Obeslo, et al. v. Great-Western Life & Annuity, et al.Obeslo, et al. v. Great-Western Life & Annuity, et al.
Appeal from the United States District Court for the District of Colorado
(D.C. Nos. 1:16-CV-00230-CMA-SKA, 1:16-CV-01215-CMA-SKA, and 1:16-CV-03162-CMA-SKC)
Michael A. Wolff (Jerome J. Schlichter with him on the briefs), Schlichter Bogard & Denton LLP, St. Louis, Missouri, for Plaintiffs – Appellants.
Sean M. Murphy, Milbank LLP, New York, New York (Robert J. Liubicic, Milbank LLP, Los Angeles, California, Edward C. Stewart, Wheeler Trigg O’Donnell LLP, Denver, Colorado, Robert Michael Little, Great-West Life & Annuity Insurance Co., Greenwood Village, Colorado, with him on the briefs), for Defendants – Appellees.
Before TYMKOVICH, Chief Judge, HOLMES, and McHUGH, Circuit Judges.
This is an appeal from a consolidated shareholder derivative action arising under
Shareholders suing under § 36(b) must satisfy the arduous standard set out in Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010). No one has ever done so, including, according to the district court, Plaintiffs. After holding an eleven-day bench trial in January 2020, the district court adopted and incorporated by reference, with few changes, Defendants’ Proposed Findings of Fact and Conclusions of Law. It also found for Defendants on every element of every issue, concluding “even though they did not have the burden to do so, Defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.” App. Vol. II at 528.
Plaintiffs now appeal. Exercising jurisdiction under
I. BACKGROUND
To provide context for the factual and procedural history of this dispute, we begin with an overview of the investment framework and the relevant regulatory statutes. With the benefit of that backdrop, we set forth the factual and procedural history of this dispute.
A
An investment company is a corporation that manages a portfolio of financial securities for its shareholders. Separate legal entities called investment advisers create investment companies. The investment adviser incorporates the company, chooses the company’s directors, oversees the company’s investments, and compensates itself by deducting fees from the company’s assets. One common type of investment company is a mutual fund. A single investment adviser can supervise numerous mutual funds. This corporate arrangement is known as a “mutual fund complex.” App. Vol. II at 517.
Congress passed the ICA,
First, Congress bolstered the independence of mutual fund directors. The amended ICA requires at least 40% of an investment company’s board of directors to be independent, defined as having no interest in or affiliation with the investment adviser.
Second, Congress added § 36(b) to the ICA, which imposes a fiduciary duty on investment advisers and their affiliates. Section 36(b) states investment advisers owe shareholders a fiduciary duty with respect to setting and collecting their fees, and with respect to paying affiliates from mutual fund assets.
To prove breach under § 36(b), a plaintiff must show the investment adviser’s compensation is “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” Jones, 559 U.S. at 346. The Supreme Court has instructed courts to consider all relevant factors when making this determination, including six factors articulated by the Second Circuit in the seminal case Gartenberg vs. Merrill Lynch Asset Management, Inc. Id. at 353. A plaintiff must also establish the amount of “actual damages resulting from the breach” to prevail on a claim under § 36(b).
B. Factual Background
1. Great-West Funds and the Defendants
The investment company in this case is Great-West Funds Inc. (“Great-West Funds”). It is a mutual fund complex that has issued approximately sixty series of shares, each of which is a separate mutual fund (the “Funds”). The Great-West Funds’ Board of Directors (the “Board”) oversees the Funds.
Defendant GWCM is the investment adviser for the Funds. GWCM provides investment advisory services for all the Funds under a single investment advisory agreement approved by the Board. GWCM does not direct investment strategy. Instead, it hires and monitors subadvisers that direct individual funds. GWCM’s other advisory services include preparing weekly performance reports, conducting a fund performance review, and supervising certain aspects of Great-West Funds’ Lifetime Funds.2 GWCM is a wholly-owned subsidiary of Defendant GWL&A. With staff and professionals supplied by GWL&A, GWCM provides a 120-person
Defendant GWL&A administers the Funds as part of its retirement recordkeeping business, pursuant to an administrative services agreement approved by the Board. “GWL&A is the second largest recordkeeper in the country, administering $650 billion in assets and 40,000 plans, and has grown faster than its competitors.” App. Vol. II at 505.
Customer organizations hire GWL&A—doing business as Empower Retirement3—to develop and maintain retirement plans for their employees. A customer designates a retirement plan sponsor to set up a customized retirement plan for its organization by selecting from among the 14,000 investment options Empower offers, which include the Funds. Of note, plan sponsors owe their customer organizations a fiduciary duty to select prudent investments. See
Employees of GWL&A’s customers who select the Funds in their retirement portfolios become Great-West Funds shareholders. The recordkeeping services GWL&A provides its customers, therefore, also service shareholders. These services include maintaining mutual fund records, performing sub-accounting of plan participant shareholdings, distributing investment materials such as quarterly statements and prospectuses, distributing dividends and other payments, responding to shareholder queries, and providing information to the Board. GWL&A serves shareholders through call centers, a mobile app, a website, and on-site meetings.
2. The Contested Funds and the Plaintiffs
Plaintiffs are three individuals who hold shares in the Funds.4 They claim the advisory and administrative services fees charged to four mutual funds (the “Contested Funds”) are excessive under § 36(b). The Contested Funds are: (1) the Great-West S&P 500 Index Fund; (2) the Great-West S&P 600 Index Fund; (3) the Great-West Real Estate Index Fund; and (4) the Great-West Templeton Global Bond Fund.
