Class Action Claims Alleging Violations of Sections 34(b), 36(a) and 48(a) of Investment Company Act (ICA) Dismissed for Lack of Private Right of Action and Class Action’s ICA Section 36(b) Claim Fails to Allege Excessive Fees Connecticut Federal Court Holds
Shareholders-plaintiffs filed a putative class action against various mutual funds, trustees and investment advisors in part for violations of the Investment Company Act (ICA) by alleging charging “excessive” fees within the meaning of the ICA. Alexander v. Allianz Dresdner Asset Mgmt. of Am. Holding, Inc., 509 F.Supp.2d 190, 192-93 (D.Conn. 2007). The class action alleged that defendants “acquire[d] ‘shelf-space’ at brokerage firms, i.e., that they paid excessive commissions to brokers to promote the sale of fund shares to investors” and that they benefited financially from directing investors to certain mutual funds. Id., at 193. The class action complaint alleged violations of ICA §§ 34(b), 36(a), 36(b) and 48(a), as well as state law and Investment Advisers Act (IAA) claims, Id., at 193-94. We focus here on the ICA claims only. In connection with those claims, defense attorneys moved to dismiss the class action complaint because (1) no private right of action exists under ICA §§ 34(b), 36(a) or 48(a), and (2) the allegations in the class action complaint failed to allege “excessive fees” within the meaning of ICA § 36(b). Id., at 194-95. The district court agreed.
With respect to the ICA §§ 34(b), 36(a) and 48(a) claims in the complaint, the district court agreed with defense counsel that the Second Circuit has held no private right of action may be asserted. Alexander, at 194 (citing Bellikoff v. Eaton Vance Corp., 481 F.3d 110, 114 (2d Cir. 2007). With respect to the ICA § 36(b) claim in the complaint, the district court held that had failed to allege that the fees were “excessive”; rather, the class action complaint asserted “only that the defendants used fees for an improper purpose.” Id., at 195. Specifically, “the plaintiffs do not allege that the compensation paid to the defendants was disproportionate to the services rendered.” Id. Under the Second Circuit’s opinion in Eaton Vance, that is insufficient: “‘[i]n order to state a claim under § 36(b), one must allege excessive fees, rather than fees that might simply be described as “improper.”’” Alexander, at 195 (quoting Eaton Vance, at 118). Accordingly, the federal court granted the defense motion to dismiss the ICA § 36(b) claim in the class action complaint. Id., at 195-96.
NOTE: For reasons not discussed here, the district court also granted the defense motion to dismiss the other claims in the class action complaint. See Alexander, at 196-98.