Several shareholders in the Hartford Funds brought this lawsuit, alleging that the investment adviser, Hartford Investment Financial Services, was charging excessive investment management and Rule 12b-1 fees, in violation of Section 36(b) of the Investment Company Act of 1940. Section 36(b) of the Act imposes a fiduciary duty on investment advisers with respect to the compensation they receive for providing services to mutual funds.
The original Complaint was filed in U.S. District Court for the District of New Jersey on February 25, 2011. The Defendant filed a Motion to Dismiss and it was granted in September 2011, although the Plaintiffs were permitted to amend their Complaint. After the Plaintiffs filed an Amended Complaint, the Defendant moved to dismiss it again.
In this lawsuit, the Plaintiffs allege that Hartford pays sub-advisors to perform "substantially all" of the investment management services that it provides to the Funds, at a fraction of the fees it charges for similar services. The Amended Complaint states that the management fees Hartford charges the Funds are, on average, three times (and sometimes more than five times) the amount Hartford pays its sub-advisors for substantially the same investment management services.
On December 17, 2012, the Court denied the Defendant's Motion to Dismiss on the claim of excessive investment management fees, concluding that the Plaintiffs' Complaint alleges sufficent facts to create a plausible inference that Hartford's management fees are so disproportionately large that they bear no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining. The Court agreed with the Defendant on the Rule 12b-1 claim, determining that the Plaintiffs' allegations are "sparse and conclusory" and fail to state a claim under Section 36(b).
The case has been in a discovery phase on the claim of excessive investment management fees. On March 24, 2016, the Court approved a summary judgment motion by the defendants on the issue of the fund board's oversight process involving advisory contracts. The Court denied Hartford's summary judgment motion on the excessive fee claims.
After a trial, the Court applied the Gartenberg factors and ruled, on February 28, 2017, that the plaintiffs did not meet their burden of proof to show that these fees were so disproportionately large that they could not have been negotiated at arm's length. The plaintiffs intend to appeal this ruling in favor of Hartford.