Defendants acknowledge many index funds are commodity-like products, as some index funds “are all essentially the same except for the fees that they charge.”
The Great-West Templeton Global Bond Fund is a “clone[] of an existing retail fund[]” that Franklin Advisers Inc., a third-party, sells to the general public. App. Vol. V at 1433. Of note, Franklin Advisors also serves as the subadviser to GWCM for the Great-West Templeton Global Bond Fund. Id. From 2010 through 2016, the Great-West Templeton Global Bond Fund grew from $182.4 million to $359.1 million.
3. Board Approval of the Contested Funds’ Fees
The ICA limits recovery to actual damages from excessive compensation as of the year preceding commencement of the action.
a. The Board’s annual 15(c) process
An investment adviser’s compensation must be annually reviewed and approved by the majority of a mutual fund’s independent directors.
The Board had an Independent Directors’ Committee (“IDC”) that met separately at the end of each quarterly meeting. The IDC also met every March to review 15(c) process materials in advance of the April meeting. These materials could total approximately 10,000 pages and included information about the six Gartenberg factors. See App. Vol. X at 2742–50 (March 2015 memo to the IDC from outside counsel describing the factors and how they should be applied); App. Vol. XV at 3537 (March 2015 IDC meeting minutes showing outside counsel presented on the factors and “noted that the information requested of [GWCM] and the sub-advisers was meant to address these factors”). The materials also included analysis from outside consultants—Lipper Inc. provided comparisons of peer funds’ fees and performance, and JDL Consultants reported on the competitiveness and reasonableness of the Funds.5 The IDC was represented
“The directors had six weeks with the [15(c)] material[s] before the April meeting, during which time they reviewed the material and asked GWCM follow-up questions.” Id. IDC members received these materials two weeks before their 15(c) meeting in March.
b. GWCM’s advisory services fees
Great-West Funds compensates GWCM based on a percentage of the total value of the average daily net assets under management for each fund. That percentage is expressed in basis points (“bps”)—e.g., 15 bps is 0.15% of covered assets. For clarity’s sake, the investment advisory services fees GWCM charged the Contested Funds during the relevant time period are listed in the following chart.
| Jan. 2015 | May 2017 | Aug. 2017 | |
| S&P 500 Index Fund | 25 bps | 19 bps | 17 bps |
| S&P 600 Index Fund | 25 bps | 25 bps | 21 bps |
| Real Estate Index Fund | 35 bps | 35 bps | 35 bps |
| Templeton Global Bond Fund | 95 bps | 58 bps | 58 bps |
The March 2014 Investment Advisory Agreement governed GWCM’s advisory services fees at the beginning of the relevant time period. Per this agreement, GWCM collected a 25 bps fee from the Great-West S&P 500 and S&P 600 Index Funds.6 GWCM also collected a 35 bps fee from the Great-West Real Estate Index Fund, and a 95 bps fee from the Great-West Templeton Global Bond Fund. GWCM’s compensation did not change when the Board approved an Amended and Restated Investment Advisory Agreement on May 1, 2015.7
The underlying lawsuit was initiated in January 2016. At that time, the 2015 Amended and Restated Investment Advisory Agreement was in effect, and the 2016 15(c) process was underway. The IDC held its 15(c) meeting in March 2016, during which the directors questioned GWCM about specific Funds’ expenses and fees. They also asked outside counsel to “request additional information from [GWCM] regarding the fees and expenses of the Great-West Templeton Global Bond Fund, the Great-West S&P 500 index Fund,” and others. App. Vol. XV at 3542. GWCM provided responses to the Directors in advance of the Board’s April 2016 meeting. The responses did not discuss the Great-West Templeton Global Bond Fund due to GWCM’s ongoing review of that fund’s expense structure and its stated intention to present the Board with a new proposal.
The Board met in April 2016, and questioned GWCM about the Great-West S&P 500 Index Fund’s and the Great-West Templeton Global Bond Fund’s fees and expenses. The Board then renewed the May 2015 Amended and Restated Investment Advisory Agreement for another year. GWCM’s fees remained the same.
In June 2016, GWCM provided the Board with a presentation following up on questions from the April 2016 meeting. GWCM concluded its fees were “reasonable” and “consistent with industry averages.” Id. at 3162, 3164. GWCM also said it
In September 2016, GWCM first proposed revising its fee and expense structure. The proposal included breakpoints—automatic fee reductions triggered when a fund reaches a certain size. GWCM proposed reducing fees on funds that reached $1 billion and $2 billion.
At a November 15, 2016, board meeting, GWCM submitted its proposal for Board approval. GWCM’s portfolio manager said “the proposal is intended to position the Funds for future growth,” and GWCM’s goal is “to be priced reasonably and competitively with peers.” App. Vol. XV at 3518–19. Because the Great-West S&P 500 Index Fund had hit the relevant breakpoints, GWCM proposed reducing its effective fee on that fund to 19 bps. For reasons unrelated to breakpoints, GWCM also proposed reducing its fee to 58 bps on the Great-West Templeton Global Bond Fund. GWCM did not propose immediately reducing fees for the Great-West S&P 600 Index Fund or Real Estate Index Fund. The independent directors then requested “GWCM provide further analysis on the proposals for the Great-West S&P 500 Index” and a different fund, and the Board scheduled another meeting for November 18 “to consider such analysis and to defer any further consideration of the proposals until such time.” Id. at 3522.
