The suit, Gallus v. Ameriprise Financial, Inc., was originally filed in 2004 by shareholders in nine mutual funds managed by Ameriprise affiliates and made three major allegations against the asset manager.
The first allegation was that fee negotiations were flawed because they were based on external factors, namely the fee agreements of similar mutual funds in the market.
The second allegation was that Ameriprise provided comparable advisory services to institutional, non-fiduciary clients at substantially lower fees than it charged the plaintiffs.
The final allegation of the suit was that Ameriprise misled the Fund’s board of directors (the Board) about its arrangements with non-fiduciary clients to prevent the Board from questioning the higher fees charged to the plaintiffs.
When deciding in favor of Ameriprise, a Judge Roger Wollman of U.S. District Court for the Eighth Circuit ruled that that the suit “has altered the way in which we determine whether an adviser has breached its fiduciary duty,” under Section 36(b) of the Investment Company Act of 1940, which governs fiduciary responsibilities. In particular, the issue at question was flaws in a fund’s fee negotiation process constitute unscrupulous behavior.
The suit was first seen in front of the court for the District of Montana in 2007, with the district court deciding in favor of Ameriprise. This decision was reversed by the 8th Circuit Court in 2009. Then the U.S. Supreme Court in 2010 ordered that the case be remanded back to the Eighth Circuit for reconsideration. The Eighth Circuit soon after remanded the case back to the District of Montana, which reinstated its original 2007 decision. The case was then appealed and went again before the Eighth Circuit, which at the end of March confirmed the Montana district’s original 2007 decision as well.
In his opinion, Judge Wollman wrote that "In our previous decision, we held that 'the proper approach to 36(b) is one that looks to both the adviser's conduct during negotiation and the end result. Unscrupulous behavior with respect to either can constitute a breach of fiduciary duty.'”
However, he continued “the plaintiffs urge us to forego reconsideration of that holding, but after Jones, a process-based failure alone does not constitute an independent violation of 36(b). Instead, we have been instructed that 36(b) 'is sharply focused on the question of whether the fees themselves were excessive.'"
