CURD et al v. SEI INVESTMENTS MANAGEMENT CORPORATION

Filing 70

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE ANITA B. BRODY ON 7/13/2015. 7/14/2015 ENTERED AND COPIES VIA ECF.(mo, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
STEVEN CURD and REBEL CURD,
on behalf of SEI
INTERNATIONAL EQUITY FUND, SEI
HIGH YIELD BOND FUND, SEI
TAX-MANAGED LARGE CAP FUND, SEI
TAX-MANAGED SMALL/MID CAP
FUND, and SEI INTERMEDIATE-TERM
MUNICIPAL FUND,

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Plaintiffs,
v.
SEI INVESTMENTS MANAGEMENT
CORPORATION and SEI INVESTMENTS
GLOBAL FUNDS SERVICES,
Defendants.
July _13__, 2015

CIVIL ACTION
No. 13-7219

Anita B. Brody, J.
MEMORANDUM

Plaintiffs Steven Curd and Rebel Curd (the “Curds”) bring an action on behalf of five
mutual funds in which they own shares (collectively, the “SEI Funds”),1 against Defendant SEI
Investments Management Corporation (“SIMC”), the investment adviser for the SEI Funds, and
against Defendant SEI Investments Global Funds Services (“SIGFS”), the administrative agent
for the SEI Funds. In the Amended Complaint, the Curds allege that SIMC and SIGFS each
The five SEI Funds are SEI International Equity Fund (“International Equity”), SEI High Yield Bond
Fund (“High Yield Bond”), SEI Tax-Managed Large Cap Fund (“Tax-Managed Large Cap”), SEI TaxManaged Small/Mid Cap Fund (“Tax-Managed Small/Mid Cap”), and SEI Intermediate-Term Municipal
Fund (“Intermediate-Term Municipal”). The SEI Funds are organized under three trusts—the SEI
Institutional International Trust, the SEI Institutional Managed Trust, the SEI Tax Exempt Trust—which
are management investment companies under the ICA. Am. Compl. ¶¶ 12–16, ECF No. 51. The SEI
Funds were originally named as Nominal Defendants in this lawsuit. However, they have since been
dismissed.
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breached their fiduciary duties to the SEI Funds by charging excessive management and
administrative fees to the SEI Funds, in violation of § 36(b) of the Investment Company Act of
1940 (“ICA”), 15 U.S.C. § 80a-35. Pursuant to § 36(b)(3) of the ICA, the Curds seek actual
damages in the amount of all excessive fees paid from a period one year before this action was
instituted. As an alternative remedy, pursuant to § 47(b) of the ICA, 15 U.S.C. § 80a-46, the
Curds seek rescission of the contracts between the SEI Funds and the Defendants and restitution
of all excessive fees paid from a period one year before this action was instituted.2 This Court
has subject matter jurisdiction over the Curds’ claims pursuant to 28 U.S.C. § 1331.
Pursuant to Federal Rule of Civil Procedure 12(b)(6), SIMC and SIGFS move to dismiss
the Amended Complaint alleging that the Curds have failed to state a claim for excessive fees
under Section 36(b) of the ICA. ECF No. 54. On July 7, 2015, I held oral argument on
Defendants’ motion. For the reasons discussed below, I will deny Defendants’ motion as to
SIMC and grant it as to SIGFS.
I.

BACKGROUND
The Curds own shares in each of the SEI Funds, which are mutual funds3 held in three

management investment companies governed by the ICA. Am. Compl. ¶¶ 10–16, ECF No. 51.
SIMC serves as the investment adviser for the SEI Funds, and per Advisory Agreements is
charged with managing the investment and reinvestment of the SEI Funds’ assets. Id. ¶¶ 2, 35.
In turn, SIMC subcontracts the majority of its investment management duties to numerous subadvisers pursuant to Sub-Advisory Agreements. Id. ¶ 36. All of the SEI Funds’ assets are
managed by sub-advisers, “leaving defendant SIMC largely without any asset management

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Technically, the trusts entered into contracts with SIMC (Advisory Agreements) and SIGFS
(Administration Agreements) on behalf of the SEI Funds. See id. ¶¶ 17–18, 35, 90.
3
“A mutual fund is a pool of assets, consisting primarily of [a] portfolio [of] securities, and belonging to
the individual investors holding shares in the fund.” Burks v. Lasker, 441 U.S. 471, 480 (1979).

