LEVY, PHILLIPS & KONIGSBERG, LLP 

800 Third Avenue, 11th Floor 

New York, New York 10022 

By: Moshe Maimon 

 Danielle Disporto 

Telephone: (212) 605-6200 

Fax: (212) 605-6290 

SZAFERMAN, LAKIND, BLUMSTEIN & BLADER, P.C. 

101 Grovers Mill Road, Suite 200 

Lawrenceville, New Jersey 08648 

By: Arnold C. Lakind 

 Robert L. Lakind 

Telephone: (609) 275-0400 

Fax: (609) 275-4511 

 

Attorneys For Plaintiffs 

UNITED STATES DISTRICT COURT 

DISTRICT OF NEW JERSEY

JENNIFER L. KASILAG, LOUIS MELLINGER, JUDITH 

M. MENENDEZ, JACQUELINE M. ROBINSON, and 

LINDA A. RUSSELL, et al., 

Plaintiffs, 

vs. 

HARTFORD INVESTMENT FINANCIAL SERVICES, 

LLC, 

 Defendant. 

 

 

 

 Case Number: _________ 

 DEMAND FOR JURY TRIAL

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TABLE OF CONTENTS 

TABLE OF CONTENTS................................................................................................................. i 

COMPLAINT ................................................................................................................................. 1 

OVERVIEW ................................................................................................................................... 1 

I. JURISDICTION AND VENUE ..................................................................................... 4

II. NATURE OF THE ACTION ......................................................................................... 4 

III. PARTIES ........................................................................................................................ 7 

IV. BACKGROUND INFORMATION ABOUT THE INVESTMENT 

 MANAGEMENT INDUSTRY AND THE PURPOSE OF SECTION 36(b).............. 10 

V. INHERENT CONFLICT IN THE STRUCTURE OF MUTUAL FUNDS 

 GENERALLY AS EXEMPLIFIED BY THE HARTFORD FUND COMPLEX ........ 15 

VI. FACTORS GENERALLY RELEVANT TO A SECTION 36(b) CLAIM.................. 20 

 A. THE NATURE AND QUALITY OF THE INVESTMENT 

 MANAGEMENT AND DISTRIBUTION SERVICES 

 PERFORMED BY HIFSCO DO NOT JUSTIFY HIFSCO’S FEE ..................... 21 

 1. Investment Management Services ................................................................. 21 

 2. 12b-1 Distribution Services ........................................................................... 27

B. THE HARTFORD FUNDS’ BOARDS OF DIRECTORS WERE 

 NOT ACTING CONSCIENTIOUSLY IN APPROVING THE 

 INVESTMENT MANAGEMENT AGREEMENTS AND RULE 12b-1 

 DISTRIBUTION PLANS..................................................................................... 32 

 1. Investment Management Agreements............................................................ 33 

 2. 12b-1 Distribution Plans ................................................................................ 37 

C. COMPARATIVE FEE STRUCTURES CHARGED TO 

 NON-MUTUAL FUND CUSTOMERS AND OTHER MUTUAL 

 FUND COMPLEXES FOR SIMILAR INVESTMENT MANAGEMENT 

 SERVICES DEMONSTRATE THAT HIFSCO HAS CHARGED 

 THE FUNDS EXCESSIVE FEES THAT BREACHED 

 HIFSCO’S FIDUCIARY DUTY........................................................................ 40

 1. Fee Structure of Defendant’s Sub-Advisors ................................................. 40 

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 2. Fees Charged to Other Mutual Fund Complexes For Similar 

 Investment Management Services ................................................................. 41

 3. Fees Charged By Hartford to Institutional Clients for Similar 

 Investment Management Services .................................................................. 45

