                 United States Court of Appeals
                             For the Eighth Circuit
                         ___________________________

                                 No. 16-1576
                                 No. 16-1580
                                 No. 16-1712
                         ___________________________

          American Chemicals & Equipment Inc. 401 (K) Retirement Plan

                lllllllllllllllllllll Plaintiff - Appellant/Cross Appellee

                                           v.

                         Principal Management Corporation

               lllllllllllllllllllll Defendant - Appellee/Cross Appellant
                             ___________________________

                    Appeals from United States District Court
                  for the Southern District of Iowa - Des Moines
                                  ____________

                             Submitted: January 11, 2017
                                Filed: July 24, 2017
                                  ____________

Before RILEY, Chief Judge,* LOKEN and BENTON, Circuit Judges.
                              ____________

LOKEN, Circuit Judge.




      *
       The Honorable William Jay Riley stepped down as Chief Judge of the United
States Court of Appeals for the Eighth Circuit at the close of business on March 10,
2017. He has been succeeded by the Honorable Lavenski R. Smith.
       Section 36(b) of the Investment Company Act (ICA) of 1940, 15 U.S.C. § 80a-
35(b), provides that an action may be brought “by a security holder of [a] registered
investment company on behalf of such company, against [its] investment adviser . . .
for breach of fiduciary duty in respect of [the] compensation [for services] or
payments [of a material nature] paid by [the] registered investment company or by the
security holders thereof to [its] investment adviser.” American Chemicals &
Equipment 401(K) Retirement Plan (ACE) invested in six LifeTime Funds, which are
mutual funds created by Principal Funds Incorporated (PFI). The LifeTime Funds are
structured as target-date “funds of funds,” meaning each fund invests in a portfolio
of other mutual funds designed to maximize performance for investors targeting a
specific retirement date. ACE sued the LifeTime Funds’ investment adviser,
Principal Management Corporation (PMC), for breach of its § 36(b) fiduciary duty
to the LifeTime Funds, seeking to recover “unfair and excessive” fees. ACE
explicitly disclaimed a challenge to the excessiveness of the adviser fees that the
LifeTime Funds paid directly to PMC. Instead, ACE based its excessiveness
challenge on “all or part of” the adviser fees paid to PMC by the funds in which the
LifeTime Funds invest, fees which indirectly reduced the net asset values of the
LifeTime Funds. The district court1 entered judgment in favor of PMC, concluding
that ACE lacks statutory standing under § 36(b) to challenge the fees in question.
Reviewing this decision de novo, we affirm.

                                         I.

      A. Responding to investment company mismanagement and abuse, Congress
enacted the ICA in 1940 “to impose controls and restrictions on the internal
management of investment companies.” Burks v. Lasker, 441 U.S. 471, 478 (1979)
(emphasis and quotation omitted). “A mutual fund is an open-end investment


      1
        The Honorable John A. Jarvey, Chief Judge of the United States District Court
for the Southern District of Iowa.

                                         -2-
company” subject to the ICA’s controls and restrictions. Inv. Co. Inst. v. Camp, 401
U.S. 617, 625 n.11 (1971). A typical mutual fund sells shares to investors and then
invests the proceeds of those sales in a portfolio of securities such as stocks or bonds.
A mutual fund structured as a “fund of funds,” such as the LifeTime Funds, purchases
shares of other, often publicly-traded mutual funds (commonly referred to as the
“acquired” or “underlying” funds, while the fund of funds is referred to as the
“acquiring” fund). For most mutual funds, including funds of funds, an investment
adviser creates the mutual fund, selects the fund’s directors, manages the fund’s
investments, and provides other services.

        To curb perceived abuses,2 including the charging of duplicative fees, the ICA
initially limited mutual funds to buying up to five percent of another mutual fund’s
shares. See 15 U.S.C. § 80a-12(d)(1) (1940). It also authorized the Securities and
Exchange Commission “to bring an action . . . alleging that a person serving or acting
[as an investment adviser] has been guilty . . . of gross misconduct or gross abuse of
trust in respect of any registered investment company.” § 80a-35 (1940). After World
War II, “investment companies enjoyed enormous growth.” Daily Income Fund, Inc.
v. Fox, 464 U.S. 523, 537 (1984). In 1970, Congress amended the ICA to bolster
shareholder protection by giving disinterested mutual fund directors increased
responsibilities and by enacting § 36(b), which “imposed upon investment advisers
a ‘fiduciary duty’ with respect to compensation received from a mutual fund . . . and
granted individual investors a private right of action for breach of that duty.” Jones
v. Harris Assocs. L.P., 559 U.S. 335, 340 (2010).

