaffiliated funds.

After reviewing the arguments and evidence presented, the Court granted the defendant’s motion for summary judgment with respect to two of the Gartenberg factors—nature and quality of services and fall-out benefits—noting that the plaintiff did not offer a strong argument that those factors leaned in his favor. However, the Court denied summary judgment as to the other Gartenberg factors.

As to comparative fee structures, the Court stated that MetWest’s reliance on peer group data as evidence of the reasonableness of the advisory fee was not sufficient to warrant summary judgment because comparing the fees charged by MetWest as a sub-adviser to unaffiliated funds to the advisory fee MetWest charged the fund could offer a “probative alternative” that could prevail at trial. The Court also refused to grant summary judgment on the care and conscientiousness of the board. In that regard, the Court stated that the board’s decision to approve the advisory

fee should be entitled to considerable weight unless the board’s approval process was deficient or MetWest withheld material information from the board. However, the Court found that there was a triable issue of fact as to the approval process because the board did not receive or consider certain materials. (The identity of the materials the Court took issue with were redacted in the tentative ruling.) The Court also determined that there were triable issues of fact as to economies of scale and profitability.

The tentative ruling was issued under the caption Kennis v. Metropolitan West Asset Management, LLC, Case No. 2:15-cv-8162-GW-FFM.

© 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,...