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responsibilities.” Id. ¶ 37. As their investment adviser, SIMC charges the SEI Funds
management fees.4 Id. ¶ 2. Management fees are based on a stated percentage of the SEI Funds’
average daily net asset value. Id. ¶ 40. SIMC has charged the same fee percentage to the SEI
Funds since initiating its management services, despite the SEI Funds’ significant growth
through additional investment.5 Id. ¶¶ 51–53. For the 2013 fiscal year, the SEI Funds paid
SIMC approximately $30.7 million in management fees.6 Id. ¶¶ 40–41. Of that amount, the subadvisers received approximately $18.5 million and SIMC retained approximately $12.2 million.
Id. ¶¶ 2, 41. SIMC thus passes on approximately 60% of these fees to the sub-advisers, and
retains 40% for itself. Id. ¶ 41.
SIGFS serves as the administrative agent for the SEI Funds and provides administrative,
regulatory, and other back-office services to the SEI Funds. Id. ¶¶ 4, 90. SIGFS has
Administration Agreements with the trusts in which the SEI Funds are held. Id. ¶ 90.
Administrative fees are based on a stated percentage of the SEI Funds’ average daily net asset
value. Id. ¶ 92. SIGFS has charged the same fee rates to the SEI Funds since initiating its
administrative services, despite the SEI Funds’ significant growth through additional investment.
Id. ¶¶ 99–100. In fiscal year 2013, SIGFS received approximately $27 million in administration
fees. Id. ¶ 92.
The SEI Board of Trustees (the “Board”) oversees all of the funds in the SEI Fund
Complex, including the SEI Funds at issue in this case. Id. ¶¶ 69–70. The Board is composed of

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SIMC has voluntarily agreed to waive portions of its fee for select funds. Am. Compl. ¶¶ 40, 54.
Assets under management have grown at each SEI Fund since SIMC initiated its management services
as follows: Intermediate-Term Mutual (314%); International Equity (267%); High Yield Bond (94%); and
Tax-Managed Small/Mid Cap (123%). Id. ¶ 51. Tax-Managed Large Cap (18%) is the only SEI Fund
that has not experienced significant asset growth since its initiation. Id.
6
The 2013 fiscal year for Intermediate-Term Municipal ended on August 31, 2013. Id. ¶ 40 n.5. The
2013 fiscal year for High Yield Bond, International Equity, Tax-Managed Large Cap, and Tax-Managed
Small/Mid Cap ended on September 30, 2013. Id.
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eight trustees, six independent members who are compensated for their services and two
interested trustees who do not receive compensation. Id. ¶ 69. The Board negotiates and
approves management and administration fees, monitors the quality of services provided to the
SEI Funds, and reviews the Funds’ investment performance. Id. ¶¶ 68–76. In recent years, the
Board approved SIMC’s fees for the SEI Funds despite underperformance by the Funds. Id.
¶ 74. For the 2013 fiscal year, all five SEI Funds missed their five-year and ten-year period
primary benchmarks, and three of the Funds missed their one-year period primary benchmarks.
Id. In recent years, the Board also approved the Administration Agreements with SIGFS without
publishing their considerations for approval. Id. ¶ 108.
II.

LEGAL STANDARD
In deciding a motion to dismiss under Rule 12(b)(6), a court must “accept all factual

allegations as true, construe the complaint in the light most favorable to the plaintiff, and
determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled
to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (internal quotation
marks omitted).
To survive dismissal, a complaint must allege facts sufficient to “raise a right to relief
above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
“Threadbare recitals of the elements of a cause of action, supported by mere conclusory
statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Rather, “a complaint
must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible
on its face.” Id. (internal quotation marks omitted). “A claim has facial plausibility when the
plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id.