D. THE ECONOMIES OF SCALE ENJOYED BY HIFSCO IN 

 CONNECTION WITH THE INVESTMENT MANAGEMENT AND 

 DISTRIBUTION SERVICES WERE NOT PASSED ON TO THE 

 PLAINITFFS AND OTHER SHAREHOLDERS OF THE FUNDS AS 

 REQUIRED UNDER SECTION 36(b) BUT WERE KEPT BY 

 DEFENDANT HIFSCO IN VIOLATION OF ITS FIDUCIARY DUTY ............ 48

E. THE COSTS AND PROFITABILITY OF PROVIDING INVESTMENT 

 MANAGEMENT AND DISTRIBUTION SERVICES DID NOT 

 JUSTIFY HIFSCO’S EXCESSIVE FEE............................................................... 54 

COUNT I: AGAINST DEFENDANT HIFSCO PURSUANT TO ICA § 36(b) 

DERIVATIVELYON BEHALF OF THE COUNT I FUNDS 

(Investment Management Fees).................................................................................................... 59 

COUNT II: AGAINST DEFENDANT HIFSCO PURSUANT TO ICA § 36(b) 

DERIVATIVELY ON BEHALF OF THE HARTFORD FUNDS 

(Unreasonable and Excessive Rule 12b-1 Distribution Fees and Extraction of 

Additional Compensation for Investment Management Services) ............................................... 60 

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COMPLAINT 

Plaintiff JENNIFER L. KASILAG (“Kasilag”), whose street address is 35 Oklahoma 

Trail, Hopatcong, New Jersey, 07843, Plaintiff LOUIS MELLINGER (“Mellinger”), whose 

street address is 28 Mockingbird, Hackettstown, New Jersey, 07840, Plaintiff JUDITH M. 

MENENDEZ (“Menendez”), whose street address is 93 Eyland Avenue, Succasunna, New 

Jersey, 07876, Plaintiff JACQUELINE M. ROBINSON (“Robinson”), whose street address is 45 

Livingston Road, Morristown, New Jersey, 07960, and Plaintiff LINDA A. RUSSELL 

(“Russell”), whose street address is 52 Birch Ridge Road, Blairstown, New Jersey 07825 

(collectively, “Plaintiffs”) bring this action on behalf of and for the benefit of: the Hartford 

Global Health Fund, the Hartford Conservative Allocation Fund, the Hartford Growth 

Opportunities Fund, the Hartford Inflation Plus Fund, the Hartford Advisers Fund, and the 

Hartford Money Market Fund (collectively, “the Hartford Funds” or “Funds”), and sue Hartford 

Investment Financial Services, LLC (“Defendant” or “HIFSCO”), an indirect wholly-owned 

subsidiary of Hartford Financial Services Group, Inc. (“HIG”), a company having shares listed 

on the New York Stock Exchange. 

OVERVIEW 

 This is a derivative action arising out of Defendant HIFSCO’s receipt of improper and 

excessive management and/or adviser and distribution fees on Plaintiffs’ investments in Hartford 

Funds in breach of its fiduciary duty under 36(b) of the Investment Company Act of 1940 

(“ICA”), as amended, 15 U.S.C. § 80a-35(b) (hereinafter “Section 36(b)” or “§ 36(b)”). In order 

to violate Section 36(b) of the ICA, the adviser must charge a fee that is “so disproportionately 

large that it bore no reasonable relationship to the services rendered and could not have been the 

product of arm’s length bargaining.” 

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 Like roughly 90 million Americans who are planning ahead for retirement, Plaintiffs 

have invested in mutual funds through their employer-sponsored Simple IRA program. As part 

of that program, Plaintiffs have invested in Hartford Mutual Funds. Because of the excessive 

management and distribution fees that HIFSCO charges and receives in connection with 

Plaintiffs’ investments in the Funds, however, Plaintiffs’ (and all Hartford Fund shareholders’) 

retirement benefits have been and continue to be diminished by staggering amounts. 

 Plaintiffs’ investment returns are diminished because Defendant charges and collects two 

fees that are excessive under § 36(b) of the ICA: (1) management and/or advisory fees and (2) 

distribution fees. The management/advisory fees are excessive because Defendant sub-contracts 

out the majority of the management services, for which the Funds pay a separate sub-advisory 

fee, and then collects a “management fee” for itself for performing little, if any, work. In fact, 

for one Fund, the management fee was up to 3.5 times the amount of the sub-advisory fee in 

2009 alone. 

