Vedder Price

Vedder Thinking | Articles Court Finds for Defendant Investment Adviser in Section 36(b) Excessive-Fee Case


Reader View

On August 5, 2019, the U.S. District Court for the Central District of California found for the defendant, Metropolitan West Asset Management, LLC (MetWest), following a bench trial in an excessive fee case brought under Section 36(b) of the Investment Company Act of 1940 by a shareholder of the MetWest Total Return Bond Fund. The plaintiff’s claim centered on a comparison between the fees charged by MetWest in its role as investment adviser to the fund versus the sub-advisory fees charged by MetWest in serving as a sub-adviser to unaffiliated funds. Specifically at issue in the trial were four of the Gartenberg factors: comparative fees, profitability, economies of scale and the independence of the independent directors and the care and conscientiousness with which they performed their duties—i.e., whether the board’s approval of the advisory fee deserved substantial deference by the court. The court had previously granted the defendant’s motion for summary judgment with respect to fall-out benefits and the nature and quality of services provided.

The court’s findings regarding the Gartenberg factors at issue were as follows:

  • Deference Owed to the Board’s Approval of the Advisory Fee. The court afforded the board’s decision to approve the fund’s advisory fee substantial deference on the basis of, among other things, the board’s “sufficiently robust” 15(c) process. The plaintiff failed to persuade the court that the board’s process was deficient simply because MetWest neither delineated the services it provided to sub-advised funds on a sub-advised-fund-by-sub-advised-fund basis nor provided the sub-advisory agreements to the board. In addition, the court concluded that the board’s failure to negotiate a fee reduction did not prevent a finding that deference was owed. In this regard, the court concurred with the defendant’s assertion that “it was not the Board’s duty to negotiate the best deal possible, but instead to use its reasonable judgment in deciding whether to approve a fee once it had all relevant information.”
  • Comparative Fees. The court concluded that the services MetWest provided to the fund were significantly different from the services it provided to the sub-advised funds, noting, among other things, MetWest’s responsibilities in calculating the fund’s net asset value, satisfying redemption requests, providing compliance-related services, preparing public filings, assisting the board in fulfilling its duties and overseeing third-party service providers. The court also concluded that MetWest assumed substantial risks as adviser to the fund, which risks MetWest did not faceat least not to the same extentwhen serving as sub-adviser. The risks cited by the court included reputational, financial, litigation and business risks, as well as cybersecurity risks, the threat of losing personnel essential to client relations, asset flight risk and risks associated with the fund’s regulatory filings.
  • Economies of Scale. The court did not believe that the plaintiff proved the existence of economies of scale, finding that the plaintiff’s expert witness was not persuasive. Moreover, the court concluded that, even if the evidence showed that MetWest experienced some economies of scale, the evidence was insufficient to find that MetWest failed to share those economies of scale with the fund. The court determined that the fund benefited from MetWest’s reinvestments in its organization—including through the addition of new employees, improving technology systems and increasing compensation for retention purposes. The court also noted the plaintiff’s failure to cite any case law requiring that the realization of economies of scale result in the addition of fee reductions or breakpoints in the advisory fee schedule. The court further cited evidence that MetWest priced the fund to scale at the outset.
  • Profitability. In finding that the plaintiff failed to prove that the profitability factor leaned in his favor, the court noted that MetWest’s profit margins over the relevant period “generally rested below the median of reported profit margins that other asset managers comparable to MetWest received.”

The court found in favor of MetWest and ordered the dismissal of the plaintiff’s action in its entirety, on the merits and with prejudice. The case is Kennis v. Metropolitan West Asset Management, LLC, Case No. 2:15-cv-08162 (C.D. Cal. July 9, 2019).


Nathaniel Segal


Jacob C. Tiedt


John S. Marten