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“As a general matter, a district court ruling on a motion to dismiss may not consider
matters extraneous to the pleadings. However, an exception to the general rule is that a
document integral to or explicitly relied upon in the complaint may be considered . . . .” In re
Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (emphasis omitted)
(citations omitted) (internal quotation marks omitted). Thus, a court may “consider matters of
public record, orders, exhibits attached to the complaint and items appearing in the record of the
case.” Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 n.2 (3d Cir. 1994).
Further, “a court may consider an undisputedly authentic document that a defendant attaches as
an exhibit to a motion to dismiss if the plaintiff's claims are based on the document.” Pension
Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993).
III.

DISCUSSION
Congress enacted the Investment Company Act of 1940 (“ICA”) to address “the potential

for abuse inherent in the structure of investment companies.” Daily Income Fund, Inc. v. Fox,
464 U.S. 523, 536 (1984) (internal quotation marks omitted). “Recognizing that the relationship
between a fund and its investment adviser was fraught with potential conflicts of interest, the Act
created protections for mutual fund shareholders.” Jones v. Harris Assoc., L.P., 559 U.S. 335,
339 (2010) (internal quotation marks omitted). In its 1970 amendments to the ICA, Congress
“bolstered shareholder protection” by “impos[ing] upon investment advisers a fiduciary duty
with respect to compensation received from a mutual fund and grant[ing] individual investors a
private right of action for breach of that duty.” Id. at 339–40 (internal citation and quotation
marks omitted).
The ICA’s resulting fiduciary duty section, § 36(b), provides in pertinent part:
[T]he investment adviser of a registered investment company shall be deemed to
have a fiduciary duty with respect to the receipt of compensation for services, or
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of payments of a material nature, paid by such registered investment company, or
by the security holders thereof, to such investment adviser or any affiliated person
of such investment adviser. An action may be brought under this subsection by
the Commission, or by a security holder of such registered investment company
on behalf of such company, against such investment adviser, or any affiliated
person of such investment adviser, or any other person enumerated in subsection
(a) of this section who has a fiduciary duty concerning such compensation or
payments, for breach of fiduciary duty in respect of such compensation or
payments paid by such registered investment company or by the security holders
thereof to such investment adviser or person.
15 U.S.C. § 80a-35(b). The ICA imposes the burden of proof on the party
claiming breach under § 36(b). 15 U.S.C. § 80a-35(b)(1); see Jones, 559 U.S. at 347.
In Jones v. Harris Associates, the Supreme Court adopted the Second Circuit’s
standard for proving § 36(b) violations as follows:
[T]o face liability under § 36(b), an investment adviser must charge a fee that 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.
559 U.S. at 346 (citing Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir.
1982)). The Supreme Court also adopted the Second Circuit’s multi-factor Gartenberg test used
to evaluate § 36(b) claims. Id. at 346–48 (citing Gartenberg, 694 F.2d at 929). The Gartenberg
factors include: (1) the nature and quality of the services provided to the fund and shareholders;
(2) the profitability of the fund to the adviser; (3) any “fall-out financial benefits,” those
collateral benefits that accrue to an adviser because of its relationship with a mutual fund; (4)
comparative fee structures (meaning a comparison of the fees with those paid by similar funds);
(5) economies of scale; and (6) the independence, expertise, care, and conscientiousness of the
board in evaluating adviser compensation. Id. at 344 & n.5 (citing Gartenberg, 694 F.2d at 929–
32). “Gartenberg insists that all relevant circumstances be taken into account, as does
§ 36(b)(2).” Id. at 347 (internal citation omitted).