 Distribution fees are fees that the Securities Exchange Commission (promulgated through 

its Rule 12b-1, 17 C.F.R. § 270-12b-1) determined are to be used for marketing and distribution 

services. The fees are to be used primarily to attract new fund shareholders in order to create 

economies of scale that should allow advisers to provide the same quality and nature of services 

at dramatically lower costs since the costs of managing a fund does not increase proportionately 

with an increase in fund shareholders. Here, the distribution (or “12b-1”) fees are excessive 

because, inter alia, they are not tied to any distribution activities and no economies of scale are 

created or passed on to the Funds. As an example of HIFSCO’s 36(b) violations, its Class B 

shareholders are paying 12b-1 fees despite the class having been closed to new investments since 

September 30, 2009. 

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 As explained in detail below, the management and 12b-1 distribution fees collected by 

HIFSCO from the Plaintiffs are excessive and thus a breach of HIFSCO’s fiduciary duty under § 

36(b). The criteria for determining a § 36(b) breach of fiduciary duty is not laid out in the 

statute. Rather, the Supreme Court has set forth the following factors to use when determining 

whether a fee is excessive: 

• the nature and quality of services being paid for by the fund and its investors; 

• whether the directors exercised a sufficient level of care and conscientiousness 

in approving the investment advisory or management agreements; 

• what fees are charged by the adviser to its other non-mutual fund customers, if 

any; 

• what fees other mutual fund complexes or funds within the same fund family 

charge for similar services to similar mutual funds; 

• whether economies of scale were passed to the funds and their investors or kept 

by the investment adviser; and 

• the costs of providing those services and the profitability of providing the 

services. 

As discussed fully below, an examination of these factors demonstrates that the 

management and 12b-1 distribution fees charged to the Hartford Funds breached, and continue to 

breach, HIFSCO’s fiduciary duty to the Funds. The advisory and distribution fees received by 

HIFSCO were so disproportionately large that they bore no reasonable relationship to the 

services rendered, and could not have been the product of arm’s length bargaining, and were thus 

unfair to Plaintiffs and the other shareholders of the Funds. 

The Plaintiffs seek to rescind the Investment Management Agreements1

 and Distribution 

Plans between Defendant and the Hartford Funds and to recover the total fees Defendant charged 

 

1

 For the Hartford Money Market Fund, Plaintiff Kasilag only seeks to rescind the Distribution 

Plan and to recover the 12b-1 distribution fees Defendant charged this Fund or, alternatively, to 

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the Funds or, alternatively, to recover all improper compensation received by Defendant in 

breach of its statutory fiduciary duty under Section 36(b). The conduct complained of is 

continuing in nature, and Plaintiffs seek recovery from the earliest possible period allowed by the 

applicable statute of limitations through the date of final judgment. Plaintiffs allege: 

I. JURISDICTION AND VENUE 

1. This Court has subject matter jurisdiction pursuant to 15 U.S.C. § 80a-43, 15 

U.S.C. § 80a-35(b)(5), and 28 U.S.C. § 1331. 

2. Venue is proper in this judicial district pursuant to 28 U.S.C. § 1391 and 15 

U.S.C. § 80a-43 as Defendant inhabits or transacts business in this district, a substantial part of 

the events or omissions that give rise to Plaintiffs’ claims occurred in this district, and Defendant 

may be found in this district. 

3. No pre-suit demand on the Boards of Directors of The Hartford Mutual Funds, 

Inc. and The Hartford Mutual Funds II, Inc. (collectively the “Boards”), which are the Boards 

overseeing the Hartford Funds, is required, as the demand requirement of Rule 23.1 of the 

Federal Rules of Civil Procedure does not apply to actions or counts brought under § 36(b) of the 

ICA. 

4. All conditions precedent to suit have been performed, or have been satisfied or 

waived. 

II. NATURE OF THE ACTION 

5. This action is a derivative action brought by the Plaintiffs, for the benefit of, and 

on behalf of, the Hartford Funds, pursuant to ICA § 36(b). 

 

recover all improper compensation in connection therewith. She does not now challenge the 

investment management advisory fees (even though they are excessive) for this Fund, since 

HIFSCO has thus far reimbursed those fees to this Fund. 