On November 18, 2016, the Board approved GWCM’s proposal. Because the new fee and expense structure contained changes besides fee reductions,8 the Board chose to have the proposal take effect in May 2017 so shareholders could approve all the changes at once as part of the annual 15(c) process. The Board re-approved the proposal on November 30 to correct clerical errors. The Amended and Restated Investment Advisory Agreement dated May 1, 2017, included the proposed fee reductions.9
In June 2017, as part of its “constant[] reassess[ment of] fund expenses in an effort to keep the Great-West Funds competitively positioned,” GWCM volunteered further fee reductions. App. Vol. XI at 2942–43. GWCM proposed reducing its fees on the Great-West S&P 500 Index Fund to 17 bps and on the S&P 600 Index Fund to 21 bps. Its stated goal was to “make [the] Funds more competitive with their passively-managed peers.” Id. at 2943. The reductions took effect in August 2017.
c. GWL&A’s administrative services fees
Great-West Funds compensates GWL&A through a 35 bps administrative services fee charged to certain share classes of Great-West Funds stock. This fee has not changed during the relevant time period.
A 2006 administrative services agreement between GWCM and GWL&A set the price and terms of GWL&A’s fees at the start of the relevant time period. GWL&A did not collect its compensation directly. GWCM added GWL&A’s 35 bps
The 2006 agreement terminated in May 2015, in conjunction with the creation of Empower. GWL&A then entered into an administrative services agreement with Great-West Funds directly. The Board approved this agreement at its September 2014 quarterly meeting, and it went into effect on May 1, 2015. GWL&A still charged a 35 bps fee under this agreement, but it was now paid directly by the Funds.
Around this same time, Great-West Funds began issuing Institutional Class shares of its mutual funds, alongside the Initial Class and Class L shares it had historically issued. Great-West Funds offered each Contested Fund in all three shares of classes. Under the 2015 agreement, Institutional Class shares are not charged administrative services fees. Customer plans “may choose the Institutional share class of the Funds . . . and pay for recordkeeping through fees charged at the plan or participant level.” App. Vol. II at 492; see also App. Vol. IV at 1124 (independent director testimony, noting “it is [a customer’s] decision how they want to pay for [their plans]; whether it is by the sponsor, by the participant fee, by a 12b-1 fee, or by using a 35 basis points administrative fee”); App. Vol. V at 1361–62 (independent director testimony, saying “whether a plan sponsor . . . picks the institutional share class with zero basis points or the investor class with 35 basis points, GWL&A is going to basically make the same amount of money on that plan”). Plans created before 2015 did not have the ability to select Institutional Class shares, but could switch to Institutional Class shares later.
The Board renewed the 2015 Administrative Services Agreement at its April 2016 15(c) annual meeting. However, at the IDC’s separate meeting in March 2017, the independent directors had questions about the administrative services fee. The “performance and expense analysis” JDL Consultants provided them “use[d] the Institutional Class shares,” and because they do not pay the administrative services fee, the directors thought it was “difficult to assess the reasonableness of such fees relative to peer groups.” App. Vol. XV at 3551. The independent directors then “requested peer group fee and expense data for the non-Institutional Share classes of the Funds.” Id. at 3533. This information was provided, and, after further review and discussion, the Board renewed the 2015 Administrative Services Agreement in April 2017. The Board also changed the agreement’s name to the Shareholder Services Agreement.
C. Procedural History
1. Pretrial Proceedings
In January 2016, Plaintiffs filed a shareholder derivative action under § 36(b) alleging GWCM breached its fiduciary duty by charging excessive investment advisory services fees. In December 2016, Plaintiffs filed another derivative action under § 36(b) challenging the administrative advisory services fees charged by GWCM and GWL&A. These cases were consolidated with a third against GWCM, filed in May 2016 by the Duplass 401(k) Plan. Plaintiffs filed a Consolidated Amended Complaint in September 2017, which was amended in October 2018. Plaintiffs, derivatively on behalf of Great-West Funds, “sought to recover for the [F]unds the Defendants’ excess compensation and the [F]unds’ lost investment opportunity.”
Defendants filed a motion to dismiss and a motion for summary judgment. The district court dismissed some plaintiffs who lacked standing, but it denied summary judgment after “rel[ying] on opinions offered by Plaintiffs’ expert . . . J. Chris Meyer” to conclude genuine material facts were disputed. App. Vol. II at 520–21. Defendants filed a motion to strike Mr. Meyer as an expert shortly thereafter. The district court denied the motion, stating “weaknesses in Mr. Meyer’s qualifications and conclusions were proper subjects for cross examination, but they did not preclude him from testifying.”10 Id. at 521.
2. The Bench Trial
The district court held an eleven-day bench trial in January 2020. Plaintiffs presented four fact witnesses. Three were plaintiff shareholders and the other was a trustee of the Duplass Plan. The district court found the fact witnesses’ “testimony had limited probative value with respect to whether Defendants’ fees were excessive.” Id. The district court emphasized this point by highlighting two examples—Ms. Obeslo testifying she was happy because her retirement account kept making money, and a former trustee of the Duplass 401(k) Plan saying he opposed initiating the litigation.
Plaintiffs’ sole expert witness was Mr. Meyer, and he was the “only witness that Plaintiffs produced who attempted to calculate damages.” Id. at 528. Mr. Meyer “was formerly employed at Nationwide Funds, Delaware Investments, Putnam, and Kemper Financial Services, in a variety of roles . . . [but he had] not worked in the mutual fund industry since 2009.” Id. at 524. The district court stated Mr. Meyer was “thoroughly discredited on cross examination,” noting just a few of the “abundant examples of . . . weaknesses and inconsistencies in Mr. Meyer’s testimony.” Id. 528–29 (emphasis in original). The district court found “Mr. Meyer’s testimony to be non-credible . . . [and] his specific theories regarding Plaintiffs’ alleged damages [to be] legally flawed.” Id. at 529.
