In re Blackrock Mut. Funds Advisory Fee Litig.
| Decision Date | 13 June 2018 |
| Docket Number | Civil Action No. 14–1165 (FLW) (TJB) |
| Citation | 327 F.Supp.3d 690 |
| Parties | IN RE BLACKROCK MUTUAL FUNDS ADVISORY FEE LITIGATION |
| Court | U.S. District Court — District of New Jersey |
REDACTED OPINION
Defendants BlackRock Advisors, LLC ("BRA"), BlackRock Investment Management, LLC ("BRIM"), and BlackRock International Limited ("BRIL") (collectively, "BlackRock" or "Defendants")1 move for summary judgment, pursuant to Federal Rule of Civil Procedure 56, on Plaintiffs Owen Clancy, Cindy Tarchis, and Brendan Foote's (collectively, "Plaintiffs") Consolidated Complaint (the "Complaint"). Plaintiffs are shareholders in two mutual funds managed by BRA, the BlackRock Global Allocation Fund, Inc. ("Global Allocation") and the BlackRock Equity Dividend Fund ("Equity Dividend") (collectively, the "Funds"). The Complaint asserts claims under § 36(b) of the Investment Company Act of 1940 (the "ICA" or "Act"), 15 U.S.C. § 80a–35(b), alleging that Defendants breached their fiduciary duties by receiving excessive investment advisory fees from the Funds. Plaintiffs oppose Defendants' Motion, and have also moved to preclude Defendants from relying on certain evidence and arguments, pursuant to Federal Rule of Civil Procedure 3 7, on the ground that Plaintiffs failed to produce complete discovery as to those topics.
This Court held oral argument on Defendants' Motion on May 29, 2018. For the reasons that follow, Defendants' Motion for Summary Judgment is granted, insofar as Defendants seek a ruling that the decision of the Funds' board of directors and board of trustees to approve BRA's advisory fees with the Funds is entitled to substantial deference, and denied, insofar as Defendants seek the dismissal of Plaintiffs' claims. Plaintiffs' Motion to Preclude is denied without prejudice.
Plaintiff Owen Clancy has been a shareholder of Global Allocation since October 2011, and filed suit against Defendants on February 21, 2014. Defendants' Local Civil Rule 56.1 Statement of Material Facts Not in Dispute ("SOF"), ¶ 1.3 Plaintiff Brendan Foote has been a shareholder of Global Allocation since June 2012, and commenced his case against Defendants on March 28, 2014. Id. at ¶ 2. Plaintiff Cynthia Tarchis has been a shareholder of Global Allocation since 1993 and Equity Dividend since 2012. Id. at ¶ 3. Tarchis joined this action on June 16, 2015. Id.
BlackRock was established in 1988, and is one of the world's largest investment advisers, with over $4 trillion in assets under management ("AUM").Id. at ¶ 20. BlackRock provides investment advice and invests capital on behalf of a broad array of clients through various investment products, including open-end and closed-end mutual funds, exchange-traded funds ("ETFs"), and other pooled investment vehicles. Id. at ¶ 21.
The Funds are open-end mutual funds,4 registered with the United States Securities and Exchange Commission (the "Commission" or "SEC") under the ICA. Id. at ¶ 4. Global Allocation began offering shares for sale to the public on February 3, 1989. Id. at ¶ 8. From February 21, 2013 through November 2015 (the "Relevant Period"),5 Global Allocation had AUM of between $51 billion and $58 billion. Id. at ¶¶ 12–13. Equity Dividend began offering shares for sale to the public on November 25, 1987. Id. at ¶ 14. During the Relevant Period, Equity Dividend managed between $20 billion and $30 billion in assets. Id. at ¶ 19.
As with most mutual funds, the Funds do not have employees or facilities of their own. Plaintiffs' Supplemental Statement of Disputed Material Facts ("PSSOF"), ¶ 5. Pursuant to investment management agreements ("IMAs") with Global Allocation and Equity Dividend, BRA, a subsidiary of BlackRock, serves as the investment adviser to the Funds. SOF ¶¶ 26–27. The IMAs are reviewed annually, and are subject to the approval of Global Allocation's board of directors and Equity Dividend's board of trustees (collectively, the "Board").6 Id. at ¶ 27. Pursuant to the IMAs, BRA provides investment advisory services7 to the Funds, including: (i) "supervis[ing] and manag[ing] the investment and reinvestment of the [Funds'] assets"; (ii) "supervising] continuously the investment program of the [Funds] and the composition of [their] investment portfolio[s]"; (iii) "arranging] ... for the purchase and sale of securities and other assets held in the investment portfolio of the [Funds]"; (iv) "providing] investment research to the [Funds]"; and (v) "selecting] brokers" to execute the transactions for the [Funds]." PSSOF ¶ 20; Certification of Andrew Muscato in Support of Defendants' Motion for Summary Judgment ("Muscato Cert."), Ex. 14, GA Fund IMA at §§ 2, 4(b)(i); Muscato Cert., Ex. 15, ED Fund IMA at §§ 2, 4(b)(i).
