Ninth Circuit Ruling in American Funds Fee Case

On August 24, 2011, the Ninth Circuit Court of Appeals handed down an unpublished opinion in the American Funds fee case. The Court upheld the dismissal of the case by the District Court, holding that the Gartenberg standards were correctly applied. The Court noted that the standards did not change under the recent ruling by the Supreme Court in Jones v. Harris Associates, which confirmed these legal standards for a fiduciary duty case under Section 36(b) of the Investment Company Act.

While the District Court was critical of the oversight role of the independent directors for the American Funds in "papering the file," the Court concluded that their lack of conscientiousness was not sufficient proof that the directors failed to meet the Gartenberg standards.

The Ninth Circuit did agree with the plaintiffs in this case that the Investment Company Act permits a claim to be brought when a fiducary breaches its duty by "Improperly using fees." In this case, however, the plaintiffs did not allege that the investment adviser "misused the fees or that the mutual funds did not benefit from the services provided by those fees." Instead, the plaintiffs argued that the fees were used to promote growth that was adversely affecting the mutual funds.

While this case is a victory for the investment adviser to the American Funds--Capital Research & Management--the Ninth Circuit has provided a pathway to successfully arguing a fiduciary duty case, under circumstances where a shareholder can prove that mutual fund fees were used for improper purposes or where the mutual funds did not benefit from the services provided by the fees.