       The 1970 amendments also extended § 12(d)(1)’s restrictions on funds of funds
investing to unregistered and foreign funds. See § 80a-12(d)(1)(A)-(B). Since 1970,
however, Congress and the SEC have concluded that carefully regulated fund-of-


      2
     See generally Sec. & Exch. Comm’n, Investment Trusts and Investment
Companies, pt. I, ch. 1, H.R. Doc. No. 76-279 (1939).

                                          -3-
funds structures offer advantages to small investors. Using its general exemption
authority, § 80a-6(c), the SEC first allowed several large mutual fund complexes to
create “affiliated” funds of funds free from the percentage restrictions in § 12(d)(1).
See, e.g., Vanguard Special Tax-Advantaged Retirement Fund, Inc., Investment
Company Release No. 14361, 1985 WL 548623 (1985). In 1996, Congress amended
the ICA to codify these exemptions. With some restrictions, § 12(d)(1) now does not
apply when the fund of funds and the underlying funds “are part of the same group
of investment companies,” defined as a group “that hold themselves out to investors
as related companies for purposes of investment and investor services.” § 80a-
12(d)(1)(G)(i)(I), (ii).

       Experience persuaded the SEC that the public disclosures of affiliated funds
of funds limited the investor’s ability to compare their management costs with other
mutual funds by obscuring the indirect costs incurred from investing in other mutual
funds. See Fund of Funds Investments, Proposed Rules, 68 Fed. Reg. 58,226, at
58,234 (Oct. 8, 2003). In 2006, the SEC promulgated a rule that requires funds of
funds to disclose their “Acquired Fund Fees and Expenses,” or AFFE. The rule,
which formed the basis of ACE’s Complaint, was “designed to provide investors with
a better understanding of the actual costs of investing in a fund that invests in other
funds.” Fund of Funds Investments, Final Rule, 71 Fed. Reg. 36,640, at 36,645 (June
27, 2006) (codified at 17 C.F.R. § 274.11). The AFFE reflects the underlying funds’
total expenses, including management fees, apportioned according to the percentage
of shares that the fund of funds holds in the underlying funds and expressed as a
percentage of the fund of funds’ total assets. The AFFE discloses indirect costs the
fund of funds incurs, including management fees paid by the underlying funds. It
does not disclose payments made by the fund of funds.

      B. ACE holds shares in six LifeTime Funds, which are affiliated funds of
funds that invest in twenty-or-so underlying funds under the § 80a-12(d)(1)(G)
exemption. PMC is the investment adviser for both the LifeTime Funds and the

                                         -4-
underlying funds. Each LifeTime Fund pays PMC a management fee of 3 basis
points (0.03% of the LifeTime Funds’ total net assets) for its services to these funds
of funds, which PMC pays to an affiliated sub-adviser, Principal Global Investors.
PMC also calculates and discloses the AFFE for each LifeTime Fund in accordance
with SEC disclosure requirements. In 2013, the AFFE of the six LifeTime Funds at
issue ranged from 0.59% to 0.75% of the fund’s total net assets. The management
fees that the underlying funds pay directly to PMC for its advice and services to those
funds are reflected in the LifeTime Funds’ AFFE, weighted in accordance with the
SEC’s disclosure formula.

       Count I of ACE’s Complaint alleged that PMC breached its § 36(b) fiduciary
duty by charging fees for advisory services that “are unfair, excessive, and were not
negotiated at arm’s length in light of all the surrounding circumstances.” The
Complaint alleged that ACE “does not challenge” the 3-basis-point management fee
the LifeTime Funds pay directly to PMC. “Instead, [ACE] here challenges and seeks
recovery of part or all of a fee charged to investors in the LifeTime Funds” that PMC
calls the AFFE. As ACE’s Reply Brief described this convoluted claim on appeal,
for purposes of § 36(b) PMC received as “compensation” or “payments of a material
nature” the AFFE’s “revenue portion,” that is, “the proportional share of the overall
management fee that is attributable to PMC’s management of the assets in the
Underlying Fund owned by the LifeTime Funds.” To recover on this claim, ACE has
the burden to prove, based on consideration of all relevant procedural and substantive
factors, that the fee was “so disproportionately large that it bears no reasonable
relationship to the services rendered and could not have been the product of arm’s
length bargaining.” Jones, 559 U.S. at 346-47; see Gallus v. Ameriprise Fin., Inc.,
675 F.3d 1173, 1178 (8th Cir. 2012).