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A. Section 36(b) Claim Against SIMC
SIMC moves to dismiss the Curds’ Amended Complaint on two grounds. First, SIMC
argues that the Curds fail to state a claim because they do not allege sufficient facts to satisfy the
Gartenberg test. Second, SIMC argues that the Curds’ allegations are untimely because they do
not allege facts within the relevant damages period.
1. Gartenberg Analysis of the Curds’ Claim
SIMC argues that the Curds fail to state a claim under § 36(b) because their allegations
fail to satisfy the demanding Gartenberg standard.
Justice Alito’s majority opinion in Jones makes clear that the Gartenberg approach is fact
intensive. See generally id. at 348–53 (discussing, on review of a grant of summary judgment,
how courts should analyze and weigh the Gartenberg factors); id. at 354 (Thomas, J.,
concurring) (noting that courts have applied the Gartenberg test “principally in deciding which
cases may proceed past summary judgment”). At the motion to dismiss stage, a district court
looks to the Gartenberg factors not to engage in a merits inquiry, but rather to determine whether
a plaintiff plausibly states a claim for relief under § 36(b).
Under Rule 8’s liberal pleading standard and the Iqbal/Twombly “plausibility standard,”
the Curds’ Amended Complaint states a claim under § 36(b) sufficient to survive SIMC’s motion
to dismiss. See In re Blackrock Mut. Funds Advisory Fee Litig., No. 14-1165, 2015 WL
1418848, at *4 (D.N.J. Mar. 27, 2015) (“The plaintiff need not address all of the Gartenberg
factors to survive a motion to dismiss if, when taken as a whole, the complaint demonstrates a
plausible claim for relief under § 36(b).” (internal quotation marks omitted)); Am. Chem. &
Equip., Inc. 401(K) Ret. Plan v. Principal Mgmt. Corp., No. 14-44, 2014 WL 5426908, at *4
(S.D. Iowa Sept. 10, 2014) (explaining that a plaintiff “may state a § 36(b) claim by alleging any

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combination of facts that plausibly support an inference that a particular fee, given all of the
surrounding facts and circumstances, is disproportionately large to the services rendered in
exchange for that fee” (internal quotation marks omitted)). Here, the Curds allege facts relevant
to all of the Gartenberg factors. While not all of the Curds’ allegations are sufficient to state a
claim on their own, taken together they raise a plausible inference that SIMC’s fees are so
disproportionately large that they bear no reasonable relationship to the services provided to the
SEI Funds and could not have been the product of arm’s length bargaining. See Reso ex rel.
Artisan Int’l Fund v. Artisan Partners Ltd. P’ship, No. 11-873, 2011 WL 5826034, at *6 (E.D.
Wis. Nov. 18, 2011) (explaining that a § 36(b) claim may survive a motion to dismiss even
where a plaintiff failed to allege some of the Gartenberg factors “so long as [plaintiff’s]
complaint, taken as a whole, alleges facts that demonstrate a plausible claim for relief”). In
particular, the Curds’ allegations about the nature and quality of the services provided and about
SIMC’s failure to share cost savings realized by economies of scale demonstrate a plausible
claim for relief under § 36(b). See Zehrer v. Harbor Capital Advisors, Inc., No. 14-789, 2014
WL 6478054, at *3–4 (N.D. Ill. Nov. 18, 2014) (denying motion to dismiss where plaintiff
alleged substantially similar facts regarding the same two factors).
Regarding the nature and quality of the services SIMC provided to the SEI Funds, the
Curds allege the following facts: SIMC subcontracts the majority of its investment advising
duties to sub-advisers, yet keeps 40% of the investment management fees. Am. Compl. ¶ 36,
40–41. In subcontracting its duties, SIMC uses a “Manager of Managers” approach, leaving
itself “largely without any asset management responsibilities.” Id. ¶ 37. The SEI Funds pay
SIMC a monthly management fee based on a percentage of the Funds’ average daily net asset
value. Id. ¶ 40. Thus, the fees are not based on SIMC’s quality of services nor on the cost of

