U.S. District Judge John A. Jarvey, an Iowa federal judge, decided not to dismiss a case alleging investment managers Principal Management Corp. and Principal Global Investors, LLC took too much on fees they charged a retirement plan investing in particular mutual funds. Judge Jarvey ruled that American Chemical & Equipment Inc 401(K) Retirement Plan (ACE) had standing under the Investment Company Act (ICA) to initiate a case alleging the investment management groups kept an acquired fund fee that was in breach of their fiduciary duties to investors in a collection of mutual funds, which held $18 billion in assets combined.
According to Judge Jarvey, a shareholder in those principal funds, ACE is a security holder of the principal funds within the meaning of ICA and therefore established standing to file the case. In addition, ACE rightfully limited it breach of fiduciary duty claim against the Principal defendants to only those fees collected from principal interest holders and retained by principal fund advisers.
ACE alleged the defendants, as advisers to the principal funds, first “pocket[ed] the entire acquired fund fee from the principal funds as investment money” before distributing a part of the fee to sub-advisers for managing the underlying funds. ACE is only looking to recover the fees it was charged as a principal funds shareholder and which were kept by defendants as advisers to that fund.
Judge Harvey, however, did dismiss a claim for excess profits from economies of scale, taking the defendants’ position that breach of fiduciary duty based only on economies of scale is not an independent cause of actions under the ICA.
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