American Chemicals & Equipment Inc. 401 (K) Retirement Plan v. Principal Management Corp.
2017 U.S. App. LEXIS 13332
| 8th Cir. | 2017Background
- ACE, a shareholder in six Principal Funds’ LifeTime target‑date "funds of funds," sued adviser Principal Management Corp. (PMC) under § 36(b) of the Investment Company Act for allegedly excessive fees.
- LifeTime Funds pay PMC a direct management fee of 0.03% (3 basis points); the funds also disclose Acquired Fund Fees and Expenses (AFFE), which reflect underlying funds’ expenses (including management fees paid by those underlying funds to PMC).
- ACE expressly disclaimed challenging the LifeTime Funds’ direct 3‑bp fee and instead sought recovery based on the portion of underlying‑fund fees attributable to PMC that reduce the LifeTime Funds’ NAV via their investments in those underlying funds.
- The district court granted summary judgment to PMC, holding ACE lacked a § 36(b) cause of action because the challenged fees were paid by the separate underlying funds, not by the LifeTime Funds or their shareholders.
- On appeal the Eighth Circuit reviewed de novo, rejected ACE’s alternative arguments (including that series treatment collapses the funds into a single investment company), and affirmed dismissal because § 36(b) limits claims to compensation “paid by” the registered investment company or its security holders.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 36(b) authorizes a shareholder of a fund‑of‑funds to sue over fees paid by underlying funds that reduce the fund‑of‑funds’ NAV | ACE: § 36(b) permits LifeTime shareholders to challenge acquired fund fees reflected in AFFE because those fees effectively were paid “with respect to” the LifeTime Funds’ investment | PMC: § 36(b) applies only to compensation or payments paid by the registered investment company or its shareholders; AFFE reflects fees paid by separate underlying funds, not payments by LifeTime Funds | Held: No. § 36(b) requires the challenged compensation be paid by the fund (or its shareholders); fees paid by underlying, separate funds are not actionable by LifeTime shareholders |
| Whether the AFFE is itself a "payment of a material nature" or "compensation for services" under § 36(b) | ACE: AFFE represents payments/compensation that burden LifeTime shareholders and thus fits § 36(b) | PMC: AFFE is a disclosure construct estimating indirect costs; it is not an actual payment and does not constitute compensation paid by the LifeTime Funds | Held: AFFE is a disclosure construct and not a payment/compensation paid by the LifeTime Funds; § 36(b) does not cover it |
| Whether ACE may sue on behalf of underlying funds by treating the series structure as a single investment company | ACE (late argument): PFI’s series structure makes LifeTime and underlying funds one company so ACE is a shareholder of the single registered investment company | PMC: Each series/fund is treated as a separate registered investment company under precedent and SEC guidance; ACE lacks an interest in underlying funds | Held: Not preserved and meritless; series funds are separate for § 36(b) purposes, so ACE cannot sue for fees of funds in which it holds no interest |
| Whether district court’s standing/jurisdictional characterization affects the proper analysis of ACE’s claim | ACE: argued statutory language does not require direct payment; court’s framing was erroneous | PMC: Statute’s text limits suits to fees paid by the fund or its shareholders; absence of a cause of action is resolved by statutory interpretation, not jurisdictional defect | Held: The court applied traditional statutory interpretation to determine ACE has no cause of action under § 36(b); dismissal affirmed |
Key Cases Cited
- Burks v. Lasker, 441 U.S. 471 (discussing ICA’s purpose to curb mutual‑fund abuses)
- Investment Company Institute v. Camp, 401 U.S. 617 (defining mutual funds as investment companies subject to ICA)
- Daily Income Fund, Inc. v. Fox, 464 U.S. 523 (historical growth of investment companies post‑WWII)
- Jones v. Harris Associates L.P., 559 U.S. 335 (standard for § 36(b) excessive‑fee claims)
- Lexmark International, Inc. v. Static Control Components, Inc., 572 U.S. 118 (statutory‑creation of causes of action is not jurisdictional)
- Gallus v. Ameriprise Financial, Inc., 675 F.3d 1173 (applying § 36(b) claim standard in 8th Circuit)
- Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co., 677 F.3d 178 (limitations on who may sue on behalf of funds)
- In re Mutual Funds Investment Litigation, 519 F. Supp. 2d 580 (treating series funds as separate registered investment companies)
- Forsythe v. Sun Life Financial, Inc., 417 F. Supp. 2d 100 (same conclusion regarding series/separate funds)