Defendants called nine fact witnesses. They included independent directors Gail Klapper, Steven McConahey, and R. Timothy Hudner. Id. at 522. The directors’ testimony focused on the 15(c) process. The district court found the “evidence makes clear that the directors closely scrutinized fees, resulting in numerous fee reductions.” Id. at 486. The Board “asked about breakpoints or fee reductions at nearly every meeting dating back to at least 2013,” id. at 483–84, and it engaged in a “robust push and pull process . . . with the Board continuing to press for reductions and breakpoints even when GWCM provided industry data showing the Funds were not typical candidates for breakpoints, and even when Lipper . . . agreed with that data,” id. at 484–85. Six of Defendants’ employees also testified. They discussed “the market in which Defendants compete, how Defendants function as business entities, the process of corresponding with the Board in order to set the fees at issue, and Defendants’ profitability.” Id. at 523.
Defendants also presented two expert witnesses. Arthur Laby, a professor at Rutgers Law School, “was qualified as an expert in mutual fund governance.” Id. at 524. Dr. Glenn Hubbard is a Professor of
3. District Court Decision
In August 2020, the district court entered judgment in favor of Defendants on two independent grounds. First, the district court found Defendants did not breach their fiduciary duties under § 36(b), concluding “that Plaintiffs failed to meet their burden of proof with respect to all of the Gartenberg factors.” Id. at 527 (emphasis in original). The district court also found that “even though they did not have the burden to do so, Defendants presented persuasive and credible evidence that overwhelmingly proved that their fees were reasonable and that they did not breach their fiduciary duties.” Id. at 528. Thus, the district court adopted and incorporated by reference Defendants’ proposed findings of fact and conclusions of law regarding “the Gartenberg factors and the surrounding circumstances.” Id. at 527.
Second, the district court found Plaintiffs “did not establish that any actual damages resulted from Defendants’ alleged breach of fiduciary duty.” Id. (emphasis in original). The district court reached this conclusion after refuting each of Mr. Meyer’s three theories regarding Plaintiffs’ alleged damages. When the district court juxtaposed Mr. Meyer’s “fundamentally flawed” damages theories “with the inadequacy of his testimony overall, [it] conclude[d] that his opinions [were] entitled to no weight.” Id. at 533 (emphasis in original). Thus, the district court concluded, “the record is devoid of any evidence that suggests that Plaintiffs sustained actual damages as a result of the fees that Defendants charged.” Id.
II. DISCUSSION
“In an appeal from a bench trial,” this court “review[s] the district court’s factual findings for clear error, and its legal conclusions de novo.” Holdeman v. Devine, 572 F.3d 1190, 1192 (10th Cir. 2009) (quotation marks omitted). Factual findings “are clearly erroneous when they are unsupported in the record,” or if “we have the definite and firm conviction that a mistake has been made” after reviewing all the evidence. Id. (quotation marks omitted). The same standard applies to factual findings adopted from Defendants’ proposed findings. See Anderson v. City of Bessemer City, 470 U.S. 564, 572 (1985) (“[E]ven when the trial judge adopts proposed findings verbatim, the findings are those of the court and may be reversed only if clearly erroneous.”). The district court “has the exclusive function of appraising credibility, determining the weight to be given testimony, drawing inferences from facts established, and resolving conflicts in the evidence.” Holdeman, 572 F.3d at 1192 (quotation marks omitted). Therefore, this court “view[s] the evidence in the light most favorable to the district court’s ruling and must uphold any district court finding that is permissible in light of the evidence.” Mathis v. Huff & Puff Trucking, Inc., 787 F.3d 1297, 1305 (10th Cir. 2015) (quotations marks omitted).
Plaintiffs must show more than the viability of their own theory to warrant remand under the clear error standard. They must demonstrate the district court’s findings were impermissible. See Anderson, 470 U.S. at 574 (“Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.”). Plaintiffs must prove even more to justify reversal. They must show the district
A. Breach
Defendants breach their fiduciary duty under § 36(b) if their compensation “is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining.” Jones, 559 U.S. at 346. Courts evaluate breach by considering “all relevant circumstances,” including the six factors specifically set forth in Gartenberg. Id. at 353. The Gartenberg factors are:
- the nature, extent, and quality of the services provided by the adviser to the shareholders;
- the profitability of the mutual fund to the adviser;
- “fall-out” benefits, such as indirect profits [accruing to the adviser due
to its relationship with the fund]; (4) economies of scale achieved by the adviser as a result of growth in assets under the fund‘s management and whether savings generated from the economies of scale are shared with shareholders; (5) comparative fee structures used by other similar funds; (6) the level of expertise, conscientiousness, independence, and information with which the board acts.
Goodman v. J.P. Morgan Inv. Mgmt., Inc., 954 F.3d 852, 857 (6th Cir. 2020) (citing Jones, 559 U.S. at 344–45, 344 n.5). The Gartenberg factors implicate a bevy of factual considerations. Yet, two basic patterns pervade Plaintiffs’ arguments and tilt each factor in Defendants’ favor.
