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T. Rowe's $388M Mutual Fund Fee Suit Continues in Maryland

In our article, "Do Actively Managed Funds Breach Fiduciary Duties?" we outlined the role of an entity or person who handles investments (a fiduciary) and the fiduciary duty the law provides to protect investors. Although that article discussed fiduciary duties in the context of retirement plans, these obligations are not limited to those with pensions and 401(k)s.

Last year in April 2016, a group of investors filed a complaint in California against T. Rowe Price Associates Inc. ("T. Rowe") for allegedly overcharging mutual funds by $388 million a year and for steeply increasing management fees without justification. Instead of a general class of T. Rowe investors, the lawsuit was filed on behalf of select T. Rowe funds, including the Blue Chip Growth Fund and Equity Income Fund.

According to the investors' complaint, T. Rowe owes a fiduciary duty to each fund, but charged up to 73 percent higher management fees on the eight funds identified in the complaint as compared to outside or sub-advised funds it managed. Outside, or sub-advised funds, are funds that T. Rowe manages without actually holding the fund's assets. Despite an incredible increase in fees in recent years, the management services provided have remained unchanged. The plaintiffs compared the services T. Rowe provided to its own branded funds to funds it sub-advised and found the services to be the same. However, despite T. Rowe providing the same services for both its branded funds and sub-advised funds, the sub-advised funds were paying much lower management fees.

For example, the Capital Appreciation Fund was compared to a sub-advised fund that was similar by all accounts, except its fees were 68.6 percent higher than the sub-advised fund. According to the 2010 Supreme Court decision in Jones v. Harris Associates LP., 559 U.S. 335 (2010), it is a breach of fiduciary duty for an investment adviser to charge a fee that is disproportionately large to the relationship of services provided.

Although the case has since moved to the United States District Court for the District of Maryland, Judge Marvin J. Garbis denied T. Rowe's motion to dismiss on March 31, 2017, finding that the funds asserted plausible claims of a breach of fiduciary duty.

The legal team at SFMS has significant experience litigating securities matters. If you have any questions regarding this subject or this posting, please contact Nick Lussier (nlussier@sfmslaw.com) or Chiharu Sekino (csekino@sfmslaw.com). We can also be reached toll-free at (866) 540-5505.

Shepherd, Finkelman, Miller & Shah, LLP is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, and Pennsylvania. SFMS is an active member of Integrated Advisory Group (www.iaginternational.org), which provides us with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.

SOURCES

Lee, Suevon. "T. Rowe Must Face Suit Over $388M in Mutual Fund Fees." Law360. Last modified on March 31, 2017.

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