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providing services. Id. Moreover, in recent years the SEI Funds have underperformed compared
with benchmark funds.7 Id. ¶ 74. These allegations raise a plausible claim that SIMC charges
fees that are disproportionately large in comparison to the services it provides to the SEI Funds,
and could not have been the product of arm’s length bargaining. See Kasilag v. Hartford Inv.
Fin. Servs., LLC, No. 11-1083, 2012 WL 6568409, at *3 (D.N.J. Dec. 17, 2012) (finding
allegations that adviser kept significant portion of fees though it sub-contracted “substantially
all” of its advising responsibilities sufficient to state a § 36(b) claim).
The Curds also allege facts related to the economies of scale, or cost efficiencies in
managing the SEI Funds realized by SIMC after a substantial increase in the SEI Funds’ assets.
Investment advisers often schedule reductions in fee rates when a fund’s net assets reach certain
values. These scheduled reductions are known as “breakpoints” and exist to recognize cost
efficiencies achieved in managing a fund as assets increase. Am. Compl. ¶ 52. Breakpoints
enable advisers to share savings created by these efficiencies with the fund. Despite substantial
growth in the SEI Funds’ net assets, SIMC has never applied any breakpoints during the Funds’
existence.8 Id. ¶¶ 50–55. For example, although International Equity’s assets have grown from
$640 million in 1997 to a current value of $2.3 billion, SIMC continues to receive a management
fee of 0.51% of net assets. Id. ¶ 51. According to the Curds, SIMC thus profits from economies
of scale without sharing the benefits with the SEI Funds and, in turn, investors. These
allegations support a plausible claim for relief under § 36(b).

The Fourth Circuit has cautioned that “allegations of underperformance alone are insufficient to prove
that an investment adviser’s fees are excessive.” Migdal v. Rowe Price-Fleming Int’l, Inc., 248 F.3d 321,
327 (4th Cir. 2001). The Curds do not base their claim solely on allegations of underperformance.
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Voluntary waiver of fees is another way for an adviser to share benefits realized by economies of scale
with a fund. See Am. Compl. ¶¶ 50–55. While SIMC has voluntarily waived some of its advisory fees,
in 2013 (as well as in 2011 and 2012) it did not waive any fees for International Equity. Id. ¶ 54.
Moreover, SIMC is not contractually obligated to waive any fees. Id.
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Further factual development is necessary for this Court to evaluate the validity and
strength of the Curds’ § 36(b) claim through the fact-intensive Gartenberg inquiry. While the
allegations in the Amended Complaint may well not survive summary judgment, they are
sufficient to survive the motion-to-dismiss stage.
For these reasons, the Curds have plausibly pled their § 36(b) claim.
2. Timeliness of the Curds’ Claim
SIMC moves to dismiss the Curds’ § 36(b) claim for a second, independent reason: The
Curds make no allegation about SIMC’s fees that are actionable under § 36(b). Section 36(b)
provides that “[n]o award of damages shall be recoverable for any period prior to one year before
the action was instituted.” 15 U.S.C. § 80a-35(b)(3). The parties dispute whether the Court
should look to the date the Curds filed their original Complaint or the date they filed their
Amended Complaint to assess the Curds’ compliance with this provision. The plain language of
the statute compels the conclusion that the Curds instituted this action when they filed their
original Complaint on December 11, 2013. Therefore, the Curds cannot recover damages for
excessive fees charged prior to December 11, 2012. Because they rely on financial documents
for the SEI Funds’ 2013 fiscal years,9 the Curds have alleged facts relating to the excessiveness
of SIMC’s fees within the appropriate damages recovery period. The Curds’ claim is not timebarred.
Accordingly, I will deny SIMC’s motion to dismiss.
B. Section 36(b) Claim Against SIGFS
The Curds also bring suit against SIGFS, which provides administrative, regulatory, and
other back-office services to the SEI Funds. SIGFS largely advances the same arguments as
9

As discussed supra note 6, the 2013 fiscal year ended on August 31, 2013 for Intermediate-Term
Municipal and on September 30, 2013 for the other four funds.