      Ruling on PMC’s motion for summary judgment, the district court held that
ACE lacked a cause of action under § 36(b). As ACE was not challenging the 3-
basis-point management fee the LifeTime Funds pay directly to PMC, and undisputed

                                         -5-
evidence showed that the AFFE includes “fees charged by advisors to the Underlying
Funds” and “does not reveal what shareholders in the LifeTime Funds pay” to PMC,
the court concluded that ACE was in fact challenging fees paid by the underlying
funds “at a level once removed from [ACE’s] security interest.” ACE admitted that
it was not a security holder in the underlying funds, and § 36(b) “only allows security
holders to challenge fees paid by the entity in which they have an interest.” Am.
Chems. & Equip., Inc. 401(K) Ret. Plan v. Principal Mgmt. Corp., 2016 WL
7155791, (S.D. Iowa Feb 3, 2016).

       The district court concluded that ACE lacked “statutory standing” under
§ 36(b) and dismissed the Complaint for lack of subject matter jurisdiction. The
Supreme Court has occasionally referred to “statutory standing” as “effectively
jurisdictional,” but “the absence of a valid (as opposed to arguable) cause of action
does not implicate subject-matter jurisdiction, i.e., the court’s statutory or
constitutional power to adjudicate the case.” Lexmark Int’l, Inc. v. Static Control
Components, Inc., 134 S. Ct. 1377, 1387 n.4 (2014) (quotation and emphasis
omitted). “The question whether a federal statute creates a claim for relief is not
jurisdictional.” Nw. Airlines, Inc. v. Cty. of Kent, Mich., 510 U.S. 355, 365 (1994).
Instead, “we ask whether [ACE] has a cause of action under” Section 36(b), which
requires us to “apply traditional principles of statutory interpretation.” Lexmark, 134
S. Ct. at 1387-88.

                                          II.

        A. On appeal, ACE argues that the plain language of § 36(b) “authorizes
shareholders of a fund of funds to bring an action on behalf of the fund to challenge
excessive acquired fund fees that it pays to the investment adviser.” ACE is
admittedly a “security holder” in the LifeTime Funds, a “registered investment
company.” ACE has sued the LifeTime Funds’ investment adviser, PMC, for breach
of its § 36(b) fiduciary duty, and no party doubts that ACE falls within § 36(b)’s zone

                                         -6-
of protected interests. See Lexmark, 134 S. Ct. at 1388. The question is whether
ACE has asserted a claim in respect of compensation or payments “paid by” the
LifeTime Funds to PMC.

       ACE has abandoned its claim in the Complaint and to the district court that the
AFFE “represents payments made by LifeTime Fund shareholders to [PMC],” a claim
the summary judgment record established is factually wrong. The AFFE is not
“compensation for services.” It simply estimates the fund of funds’ costs of investing
in other funds. Nor is the AFFE a “payment of a material nature” because no entity
pays the AFFE. As ACE’s expert explained, the AFFE is “not even an actual fee. It’s
a construct.” ACE now argues that a portion of the fees paid by the underlying funds
to PMC were “compensation for services” or “payments of a material nature” (the
operative words in § 36(b)) that were “paid by” the LifeTime Funds with respect to
their investment in the underlying funds.3 Though worded differently, the argument
has the same factual flaw. Section 36(b) limits shareholder suits to breaches of
fiduciary duty regarding compensation or payments paid by the mutual fund or its
shareholders. Here, the acquired fund fees at issue were paid by the underlying
funds, which are separate investment companies, not by the LifeTime Funds in which
ACE was a shareholder. As with any enterprise, adviser fees and other costs reflected
in the AFFE reduced the net asset value of the underlying fund paying the fees, which
in turn reduced the value of the LifeTime Funds’ shareholdings in the underlying
fund. But the mere reduction of an asset’s value does not mean that the reduction was
paid by the asset’s investors. To take an example from the corporate world, an
increase in a subsidiary’s operating expenses adversely affects the value of the parent
corporation’s investment, but the increased expense is not paid by the parent
corporation or its shareholders.


      3
       In other words, if the LifeTime Funds own twenty-five percent of an
underlying fund and that underlying fund earned $100 in compensation for PMC,
then PMC received $25 in compensation for managing the LifeTime Fund.