First, Plaintiffs cannot overcome the standard of review they face on appeal. The district court found for Defendants on each of the six Gartenberg factors. Because no single factor is dispositive, Plaintiffs must convince this panel that the district court erred on enough issues to justify overturning a multifactor balancing test on clear error review. They cannot carry such a heavy burden. The record is so flush with support for the district court‘s factual findings that Plaintiffs are left with little recourse beyond relitigating facts decided in district court. The substantial deference this court affords the district court‘s factual conclusions dooms this effort.
Second, even putting aside this arduous standard of review, Plaintiffs fail to satisfy their burden under
These patterns reemerge throughout the forthcoming analysis. We now turn to the Gartenberg factors, in reverse order, holding the district court did nor err on any factor.
1. Deference to the Board
The sixth Gartenberg factor is “the level of expertise, conscientiousness, independence, and information with which the board acts.” Goodman, 954 F.3d at 857. The emphasis this factor received in Jones, and its unique basis in the statutory text, suggest it is the most important. See
The district court found the Board‘s directors to be independent and qualified. Plaintiffs do not challenge this finding on appeal, instead reframing the relevant question as “not whether the directors were ‘independent’ . . . [as defined] under
Moreover, Plaintiffs mischaracterize the key inquiry. The Supreme Court has stressed “the standard for fiduciary breach under
The record supports the district court‘s finding that “the Board‘s decision to approve the fees is entitled to substantial deference” because it “engaged in a robust process in approving Defendants’ fees.” App. Vol. II at 527. The district court found the Board‘s 15(c) process “followed best practices recommended by industry authorities.” Id. at 483. The district court also credited Professor Laby‘s testimony that the Board‘s “meeting schedule was ‘at least as good or better than most boards I have seen.’” Id. at 481. The independent directors were provided “extensive information” that Professor Laby testified was “adequate to evaluate each [Gartenberg] factor.”11 Id. at 482. The IDC
Plaintiffs concede “Defendants and the directors followed the formalities of a robust approval process,” but Plaintiffs contend “they did nothing with that material that was substantively robust.” Aplt. Br. at 37 (emphasis in original). However, the record contains numerous examples suggesting otherwise. Professor Laby testified “the Board was highly engaged in the 15(c) process,” and the directors were “actively engaged with respect to fees.” App. Vol. II at 83. And the district court found the “evidence makes clear that the directors closely scrutinized fees, resulting in numerous fee reductions.” Id. at 486. This evidence includes “the Board ask[ing] about breakpoints or fee reductions at nearly every meeting dating back to at least 2013,” and the IDC immediately inquiring about fee reductions after GWCM lowered its subadviser costs on the Great-West S&P 500 and 600 Index Funds in 2015.12 Id at 483–84. It also includes Board minutes that “reflect the robust push and pull process” with GWCM about their fees, despite GWCM and Lipper providing “industry data showing the Funds were not typical candidates for breakpoints.” Id. 484–85. Furthermore, the Board‘s “continued push for a comprehensive fee restructuring” ultimately led to fee reductions saving “shareholders of the Great-West S&P 500 Index Fund . . . $1.6 million.” Id. at 485.
The record does not indicate the district court‘s findings of fact were unsupported, mistaken, or impermissible. Plaintiffs’ recycled arguments are unpersuasive. Specifically, they argued that the Board was too small, some directors appeared unknowledgeable at trial, the Board did not properly evaluate 15(c) materials, the Board took too long to enact fee reductions, and Professor Laby was not credible. These critiques all seek to relitigate the import of evidence in the record, but “[i]t is not the role of an appellate court to retry the facts.” Holdeman, 572 F.3d at 1192. And even if these contentions have merit, they do not render the district court‘s findings impermissible. Not even Plaintiffs’ most potent critique—that GWCM understated the profitability on its advisory fee by including GWLA‘s fee in the calculation—proves the 15(c) process was insufficiently robust. See Goodman, 954 F.3d at 865–66 (stating a board‘s “thoughtful review process that considered substantial information from [an adviser], . . . as well as information from independent third parties” is still robust even if an adviser “may not have presented to the Board all the information [the plaintiffs] wanted”). Plaintiffs propose an alternative interpretation of the facts; they do not highlight clearly erroneous information or fatally discredit any of the district court‘s findings.
Finally, Plaintiffs’ argument that the Board failed to engage in substantive oversight
The district court expressly rejected this restricted interpretation of negotiation. See App. Vol. II at 486 (“Plaintiffs’ suggestion that the Board and adviser must engage in adversarial negotiations is unsupported.”). Indeed, Plaintiffs’ assertion comes perilously close to arguing a more robust process or conscientious board would have necessarily pursued lower fees or employed more aggressive tactics—an argument repeatedly rejected by courts. See, e.g., In re BlackRock Mut. Funds Advisory Fee Litig., 327 F. Supp. 3d 690, 716 (D.N.J. 2018) (noting the “ICA does not impose a duty on the board of directors of a mutual fund to negotiate the lowest possible advisory fee”), aff‘d, 816 F. App‘x 637 (3d Cir. 2020); Zehrer v. Harbor Cap. Advisors, Inc., Nos. 14 C 00789, 14 C 07210, 2018 WL 1293230, at *7 (N.D. Ill. Mar. 13, 2018) (“Even if the Board might have driven a harder bargain, the legal standard does not require that.”).
