July 14, 2020

Volume X, Number 196

July 13, 2020

Subscribe to Latest Legal News and Analysis

New York District Court Grants Summary Judgement to Defendants in Section 36(b) Excessive Fee Case

On May 30, 2019, the U.S. District Court for the Southern District of New York granted the motion for summary judgment submitted by defendants Davis Selected Advisers, L.P. and Davis Selected Advisers-NY, Inc. in an excessive fee case brought under Section 36(b) of the Investment Company Act of 1940 by shareholders of the Davis New York Venture Fund.

At issue in this case were three of the Gartenbergfactors: comparative fees, nature and quality of services and profitability. With respect to comparative fees, plaintiffs alleged that the fund’s investment advisory fee was excessive because Davis charged lower fees for providing allegedly substantially similar services as a sub-adviser to unaffiliated funds. Davis argued that the services it provides as the investment adviser to a proprietary mutual fund and the services it provides as a sub-adviser to an unaffiliated fund differ significantly and offered evidence that the fund’s investment advisory fee compared favorably to the fees of peer funds. Davis further offered as evidence two mutual funds that had selected Davis to replace their previous investment adviser and whose fee structures were nearly identical to that of the fund. The court found that the sub-advisory fees, as well as the fees charged to the mutual funds that replaced their investment adviser, provided “an uncontroverted apt comparison” establishing the range of arm’s length fees; however, when analyzing the fees charged to the fund as compared to the sub-advised funds, other funds managed by Davis and the peer funds, the court concluded that the fund’s investment advisory fees fell within the range that could have been negotiated at arm’s length. With respect to performance, the plaintiffs asserted that the fund exhibited negative alpha and that certain unaffiliated funds may have terminated a sub-advisory relationship with Davis due to poor performance. However, the court found that the plaintiffs’ evidence was not indicative of “dramatic or unusual” poor performance and therefore this factor did not weigh in favor of liability. Finally, with respect to profitability, the court found that plaintiffs had not provided evidence suggesting that Davis’s profit margins of 73.33 – 81.43 percent were out of proportion to the services rendered in the context of the other Gartenbergfactors.

The order granting the motion for summary judgment was issued under the caption In re Davis New York Venture Fund Fee Litigation, No. 14 CV 4318-LTS-HBP (S.D.N.Y. July 2, 2019). On June 28, 2019, the plaintiffs filed an appeal in the U.S. Court of Appeals for the Second Circuit (Case No. 19-1967).

© 2020 Vedder PriceNational Law Review, Volume IX, Number 213


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,...