The 8th U.S. Circuit Court of Appeals determined that a lower court mistakenly rejected a comparison between fees charged to its mutual fund shareholders—to whom Ameriprise owed a fiduciary duty—and nonfiduciary institutional clients.
Instead, the appellate judges noted, the lower court merely applied the standard set out in the 1982 Gartenberg case—that a reasonable fee “represents a charge within the range of what would have been negotiated at arm’s length in light of all the surrounding circumstances”— without also conducting a broader fee inquiry.
“We believe that the proper approach to 36(b) is one that looks to both the adviser’s conduct during negotiation and the end result,” Circuit Judge Roger L. Wollman wrote for the court.
According to the opinion, the plaintiffs held shares in 11 mutual funds managed and distributed by Ameriprise affiliates. The plaintiffs charged that Ameriprise committed a fiduciary breach under Section 36(b) by providing misleading information to the funds’ board of directors during the yearly fee negotiations for the funds.
Specifically, according to the court, plaintiffs claimed that the fee talks were improperly based on fee agreements used by competing fund providers, rather than on its own profits and costs. The purpose of giving fund directors misleading information, according to the plaintiffs, was to head off questions about why Ameriprise was charging nonfiduciary institutional clients “substantially lower fees” than it was to the plaintiffs.
Wrote Wollman: “Ameriprise’s conduct must be evaluated independent from the result of the negotiation. The district court concluded that Ameriprise did not breach its fiduciary duty in one way (by setting a fee that was exorbitant relative to that of other advisers), but it should have also considered other possible violations of 36(b). Specifically, the court should have determined whether Ameriprise purposefully omitted, disguised, or obfuscated information that it presented to the Board about the fee discrepancy between different types of clients.’
The case is Gallus v. Ameriprise Financial Inc., 8th Cir., No. 07-2945.