In exchange for providing advisory services to the Funds, the IMAs require the Funds to pay BRA an annual advisory fee (the "Advisory Fee"). SOF ¶ 29. The Advisory Fee is calculated as a percentage of the Funds' AUM, pursuant to a fee schedule containing "breakpoints," which operate to reduce BRA's Advisory Fee as the Funds' AUM increase. Id. The following table depicts Global Allocation's fee schedule during the Relevant Period:
Global Allocation Fee Schedule (2013-2015)
AUM Percentage (%) of AUM
Up to $10 billion .75%
$10 billion to $15 billion .69%
$15 billion to $20 billion .68%
$20 billion to $25 billion .67%
$25 billion to $30 billion .65%
$30 billion to $40 billion .63%
$40 billion to $60 billion .62%
$60 billion to $80 billion .61%
Over $80 billion .60%
Id. at ¶ 68. Under this fee schedule, the effective Advisory Fee received by BRA from Global Allocation was .66% of AUM in 2013 and 2014, and .67% of AUM in 2015. Id. at ¶ 69. In total, Global Allocation paid BRA more than $1.2 billion in Advisory Fees during the Relevant Period ($412,500,349 in 2013 + $441,347,281 in 2014 + $407,768,884 in 2015). PSSOF ¶ 24. The pro rata amount of BRA's Advisory Fee allocable to each of the Fund's shareholders during the same period ranged between $6 and $7 for every $1,000 invested. SOF ¶ 70.
Likewise, under its IMA with Equity Dividend, BRA received an Advisory Fee calculated as a percentage of Equity Dividend's AUM, pursuant to a fee schedule that included breakpoints. Id. at ¶¶ 71–72. In 2013, BRA's Advisory Fee from Equity Dividend was calculated pursuant to the following fee schedule:
Equity Dividend Fee Schedule (2013)
AUM Percentage (%) of AUM
Up to $8 billion .60%
$8 billion to $10 billion .56%
$10 billion to $12 billion .54%
$12 billion to $17 billion .52%
$17 billion to $25 billion .51%
$25 billion to $35 billion .50%
$35 billion to $50 billion .49%
Over $50 billion .48%
Id. at ¶ 73. In 2014 and 2015, BRA's Advisory Fee from Equity Dividend was adjusted in accordance with the following fee schedule:
Equity Dividend Fee Schedule (2014-15)
AUM Percentage (%) of AUM
Up to $8 billion .60%
$8 billion to $10 billion .56%
$10 billion to $12 billion .54%
$12 billion to $17 billion .52%
$17 billion to $25 billion .51%
$25 billion to $30 billion .50%
$30 billion to $40 billion .49%
Over $40 billion .48%
Id. at ¶ 74. Under those fee schedules, the effective Advisory Fee received by BRA from Equity Dividend during the Relevant Period was .54% of AUM. Id. at ¶ 76. Equity Dividend paid BRA over $450 million in Advisory Fees during that time ($144,192,714 in 2013 + $162,300,957 in 2014 + $151,855,019 in 2015). PSSOF ¶ 25. The pro rata amount of BRA's Advisory Fee allocable to each of Equity Dividend's shareholders during the Relevant Period ranged between $5 and $6 for every $1,000 invested. SOF ¶ 77.
Apart from BRA's Advisory Fee under the IMAs, the Funds also have separate agreements with BRA that provide for the payment of certain expenses incurred by BRA, including accounting, transfer agency, professional, and registration fees. Id. at ¶ 78. Pursuant to a Shareholders Administrative Services Agreement (the "SAS Agreement") with BRA, the Funds reimburse BRA for the expenses that it incurs in providing the personnel and infrastructure required to operate a Shareholder Service Center.8 Id. at ¶ 79. Under the SAS Agreement, Global Allocation reimbursed BRA for $764,594 of expenses in 2013, $543,076 of expenses in 2014, and $601,419 of expenses in 2015. Id. at ¶ 81. Additionally, Equity Dividend reimbursed BRA for $370,634 of expenses in 2013, $133,544 of expenses in 2014, and $191,989 of expenses in 2015. Id.
The Funds also have an Accounting Support Services Agreement (the "Accounting Agreement"), which requires the Funds to partially reimburse BRA for the pro rata share of expenses that BRA incurs in providing certain specified accounting services to the Funds, up to an annual maximum of $1.6 million in the aggregate. Id. at ¶ 83. The parties dispute whether the services provided pursuant to the Accounting Agreement overlap with the services that BRA renders to the Funds under the IMAs. See id. ; PRSOF at ¶ 83. Under the Accounting Agreement, Global Allocation reimbursed BRA for $584,806 of expenses in 2013 and $597,630 of expenses in 2014. SOF ¶ 83. Equity Dividend reimbursed BRA for $300,993 of expenses under the Accounting Agreement in 2013, and $306,211 of expenses in 2014. Id. at ¶ 84. The expenses paid by the Funds under both the SAS Agreement and the Accounting Agreement required the Board's approval. Id.
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