On August 28, 2013, a retirement plan of an Alabama corporation, American Chemicals & Equipment, Inc., filed a complaint in U.S. District Court for the Northern District of Alabama. The complaint alleges that Principal collected excessive management fees from the mutual funds in this retirement plan, in violation of Section 36(b) of the Investment Company Act.
According to the complaint, Principal is collecting large management fees for supervising the work of sub-advisers who carry out the day-to-day investment management work of the mutual funds involved. In 2012, Principal retained $80 million out of $120 million collected in fees, while paying only $40 million to the sub-advisers providing the bulk of the investment management services. The plaintiff alleges that Principal is mainly acting as a "fee conduit" for its mutual funds.
The plaintiff believes that the amount of advisory fees that Principal is receiving is so disproportionately large that it bears no reasonable relationship to the services rendered in exchange for that fee and could not have been the product of arm's length bargaining, as required by the standards articulated in Jones v. Harris.
After Principal filed a Motion to Dismiss and the plaintiff responded, the Court issued an order on January 24, 2014, transferring this case to the Southern District of Iowa, where the Principal Funds are based.
On September 10, 2014, the District Court for the Southern District of Iowa denied Principal's Motion to Dismiss. The Court found that the plaintiff has alleged sufficient facts to state a claim and will now permit the case to move forward. On February 3, 2016, the Court dismissed the case for lack of standing. The plaintiffs are not shareholders in the underlying funds paying certain fees to the fund of funds in which they are shareholders.
The plaintiffs have appealed the dismissal to the 8th Circuit Court of Appeals. For some reason, the briefs before the 8th Circuit are sealed and not available to the public. The parties argued their case before an 8th Circuit panel of judges on January 11, 2017.