                                         -7-
        ACE argues the district court erred in concluding that ACE has no valid claim
under § 36(b) because the acquired fund fees at issue were paid only “indirectly” by
the LifeTime Funds. ACE asserts, without citation to any authority, that the court’s
direct payment requirement “does not exist in the language of the statute itself.” Of
course, this assertion is patently wrong -- § 36(b) is expressly limited to claims
regarding compensation or payments of a material nature paid by the LifeTime Funds
or its shareholders.

       ACE argues that the district court’s ruling “would allow excessive fees to be
buried at the underlying fund level and render the fees immune from any challenge
under § 36(b) where most or all of the underlying funds are held by the funds of
funds.” But “parading that horrible” does not apply to this case because the record
shows that unaffiliated investors hold varying percentages of the outstanding shares
of the underlying funds. Indeed, PMC suggests that, because ACE is not seeking
relief on behalf of all underlying funds’ shareholders, the relief ACE seeks as a
LifeTime Funds shareholder would be contrary to SEC rules precluding preferential
treatment of investors. See 17 C.F.R. § 270.18f-3(a)(1)(ii). In a different case, where
the fund of funds in an affiliated fund of funds complex owned all the shares of the
underlying funds, the disinterested directors of each fund would still have
responsibility to rigorously review management fees, and the SEC would have
authority to sue the investment adviser of any fund for breach of the § 36(b) fiduciary
duty. In addition, Congress and to a great extent the SEC retain authority, repeatedly
exercised in the past, to adjust the rules and exemptions governing fund of funds
investment companies to protect individual mutual fund investors.

       B. After filing the initial Complaint, ACE filed two substantively identical
“anniversary” complaints reflecting the ICA’s one-year statute of limitations. The
third case was stayed pending the district court’s summary judgment decision in the
first two cases, which had been consolidated. When the district court granted
summary judgment in the consolidated case, PMC moved for summary judgment in

                                         -8-
the third, stayed case. In response, ACE abandoned its prior admission that it is not
a shareholder of the underlying funds, a position taken to avoid adverse § 36(b)
precedent rejecting the argument. See Curran v. Principal Mgmt. Corp., LLC, 2011
WL 223872 (S.D. Iowa Jan. 24, 2011). ACE now argued that “because the LifeTime
Funds and the underlying funds in which they invest are not distinct companies, but
are part of a single registered investment company,” it is a “security holder” in the
only “registered investment company” that PMC manages, namely PFI, and therefore
may assert this § 36(b) claim for PMC’s alleged breach of fiduciary duty.

       The district court granted summary judgment in the third case “[f]or the reasons
articulated” in its prior order, without considering this new argument. ACE renews
this belated argument on appeal. Similar to a motion for reconsideration, ACE
introduced this argument only after the district court had granted summary judgment
in the consolidated case, and the district court did not address the new argument.
Accordingly, the issue was not preserved for appeal, see PFS Distrib. Co. v.
Raduechel, 574 F.3d 580, 599 n.3 (8th Cir. 2009). We also conclude the argument
is without merit. Only the SEC and “a security holder of [a] registered investment
company” may bring suit under § 36(b). PFI is arranged as a “series company,”
meaning it is a single corporation that offers multiple investment options, with each
option called a “series.” Both courts and the SEC have concluded that, for a series
company such as PFI, “each Underlying Fund should be treated as a ‘registered
investment company’ for the purposes of applying § 36(b) because they are, for all
practical purposes, separate mutual funds.” Curran, 2011 WL 223872 at *2 n.3; see
In re Mut. Funds Inv. Litig., 519 F. Supp. 2d 580, 588-89 (D. Md. 2007); Forsythe
v. Sun Life Fin., Inc., 417 F. Supp. 2d 100, 117-18 (D. Mass 2006); SEC Inv. Mgmt.
Guidance Update No. 2014-06 (Jun. 2014) (“Each series also is a separate investment
company for purposes of the investor protections afforded by the [ICA].”). Because
each mutual fund is a separate “registered investment company” and ACE has no
security interest in the underlying funds, see 15 U.S.C. § 80a-2(36), ACE cannot sue



                                         -9-
on behalf of a fund in which it lacks an interest. Cf. Santomenno ex rel. John
Hancock Trust v. John Hancock Life Ins. Co., 677 F.3d 178, 185 (3d Cir. 2012).

      The judgment of the district court is affirmed. Accordingly, the cross appeal
and the motion to dismiss the cross appeal are dismissed or denied as moot.
                      ______________________________




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