Even if this theory had merit, Plaintiffs’ burden is to show the district court‘s conclusion that the “board‘s process for negotiating and reviewing [Defendants‘] compensation [was] robust” is impermissible on the record. Jones, 559 U.S. at 351; see also Anderson, 470 U.S. at 573–74 (articulating plaintiff‘s burden on clear error review). The district court found “shareholders of the Great-West S&P 500 Index Fund saved $1.6 million as a result of negotiated breakpoints and fee reductions.” App. Vol. II at 485 (emphasis added). For reasons already discussed, the record does not suggest this is a clearly erroneous interpretation of events. Accordingly, this factor weighs heavily in Defendants’ favor and puts reversal or remand far out of reach.
2. Fee Comparisons
The fifth Gartenberg factor examines “comparative fee structures used by other similar funds.” Goodman, 954 F.3d at 857. Market competition does not sufficiently regulate adviser fees, but this “do[es] not suggest that rates charged by other adviser managers to other similar
Still, Plaintiffs make the Board‘s use of the Lipper fee comparisons—and the district court‘s adoption of the Board‘s reasoning—the centerpiece of their appeal. They allege: (1) the district court and the Board relied too heavily on the fee comparisons when deciding GWCM‘s fees were reasonable; (2) the fee comparisons were inappropriate because they compared total expense ratios of mutual funds, instead of the discrete advisory and administrative services fees at issue; (3) the fee comparisons did not show GWCM‘s advisory services fees were within the range of comparable funds; (4) the court should have considered different fee comparisons that GWCM itself prepared; and (5) the directors did not use fee comparisons when assessing GWL&A‘s advisory fees. Aplt. Br. at 13–23. None of these arguments prove persuasive.
a. Reliance on fee comparisons
Unlike Plaintiffs’ other fee comparison arguments, their claim that the district court relied too heavily on fee comparisons—and thus ran afoul of Jones—raises a question of law and is reviewed de novo. The Supreme Court has stated “courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers” because those other fees “may not be the product of negotiations conducted at arm‘s length.” Jones, 559 U.S. at 350–51. Plaintiffs claim the district court ignored this directive, but their claim is unavailing for several reasons.
First, Plaintiffs do not explain how or why the district court crossed a threshold from proper consideration of fee comparisons—which is required under Gartenberg—to relying on them too heavily—which the Jones Court admonished. They merely note “[t]he district court adopted in whole [the comparative fees] section of Defendants’ proposed findings and conclusions, which was longer than any other Gartenberg factor section” in Defendants’ Proposed Findings of Fact and Conclusions of Law. Aplt. Reply at 7. But adopting a thorough argument does not demonstrate undue reliance on it, particularly when the district court‘s judgment did not turn on fee comparisons alone. The district court held that “Plaintiffs failed to meet their burden of proof with respect to all of the Gartenberg factors.” App. Vol. II at 527 (emphasis in original). Thus, Plaintiffs provide no reason to believe the district court‘s consideration of Defendants’ fee comparisons conflicted with Jones.
Second, Plaintiffs’ critique that the directors heavily relied on the fee comparisons, and the district court merely rubberstamped the directors’ decision, misses the mark. Jones warns courts against heavily relying on fee comparisons during judicial review. 559 U.S. at 350–51. But nothing in Jones dictates what information directors, as opposed to the court, should rely on during their 15(c) process. See id. Indeed, courts have permitted boards to consider similar fee comparisons as part of their 15(c) process. See Goodman, 954 F.3d at 862 (observing that fee comparisons specifically compiled by Lipper can be appropriate under Jones because the reports are “widely accepted in the field as a tool to compare fees and performance in the mutual fund industry”). And even if the Board relied on fee comparisons during its own multi-faceted deliberation, the district court did not violate Jones by approving the Board‘s ultimate decision. On the contrary, Jones instructs courts to defer to outcomes of robust 15(c) processes, see 559 U.S. at 351, like the process at issue here.
Fourth, this case is easily distinguishable from the cases Jones warned against. Defendants correctly note the district court‘s decision is more nuanced than the opinion Jones overturned. See Aple. Br. at 29 (recognizing Jones reversed a decision “that placed almost exclusive reliance” on fee comparisons). Indeed, in the overturned decision, the Seventh Circuit expressly held “we now disapprove the Gartenberg approach.” Jones v. Harris Assocs. L.P., 527 F.3d 627, 632 (7th Cir. 2008). Here, the district court considered each Gartenberg factor, finding that none weighed in favor of Plaintiffs.
For the above reasons, the district court‘s consideration of the Lipper fee comparison was not legal error. We now turn to the many reasons the district court permissibly concluded this fee comparison demonstrated Defendants’ fees “were reasonable and that they did not breach their fiduciary duties.” App. Vol. II at 528.
b. Appropriateness of fee comparisons
Plaintiffs argue “[t]he fee comparisons on which the district court relied were inappropriate . . . because they compared
But the operative question on appeal is not which approach proves superior. Both methodologies discount and highlight different costs and benefits. Rather, the proper question is whether the district court clearly erred by concluding fee comparisons using total expense ratios of funds were appropriate. The answer to that question is “no”; the record supports the district court‘s determination. The only expert witness to discuss this issue was Dr. Hubbard, and the court deemed him credible. App. Vol. II at 488. Additionally, the court concluded Defendants’ fees “cover[] more services and expenses than most other funds,” which weighs in favor of using comparative metrics that better capture the total price of broader services. Id.; see also id. at 490 (noting Dr. Hubbard testified that “looking only at advisory fees . . . is not ‘the comparison one would do from an economic perspective’”). Thus, the district court‘s position is a permissible interpretation of the facts and was not clearly erroneous.16
c. Within range of comparable funds
The district court‘s finding that Defendants’ “Advisory Fees and Administrative Fee were within the range of comparable funds” is also not clearly erroneous. Id. at 527. Plaintiffs criticize this finding, arguing that “what is ‘within range’ is nothing more than the ipse dixit of Defendants or their expert.” Aplt. Reply at 10. However, this response underscores Plaintiffs’ misunderstanding of the clear error standard of review and their burden under
Plaintiffs also dispute this finding by: (1) selectively citing outlying fees as proof of unreasonableness; (2) blaming the district court for not defining what constitutes being within the range of other fees; (3) criticizing the use of generic fee comparisons over fund-specific fee comparisons; and (4) redeploying factual arguments rejected by the district court.17 But none of these arguments establish the district court clearly erred.
