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36(b) Cases Set Aside; Scrutiny of Board’s Process Highlights Need for Diligence

Two excessive fee cases that challenged fund advisory fees based on the sub-advised funds comparison and manager-of-managers theory were recently dismissed, continuing a trend of plaintiff losses. As lawyers from Stradley Ronon write, the federal district courts in both cases “carefully followed the principles established by the Supreme Court’s landmark Jones v. Harris Associates decision in 2010” in granting the summary judgment motions filed by the advisers.

Meanwhile, the court’s careful review of the board’s process in Zehrer v. Harbor Capital Advisors, Inc. may serve to remind directors of the substantial weight allotted to the manner in which directors carry out their responsibilities. The Zehrer plaintiffs argued that the court should not give deference to the fund board’s decisions because: “(1) the Board did not each year actively negotiate the lowest possible fee for the Funds or consider alternate advisers; (2) [the Board] was not informed about, and did not request, additional information or retain third-party advisers to analyze the profitability materials it received from Harbor; and (3) the Board was “plagued with conflicts of interest that compromised its ability to serve as an effective check in fee negotiations.’” The court was not ultimately moved by plaintiff arguments, however it wrote: “Although there is room to quibble about how little or much individual effort the trustees invested in preparation for their meetings, and whether the fees were the best that could have been negotiated, the court is not persuaded that plaintiffs’ evidence is sufficient to create a triable issue of fact under the Jones standard.” While the court found no admissible evidence to challenge the board’s process or independence, the opinion underscores the importance of adequate and thorough preparation for meetings and analysis of fees.