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SIMC in support of its motion to dismiss. Because I conclude that the ICA does not authorize a
§ 36(b) claim against SIGFS, I need not address SIGFS’ arguments.
Section 36(b) authorizes a cause of action for breach of fiduciary duty against three
categories of persons. First, § 36(b) authorizes an action against an investment adviser of a
registered investment company; that adviser has “a fiduciary duty with respect to the receipt of
compensation for services, or of payments of a material nature, paid by such registered
investment company, or by the security holders thereof, to such investment adviser or any
affiliated person of such investment adviser.” 15 U.S.C. § 80a-35(b). The Amended Complaint
alleges only that SIGFS is organized as a Delaware Statutory Trust and serves as the
administrative agent for the SEI Funds. Am. Compl. ¶¶ 4, 18. The Curds thus fail to establish
that SIGFS is an investment adviser, let alone that SIGFS serves as adviser to the SEI Funds.
Second, § 36(b) authorizes an action against any affiliated person of the investment
adviser. 15 U.S.C. § 80a-35(b). The ICA defines “affiliated person” as follows:
“Affiliated person” of another person means (A) any person directly or indirectly
owning, controlling, or holding with power to vote, 5 per centum or more of the
outstanding voting securities of such other person; (B) any person 5 per centum or
more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other person; (C) any person
directly or indirectly controlling, controlled by, or under common control with,
such other person; (D) any officer, director, partner, copartner, or employee of
such other person; (E) if such other person is an investment company, any
investment adviser thereof or any member of an advisory board thereof; and (F) if
such other person is an unincorporated investment company not having a board of
directors, the depositor thereof.
15 U.S.C. § 80a-2.
The Amended Complaint is devoid of any facts alleging that SIGFS qualifies as an affiliate of
SIMC, the investment adviser to the SEI Funds. It contains no allegation that SIGFS owns a 5%
or greater share in SIMC or that SIMC owns a 5% or greater share in SIGFS. Id. § 80a-2(A)-(B).

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It contains no allegation that SIGFS controls SIMC, that SIMC controls SIGFS, or that SIGFS
and SIMC are under common control. Id. § 80a-2(C). Finally, it contains no allegation that
SIGFS is an officer, director, partner, copartner, or employee of SIMC. Id. § 80a-2(D).
Subsections (E) and (F) do not apply because SIMC is an investment adviser, not an investment
company. The Curds thus fail to establish that SIGFS is an affiliate of SIMC. See Pfeiffer v.
Integrated Fund Servs., Inc., 371 F. Supp. 2d 502, 507–10 (S.D.N.Y. 2005) (granting defendant
administrator’s motion for judgment on the pleadings because plaintiff failed to allege any facts
indicating that administrator qualified as an “affiliate” of the relevant investment adviser).
Third, § 36(b) authorizes an action against “any other person enumerated in subsection
(a) of [15 U.S.C. § 80a-35] who has a fiduciary duty concerning such compensation or
payments.” 15 U.S.C. § 80a-35(b). Subsection (a) enumerates the following persons: an officer,
director, member of any advisory board, investment adviser, or depositor; or as principal
underwriter, if such registered company is an open-end company, unit investment trust, or faceamount certificate company. Id. § 80a-35(a). The Amended Complaint contains no allegations
that SIGFS holds any of these positions with respect to the SEI Funds. The Curds thus fail to
establish that SIGFS is a person enumerated in subsection (a).
Because the Curds fail to establish that SIGFS is an entity that faces liability under
§ 36(b), their claim against SIGFS will be dismissed.
IV. CONCLUSION
In summary, I will deny Defendants’ Motion to Dismiss the Amended Complaint as to
SIMC, and I will grant the motion as to SIGFS.

Copies VIA ECF on _________ to:

s/Anita B. Brody
________________________________
ANITA B. BRODY, J.
Copies MAILED on _______ to:
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