The first argument wrongly assumes high fees are inherently disproportionate. See Pirundini v. J.P. Morgan Inv. Mgmt. Inc., 309 F. Supp. 3d 156, 164 n.10 (S.D.N.Y. 2018) (“It is well-settled that ‘charging a fee that is above the industry average does not violate Section 36(b).’”) (quoting Paskowitz v. Prospect Cap. Mgmt. L.P., 232 F. Supp. 3d 498, 504 (S.D.N.Y. 2017)). It also ignores the district court‘s findings that Defendants’ fees were below average when looking at other data sets. The second argument improperly shifts the burden of proof onto the district court. The third argument‘s claim that fund specific analysis should be the preferred methodology is not grounded in the law. See Kasilag v. Hartford Inv. Fin. Servs., LLC, 745 F. App‘x 452, 456 (3d Cir. 2018) (unpublished) (“[T]he text of
d. GWCM‘s internal fee comparisons
Plaintiffs also claim the “district court entirely ignored” the draft fee comparison of peer funds GWCM prepared in June 2016, which it argues is a more apt comparison. Aplt. Reply at 9. This is mistaken. The court specifically called this draft fee comparison “aspirational” and found it to be largely irrelevant “due to [the] different structures and significantly higher assets” in the funds analyzed by GWCM. App. Vol. II at 493. The court‘s decision not to give this draft fee comparison more weight than the Lipper fee comparison is not clearly erroneous. See Goodman, 954 F.3d at 863 (“Lipper reports are widely used in the industry.”); Holdeman, 572 F.3d at 1192 (noting the district court “has the exclusive function of appraising credibility, determining the weight to be given [to evidence], . . . and resolving conflicts in the evidence”).
e. Fee comparisons for GWL&A
Plaintiffs further argue that “Defendants did not even provide [the district court] Lipper fee comparisons for GWLA‘s 35 bp fee.” Aplt. Br. at 22. Defendants dispute this, but even if true, the argument does not advance Plaintiffs’ case. As Defendants note, “Plaintiffs had the burden of proof on the comparative fees factor. Thus, even if Plaintiffs were correct that that [sic] there was no third party data on administrative fees, that would only further support the conclusion that they failed to satisfy their burden.”18 Aple. Br. at 38.
3. Economies of Scale
The fourth Gartenberg factor is “economies of scale achieved by the adviser as a result of growth in assets under the fund‘s management and whether savings generated from the economies of scale are shared.” Goodman, 954 F.3d at 857. The
We need not resolve whether this factor requires
4. Fall-Out Benefits
The third Gartenberg factor is ascertaining the “fall-out benefits” that accrue to the adviser due to its relationship with the fund. Goodman, 954 F.3d at 857. The district court found “Plaintiffs failed to identify any significant fall-out benefits that Defendants acquired.” App. Vol. II at 528. Plaintiffs do not contest the district court‘s finding on appeal, and this factor weighs in Defendants’ favor.
5. Profitability
The second Gartenberg factor is considering “the profitability of the mutual fund to the adviser.” Goodman, 954 F.3d at 857. This also weighs in Defendants’ favor.
First, Plaintiffs do not offer persuasive evidence demonstrating Defendants’ profits exceeded the outer bounds of arm‘s-length bargaining. This is their statutory burden. See Jones, 559 U.S. at 347 (noting plaintiffs must “show that the fee is outside the range that arm‘s-length bargaining would produce”). Instead, Plaintiffs almost exclusively focus on discrediting the methodology Defendants use to calculate profitability. See Aplt. Reply at 16 (rebuking Defendants for analogizing to other cases finding similar profit margins reasonable, because those cases featured dissimilar funds); id. at 17–18 (criticizing GWCM for combining different share classes in profitability calculations).
Undermining Defendants’ profitability data, however, does not satisfy Plaintiffs’ burden to show Defendants’ compensation is disproportionately large. Neither does highlighting “that GWCM had kept its same asset-based fees in place for years as fund assets and GWCM profit margins grew.” Aplt. Br. at 48. This point is tantamount to claiming that any increase in profit enjoyed by growing funds is inherently excessive. The Supreme Court has instructed courts to avoid engaging in this kind of blunt rate regulation. Jones, 559 U.S. at 352 (noting “Congress rejected a ‘reasonableness’ requirement that was criticized as charging the courts with rate-setting responsibilities”);
Second, the district court did not clearly err in finding “Defendants’ profits were within the range of their competitors.” App. Vol. II at 527. This result is well supported in the record. Plaintiffs’ own expert witness noted Defendants’ profits on the Great-West S&P 500 Index Fund were “in line with profit margins he himself believed were reasonable at his former employer.” Id. at 501. Additionally, “JDL independently analyzed complex-wide profitability for the Board and found Great-West‘s profit margins to be reasonable relative to other advisers.” Id. at 500. The district court‘s decision to adopt Defendants’ preferred complex-wide profitability calculation methodology, as opposed to Plaintiffs’ preferred method of calculating profitability at the share class level, does not render its analysis clearly erroneous. The record shows independent consultants like JDL used this same approach. Id.; see also Holdeman, 572 F.3d at 1192 (noting it is the district court‘s function to resolve “conflicts in the evidence”).
