The Eighth Circuit Upholds Gartenberg and Requires Comparison with Institutional Account Fees in Gallus v. Ameriprise Financial, Inc.

by John W. Rutonno, Kenneth E. Rectoris, Todd E. Pentecost, Jeffrey B. Maletta, and Nicholas G. Terris

Close on the heels of the Supreme Court's decision to grant review of a case addressing the substantive standard in excessive fee cases under Section 36(b) of the Investment Company Act of 1940 (ICA) (Jones v. Harris Associates L.P., 527 F.3d 627 (7th Cir. 2008) [enhanced version available to lexis.com subscribers / unenhanced version on lexisONE Free Case Law) (see the Supreme Court's opinion vacating the 7th Circuit's judgment, along with analysis and commentary)], the Eighth Circuit Court of Appeals has weighed in with its view of the statute in Gallus v. Ameriprise Financial, Inc., No. 07-2945, 2009 U.S. App. LEXIS 7382 (8th Cir. April 8, 2009) [enhanced version / unenhanced version]. In the most significant aspect of its decision, the Eighth Circuit concluded that a lower court had erred in rejecting, for purposes of a Section 36(b) analysis, a comparison between fees charged to an investment adviser's institutional clients and those charged to its investment company clients.

In Ameriprise, the district court had granted summary judgment in favor of the investment adviser, holding that no Section 36(b) violation had occurred because the adviser's fee "passed muster" under the standard articulated in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982) [enhanced version / unenhanced version], for evaluating whether an advisory fee is so high as to violate the statute. Nonetheless, the Eighth Circuit reversed summary judgment and remanded the case to the district court for further proceedings. Ameriprise appears to be the first published Court of Appeals decision overturning a district court grant of summary judgment for a defendant on a Section 36(b) claim. In doing so, the Eighth Circuit took sides on important issues that have divided the other four federal Circuit Courts to have substantively interpreted Section 36(b).

The Eighth Circuit acknowledged that under Gartenberg, "the relevant test for a fee is whether it 'represents a charge within the range of what would have been negotiated at arm's-length in light of all the surrounding circumstances,'" and concluded that the Gartenberg factors provide a "useful framework for resolving claims of excessive fees...." Ameriprise accordingly disagreed with the Seventh Circuit's decision in the Jones case, where the Seventh Circuit disapproved of Gartenberg and held that if an adviser "make[s] full disclosure and plays no tricks," a court should refrain from engaging in an evaluation of the reasonableness of an advisory fee approved by investment company directors.

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