Large Fund Manager Exonerated in Excessive Fee Case

In a recent case, the U.S. District Court for the Central District of California employed the Gartenberg standard to dismiss Section 36(b) claims against a large fund company and its directors. The Court explicitly rejected the Seventh Circuit’s Jones standard (full disclosure is sufficient) as well as the Gallus standard (apply a common law fiduciary standard). Nevertheless, the Court criticized the independent directors for failing to question whether compensation of adviser personnel was reasonable, although the court opined that Gartenberg does not require directors to police compensation. The Court stated that the “entire process seems less a true negotiation and more an elaborate exercise in checking off boxes and papering the file.” In the end, the court noted, the Gartenberg standard “establishes a very high standard to overcome.” The Court also opined that Rule 12b-1 fees should be judged under Rule 36(b)’s fiduciary standard. However, the court rejected the plaintiffs’ claims about misuse of 12b-1 fees because the only relevant consideration was whether the services provided were reasonable in relation to the fees paid.

OUR TAKE: Most significant is the Court’s determination that only the reasonableness, and not the use, of 12b-1 fees is the proper determination under Section 36(b). We also think the case is interesting because it offers a very comprehensive treatment and analysis of the Gartenberg factors.