Eighth Circuit Reinstates Fund Advisory Fee Action Against Ameriprise Financial

Holding:

In this suit over mutual fund fees, the U.S. Court of Appeals for the Eighth Circuit has reversed a district court’s dismissal of a suit claiming violation of fiduciary duty of fund advisers under Section 36(b) of the Investment Company Act of 1940 (“ICA”). Plaintiffs led by John E. Gallus, shareholders of eleven mutual funds, claimed that fund manager and adviser Ameriprise Financial, Inc. (“Ameriprise”) breached its statutory fiduciary duty by misleading them during the negotiation and demanding excessive fees. Citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982), the U.S. District Court for the District of Minnesota granted defendant Ameriprise’s motion for summary judgment. On appeal, the Eighth Circuit held that the district court erred in holding that no Section 36(b) violation occurred simply because defendant's fee passed muster under the standard laid down in Gartenberg. According to the Eighth Circuit, although the district court properly applied the Gartenberg factors for the limited purpose of determining whether the fees constituted a breach of fiduciary duty, it erred in rejecting a comparison between the fees defendant charged its institutional clients and its mutual funds clients. Further, the district court should have determined whether defendant purposefully omitted, disguised or obfuscated information regarding fees charged different types of clients in its presentations to the board of directors representing plaintiffs.

Detailed Summary:

This appeal required the Eighth Circuit to examine the scope of the fiduciary duty imposed on advisers of mutual funds by § 36(b) of the ICA, 15 U.S.C. § 80a-35(b).

The plaintiffs are shareholders of eleven mutual funds (“the Funds”) that are registered investment companies under the ICA. The Funds are managed and distributed by affiliates of the defendants (collectively, “Ameriprise”). The plaintiffs filed this lawsuit on June 9, 2004, alleging that Ameriprise had breached its fiduciary duty under § 36(b) of the ICA.

Sec 36(b) of the ICA states in part: “For the purposes of this subsection, the investment adviser…

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