A panel of the US Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) voted unanimously to deny a petition for rehearing of its decision (the “Decision”) that affirmed the dismissal by the US District Court for the Northern District of Illinois (Eastern Division) (the “District Court”) of an excessive fee suit brought under Section 36(b) of the Investment Company Act of 1940, as amended (the “1940 Act”), against an adviser (the “Adviser”) of registered open-end funds (the “Funds”) by Fund shareholders. Although it affirmed the District Court’s decision, the Decision explicitly rejected the approach the multi-factor analysis for suits under Section 36(b) of the 1940 Act established by the US Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc ., 694 F2d 923 (2d Cir. 1982) (“Gartenberg”). Gartenberg has been followed by district courts in other circuits and relied on by the SEC in establishing disclosure requirements for board approval of advisory contracts. The Decision also expressly rejected the plaintiffs’ claim that mutual fund fees must be judged against the fees charged to an adviser’s institutional clients. (See the June 3, 2008 Alert for a more detailed discussion of the Decision.)
A request that the Decision be reheard en banc, which requires a majority vote of the panel, or of the judges in active service, was also denied. Judge Posner joined by four other Circuit Judges filed a dissent to the denial. Like Judge Easterbrook, who wrote the Decision, Judge Posner is known for his economics-based approach to legal issues. While acknowledging that the outcome may be correct, the dissent takes issue with many aspects of the Decision, devoting particular attention to the Decision’s economic analysis and the basis on which the Decision dismisses the plaintiffs’ arguments regarding the differential between advisory fees charged mutual funds and those charged similarly managed institutional accounts. The dissent also cites the fact that the Decision is recognized as having created a split in the circuits although the panel making the Decision did not acknowledge this, or as required when its opinion would result in a split in the circuits, circulate the opinion to the full court in advance of publication.