6. Adviser Services
The first Gartenberg factor is “the nature, extent, and quality of the services provided by the adviser to the shareholders.” Goodman, 954 F.3d at 857. The district court found “Defendants provided extensive, high-quality services in exchange for their fees.” App. Vol. II at 527. Plaintiffs disagreed, arguing Defendants’ “long list of services they performed for the Funds was no different from the services other advisers perform for their funds.” Aplt. Br. at 36. They maintain Defendants’ services did not justify their fees, which “were consistently higher than [their] competitors.” Id.
Again, Plaintiffs must do more than demonstrate Defendants’ fees were higher than other advisers. They must establish Defendants’ compensation “bears no reasonable relationship to the services rendered.” Jones, 559 U.S. at 346. The record includes facts suggesting some relationship existed, including descriptions of unique services GWCM provides. Additionally, as Defendants note, “even if Defendants’ services were of the same type provided by other advisers, that does not mean Defendants provide the same quality of services.” Aple. Br. at 46. The court found the quality of Defendants’ services evidenced by the funds’ comparatively good performance. App. Vol. II at 503.
Plaintiffs state the Contested Funds’ performance does not justify Defendants’ fees, highlighting the Great-West Templeton Global Bond Fund to underscore their point. Plaintiffs observe: (1) GWCM is paid more for a cloned fund than the fund‘s primary investor; (2) shareholders of GWCM‘s version of the fund pay nearly double what investors pay for the fund on the retail market; and (3) other Empower funds pay GWL&A less for the same services.
We are unpersuaded for several reasons: (1) GWCM‘s decision to charge a higher fee than Franklin does not render its fee excessive, see Pirundini, 309 F. Supp. 3d at 164 n.10, and the district court found the Templeton Fund‘s total expense ratio to be cheaper than peer global macro hedge funds in certain years, see App. Vol. II at 489; (2) comparisons to Franklin‘s retail equivalent fund are “inapt because they were as much as one hundred times larger, did not have unitary fees, and were not subadvised like the Great-West Funds,” id. at 494 n.18; and
Further evidence of the reasonable relationship between Defendants’ fees and services was provided by Plaintiffs’ own expert. Mr. Meyers admitted “a 35 bps fee for administration in the context of a 401(k) plan was not excessive, because ‘this is between the plan sponsor and the administrator as to what a fair fee is, and the fund board shouldn‘t be in the middle of that.’” Id. at 491 (emphasis in original) (quoting trial transcript). Plaintiffs have failed to prove the district court‘s findings are clearly erroneous as to the quality of Defendants’ services.
7. Surrounding Circumstances
The Supreme Court instructed courts to specifically consider the six Gartenberg factors, but it also stressed “that all relevant circumstances be taken into account.” Jones, 559 U.S. at 347. Accordingly, the district court noted two “surrounding circumstances” that also weigh in Defendants’ favor. App. Vol. II at 510. First, plan sponsors provide an “additional layer of fiduciary scrutiny . . . [which] weighs against a finding that the Funds’ fees are outside the range of what would result from arm‘s-length bargaining.” Id. at 511. Customer plans are “managed by plan fiduciaries who, before a single individual participant ever invests in a Great-West Fund, (i) select Empower as the plan recordkeeper, and (ii) choose the Great-West Funds from among Empower‘s broad menu of options, with full visibility into the Funds’ fees and performance.” Id. at 510. Second, the administrative services fee “is not the actual price of GWL&A‘s administrative and recordkeeping services, which is individually negotiated by retirement plans with Empower.” Id. at 511. Thus, analyzing this fee demands considering other negotiated terms, like “a 10 bps credit provided to any plan that includes Great-West Funds” or the fact that “[n]on-Great-West funds often use total intermediary fees (including 12b-1 fees) to pay for GWL&A‘s services.” Id.
Plaintiffs criticize the district court‘s consideration of circumstances other than the Gartenberg factors. Yet, they dramatically overstate the weight the district court gives these surrounding circumstances. See Aplt. Br. at 28 (“An adviser cannot be relieved of its §36(b) [obligation] merely because some shareholders may be in plans subject to other duties.” (emphasis in original)). The district court never suggested these circumstances could prove dispositive independent of its Gartenberg analysis. The court merely noted they also “weigh against Plaintiffs.”19 App. Vol. II at 510.
III. CONCLUSION
For these reasons, we AFFIRM the district court‘s order.
Notes
Plaintiffs continue to argue GWCM‘s internal fee comparisons showed GWL&A‘s administrative services fee “was grossly disproportionate to the service GWL[&]A provided to [the Contested] Funds.” Aplt. Reply at 9. However, the district court found these comparisons to be largely irrelevant. App. Vol. II at 493. Instead, the district court credited competing evidence showing the GWL&A fees were reasonably proportionate, including deposition testimony from Plaintiffs’ own expert witness who admitted “a 35 bps fee for administration in the context of a 401(k) plan was not excessive, because ‘this is between the plan sponsor and the administrator as to what a fair fee is, and the fund board shouldn‘t be in the middle of that.’” Id. at 491 (emphasis in original) (quoting the trial transcript).