Judge Denies BlackRock’s Motion to Dismiss Excessive Fee Suit

A New Jersey federal court denied the motion to dismiss filed by subsidiaries of BlackRock Inc. (“BlackRock”) in an action involving allegations that the company charged excessive advisory fees to BlackRock Global Allocation Fund, Inc. and the BlackRock Equity Dividend Fund (together, the “Funds”).

The plaintiffs, who are shareholders that filed the lawsuit on behalf of the Funds, claim that by charging such fees, BlackRock has breached its fiduciary duty under Section 36(b) of the Investment Company Act of 1940. Accordingly, Section 36(b) permits to sue investment managers or advisors based simply on the theory that a fund’s fees are too high, even if the fees have been fully and accurately disclosed.

In denying the defendants’ motion, the court held that the plaintiffs alleged sufficient facts to demonstrate that there are “substantial differences between the advisory fees BlackRock charges to the Funds and the advisory fees charged to certain ‘Sub-Advised Funds’ by BlackRock for investment advisory services.” In particular, the court found that the plaintiffs’ allegations that BlackRock charged the Funds as much as 106% higher fees for services than the Sub-Advised Funds pay for the same or substantially same services, supported the inference that the Funds’ fees are disproportionately large and outside the range of what could be negotiated at arm’s length.

Despite this favorable ruling for the plaintiffs, the court in its opinion clearly stated that this decision does not provide that BlackRock’s arguments lack merit or that the court finds it likely that the plaintiffs will be able to meet the onerous standard for liability under Section 36(b). The court claimed that it merely has determined that at this stage in the proceedings, the plaintiffs have adequately “stave[d] off threshold dismissal.”

The case is: In re: BlackRock Mutual Funds Advisory Fee Litigation, No. 3:14-cv-01165 (D.N.J.)

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