By Rodney F. Tonkovic, J.D.
In a nonprecedential opinion, a Third Circuit panel concluded that a district court properly found that an investment adviser’s fees were not excessive in relation to the services provided. Taken as a whole, the fees were within the range of arm’s-length bargaining, and there was no reason to distinguish between fees paid to the manager and to a sub-administrator. The district court was also correct in deferring to the disinterested board's independent approval of the fees (Kasilag v. Hartford Investment Financial Services, LLC, August 15, 2018, Restrepo, L.).
The action was brought by shareholders of six mutual funds managed by Hartford Investment Financial Services. As manager, Hartford agreed to provide certain services in return for a fee from each fund based on its average daily net asset value. Hartford also contracted with a sub-administrator and sub-advisors to assist in its managerial duties.
The shareholders filed an action on behalf of the funds alleging that Hartford's fees were excessive, given the amount of responsibilities that were delegated to the sub-administrator and sub-advisors. The district court concluded that the shareholders failed to demonstrate that the fee was so disproportionate that it could not be one that was negotiated at arm's length. The board's approval of the fees, plus its independence and conscientiousness, also weighed in Hartford's favor.
Not excessive. The panel affirmed the district court's dismissal of the shareholders’ claim under Section 36(b) of the Investment Company Act. On appeal, the shareholders first argued that the district court should have addressed separately the fees paid to Hartford and the sub-administrator. The panel disagreed, stating that nothing in Section 36(b), or in precedent, requires this artificial bifurcation, and advisers are not prohibited from subcontracting some of their management responsibilities.
The shareholders next contested the district court's finding in Hartford's favor on the sixth Gartenberg factor: that the funds' board was careful and conscientious. Here, the shareholders maintained that the board was deficient in its failure to review and approve the compensation for Hartford and the sub-administrator separately. A disinterested board's independent approval of compensation contracts should receive deference from the courts, however, and the shareholders failed to show that the district court's review of the board's process was clearly erroneous.
Finally, the shareholders took issue with the district court's aggregation of their claims for each of the funds. This argument, the panel said, ignored the numerous findings made by the district court regarding specific funds and years. Moreover, Section 36(b) requires neither a separate analysis for each fund nor prohibits varying compensation among funds.
The case is No. 17-1653.