November 28, 2021

Volume XI, Number 332

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Tenth Circuit Court of Appeals Affirms District Court’s Judgment for Great-West in Section 36(b) Excessive Fee Suit

On July 26, 2021, the U.S. Court of Appeals for the Tenth Circuit affirmed the decision of the U.S. District Court for the District of Colorado in favor of defendants Great-West Capital Management, LLC and Great-West Life & Annuity Insurance Co. (together, Great-West) in a Section 36(b) excessive fee case.

On August 7, 2020, after an 11-day bench trial, the District Court issued a judgment in favor of Great-West, holding that the plaintiffs failed to prove that Great-West breached its fiduciary duties under Section 36(b) of the Investment Company Act of 1940 by charging excessive fees. Citing, among other things, that the testimony of the plaintiffs’ four fact witnesses had limited probative value and that plaintiffs’ sole expert witness was non-credible, the District Court found that the plaintiffs failed to meet their burden of proof with respect to each of the factors prescribed in Gartenberg v. Merrill Lynch Asset Management, Inc., and the plaintiffs failed to identify any legitimate damages stemming from Great-West’s alleged breach. 

On appeal, the Tenth Circuit reviewed the District Court’s factual findings for clear error, and its legal conclusions de novo. Because the District Court ruled in favor of Great-West on each Gartenberg factor, and because, as the Tenth Circuit stated, “no single factor is dispositive” of excessive fees, plaintiffs had the burden to convince the Court that the District Court erred with respect to its assessment of multiple Gartenberg factors. The Tenth Circuit found that the District Court did nor err on any factor, stating that because the “record is so flush with support for the district court’s factual findings” the plaintiffs were “left with little recourse beyond relitigating facts decided in district court.” The Tenth Circuit noted that the plaintiffs also failed to satisfy their burden under Section 36(b), as they did not present evidence to establish an outer bound for a fee that may be bargained for at arm’s length or that Great-West’s fees were beyond that outer bound.

In its opinion, the Tenth Circuit emphasized the importance of the sixth Gartenberg factor—“the level of expertise, conscientiousness, independence, and information with which the board acts”—stating that prior judicial treatment of this factor, including by the U.S. Supreme Court in Jones v. Harris Associates, L.P., and its “unique basis in the statutory text” suggest that this factor is of prime importance in the consideration of Section 36(b) cases. The Tenth Circuit discussed at length the contract review process undertaken by the board of the Great-West funds, noting testimony that the board was highly engaged in the process and that the board’s process followed best practices recommended by industry authorities. The Tenth Circuit noted that the board’s independent members were represented by outside legal counsel who advised them regarding the information they should consider, whether the information received from Great-West was sufficient for them to make an informed decision and how they should apply the Gartenberg factors in analyzing that information. The Tenth Circuit further noted that the independent board members asked counsel to request additional information from Great-West regarding certain funds’ fees and expenses. The Tenth Circuit cited the District Court’s findings that the board engaged in a “robust push and pull process” with Great-West, closely scrutinizing the fees Great-West charged to the funds, which resulted in “numerous fee reductions,” and that the board members were independent and well-qualified. Accordingly, the Tenth Circuit concluded that the board’s decision to approve the funds’ fees should be granted substantial deference.

The Tenth Circuit’s opinion was issued under the caption Obeslo, et al. v. Great-Western Life & Annuity, et al. (No. 20-1310).

© 2021 Vedder PriceNational Law Review, Volume XI, Number 252
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About this Author

John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
Mark Quade Investment Attorney Vedder Price Chicago
Associate

Mark Quade is an associate in Vedder Price’s Chicago office and a member of the firm’s Investment Services practice group.

Prior to joining Vedder Price, Mr. Quade served as a 1940 Act attorney and assistant vice president at a mutual fund service provider in Milwaukee, Wisconsin. There, he provided legal support to a registered open-end multiple series trust and its board of trustees, and he also supported proprietary mutual funds. Among other matters, Mr. Quade facilitated investment advisory agreement approval and renewal processes, prepared and reviewed board meeting materials...

312 609 7515
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