On June 8, 2017, the Financial CHOICE Act (H.R. 10), the financial regulatory reform legislation that aims to repeal and replace various provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, passed the House along party lines, 233-186.  Notably, the Financial CHOICE Act includes amendments to Section 36(b) of the 1940 Act that would impose heightened pleading standards and raise the burden of proof for plaintiffs in excessive fee litigation.  

Section 36(b) imposes a fiduciary duty on investment advisers with respect to the compensation they receive for providing advisory services to funds and provides fund shareholders with an express private right of action to enforce this duty against advisers and their affiliates that receive compensation from funds.  In such cases, the burden of proof rests on the plaintiffs to show, by a preponderance of the evidence, that the advisory fee is excessive, i.e., that the fee is “so disproportionate that it does not bear a reasonable relationship to the service the defendant rendered and could not have been negotiated at arm’s-length.”

The Financial CHOICE Act would require that a complaint brought under Section 36(b) “state with particularity all facts establishing a breach of fiduciary duty, and, if an allegation of any such facts is based on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”  In addition to the heightened pleading standards, the Act would raise the burden of proof for plaintiffs from a “preponderance of the evidence” standard to a “clear and convincing evidence” standard.  That is, under the Financial CHOICE Act, a fund shareholder would “have the burden of proving a breach of fiduciary duty by clear and convincing evidence.”