Several shareholders in three MainStay Funds filed a complaint in U.S. District Court - New Jersey on December 23, 2014. The complaint alleges a breach of fiduciary duty under Section 36(b) of the Investment Company Act by the adviser to these Funds, New York Life Investment Management.
According to the plaintiffs, New York Life has delegated substantially all of its responsibilities for providing investment management services for these three Funds to certain sub-advisers. However, New York Life has retained nearly 50% of all the total advisory fees charged to the Funds, in order to oversee the Funds and supervise the work of the sub-advisers.
Since the scope of services provided by New York Life is so limited, the more than $145 million in advisory fees retained by them is "so disproportionately large that they bear no reasonable relationship to the services provided by [the] Defendant and could not have been the product of arm's length bargaining."
On April 20, 2015, the plaintiffs filed an amended complaint and added one more New York Life mutual fund to this case. The amended complaint stated that during fiscal year 2014, New York Life charged $427,242,000 in advisory and certain administrative fees for four New York Life mutual funds. The services provided for these fees were substantially delegated to subadvisers and one other service provider at a cost of $226,592,000, permitting New York Life to pocket a "markup" of more than $200 million for merely overseeing these functions.
On October 28, 2015, the District Court denied New York Life's motion to dismiss the case. The Court ruled that at least three of the Gartenberg factors should be judged in favor of the plaintiffs, for purposes of the motion to dismiss. The three factors are: (1) the nature and quality of the services provided by the defendant; (2) the profitability to the defendant of managing these mutual funds; and (3) the economies of scale realized by the defendant.
The case now goes to the discovery phase.