Companies that set up mutual funds — outfits like Fidelity, Vanguard, and Oppenheimer — also "advise" the funds on their investments. People who buy shares in a mutual fund pay a fee for the advisory services. And these folks depend on the fund's board of directors to hold the fee at a reasonable level.
Almost 60 years ago,lack of robust competition in the mutual fund industry led Congress to enact the Investment Company Act of 1940 and, in 1970, to amend the statute in a way that protects mutual fund shareholders from excessive or otherwise improper adviser fees. New section 36(b) deems investment fund fund advisers "to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by [a] registered investment company or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser." 15 U.S.C. 80a-35(b). It also provides that "[a]n action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser." Id.
In Gallus v. Ameriprise Fin., Inc., No. 07-2945 (8th Cir. Apr. 8, 2009), shareholders of 11 Ameriprise mutual funds sued for breach of the section 36(b) fiduciary duty. They alleged that Ameriprise misled the funds' boards about comparable fees, particularly the fees it charged to other non-mutual fund clients, including pension funds, which paid about half as much as the mutual funds did. The district court granted Ameriprise's motion for summary judgment on the ground that the end result of the negotiations — the total fee itself — didn't pass into the realm of exorbitance.
The Eighth Circuit reversed. It held that the district court should have considered not only the fee's magnitude but also any sharp behavior of Ameriprise during the negotiation process. In looking at the fee itself, moreover, the district court should also have compared the amount to much-lower fees Ameriprise charged pension funds for similar services. The evidence raised material fact issues, the court concluded, as to whether Ameriprise's overall conduct passed fiduciary muster, requiring a trial.
