Ninth Circuit Affirms Dismissal Of '40 Act Section 36(b) Excessive Fee Action Against Davis

Introduction The U.S. Court of Appeals for the Ninth Circuit recently affirmed the dismissal of an amended complaint asserted by a shareholder of the Davis New York Venture Fund (the "Fund") under section 36(b) of the Investment Company Act of 1940 against the Fund's investment adviser, Davis Selected Advisers, and distributor, Davis Distributors. Turner v. Davis Selected Advisers, LP, No. 13-15742 (9th Cir. Sept. 29, 2015).

The lawsuit, originally filed in the U.S. District Court for the District of Arizona, alleged that defendants breached their fiduciary duties to the Fund by charging excessive advisory and 12b-1 fees. The District Court dismissed the Amended Complaint with prejudice and denied plaintiff's efforts to obtain leave to file a second amended complaint. The Ninth Circuit affirmed.

Summary At the outset, the Ninth Circuit noted that in evaluating an investment adviser's fiduciary duty under section 36(b), a court takes into account both procedure and substance. With respect to procedure, the level of deference a court affords a mutual fund's board of directors' decision to approve a certain fee depends on the "robustness" of the board's process for reviewing that contract. As for substance, courts apply the so-called "Gartenberg factors" affirmed by the U.S. Supreme Court in Jones v. Harris Assocs., L.P., 559 U.S. 335 (2010), to determine whether the fee is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining."

With respect to advisory fees, the Ninth Circuit concluded that plaintiff's comparison of the fees charged to the Fund—an actively managed fund with a large cap focus—to the fees charged to the S&P 500 Total Index Return Fund—an index fund—were entirely inapt. The Ninth Circuit found plaintiff's comparisons to fees charged by other mutual funds, absent allegations about the services provided to or strategy followed by those funds, to be similarly inappropriate. And the court found plaintiff's allegations concerning economies of scale to be conclusory and insufficient to save the Amended Complaint from dismissal.

Turning to 12b-1 fees, the court found plaintiff's allegations similarly deficient. First, plaintiff alleged that the service fee is used in part to grow the fund, such that the resulting increase in the advisory and TA fees...