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6. Defendant HIFSCO derived and continues to derive revenues in the form of fees 

for what it claims to be the provision of investment advisory services2

 and distribution services 

to the Hartford Funds. In particular, HIFSCO receives fee compensation from each of the Funds 

and earns investment management fee revenues by allegedly providing investment advisory 

services pursuant to investment management agreements with each Fund. HIFSCO also 

improperly derived and continues to derive revenue by charging excessive 12b-1 distribution 

fees. HIFSCO is sued in this Complaint based on its misconduct related to its wrongful receipt 

of fee income in violation of Section 36(b) of the ICA. 

7. The Hartford Mutual Funds, Inc. (“HMF”) is an open-end management 

investment company registered under the ICA, 15 U.S.C. § 80a-1, et seq., comprised of various 

mutual funds, including the Hartford Global Health Fund, the Hartford Conservative Allocation 

Fund, the Hartford Advisers Fund, the Hartford Inflation Plus Fund and the Hartford Money 

Market Fund, each of which is a separate investment portfolio or mutual fund. See Table II. 

8. The Hartford Mutual Funds II, Inc. (“HMFII”) is an open-end management 

investment company registered under the ICA, 15 U.S.C. § 80a-1, et seq., comprised of various 

mutual funds, including the Hartford Growth Opportunities Fund, each of which is a separate 

investment portfolio or mutual fund. See Table II. 

9. The Plaintiffs, who own shares of the Hartford Funds, allege that the investment 

management fees charged to each of the Hartford Funds (except the Hartford Money Market 

Fund) by HIFSCO, the Funds’ investment manager, breached HIFSCO’s § 36(b) fiduciary duty 

to the Funds with respect to such compensation as demonstrated by, inter alia: (a) the nature and 

quality of services provided to the Hartford Funds and their shareholders in exchange for the 

 

2

 The terms “investment advisory services” and “investment management services” are used 

interchangeably in this Complaint. 

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investment management fees, including the fact that Defendant subcontracts out most of the 

management services at a small fraction of the actual investment management fees charged to the 

Funds; (b) the failure of the Hartford Funds’ Boards of Directors to exercise the requisite level of 

care and conscientiousness in approving the investment management agreements and the fees 

paid pursuant thereto; (c) the failure of Defendant to provide the Hartford Funds’ Boards of 

Directors with all information reasonably necessary to evaluate the terms of the investment 

management agreements with respect to each of the Funds; (d) the level of the fees as compared 

to those charged by Defendant or its affiliates to institutional accounts, including non-mutual 

fund customers; (e) the fees other mutual fund advisers charge for similar services to similar 

mutual funds; (f) the failure of Defendant to adequately pass economies-of-scale savings on to 

the Funds and their shareholders, and the retention of those economies-of-scale savings by 

Defendant; and (g) Defendant’s costs and high profitability associated with providing investment 

management services to the Hartford Funds. 

10. The Plaintiffs further allege that HIFSCO improperly received Rule 12b-1 

Distribution Fees3

 (“12b-1 fees”) from the Funds and breached its fiduciary duty to the Funds 

with respect to such compensation by, inter alia: (a) the nature and quality of the services 

provided in exchange for the 12b-1 fees; (b) having produced few, if any, benefits (in the form of 

economies-of-scale benefits or otherwise) for the Hartford Funds while generating significant 

additional investment management fee revenue for HIFSCO; (c) Defendant’s failure to provide 

 

3

 Securities and Exchange Commission (“SEC”) Rule 12b-1, 17 C.F.R. § 270.12b-1, 

permits a fund to market and sell its shares with shareholder funds (Distribution Fees) out of 

fund assets only in strict compliance with the rule. Distribution fees cover the costs associated 

with the marketing and selling involved with running a mutual fund. These fees are deducted 

from a mutual fund to compensate securities professionals for sales efforts and services provided 

to the fund's investors. See SEC Proposes Measures to Improve Regulation of Fund Distribution 

Fees and Provide Better Disclosure for Investors available at: 

http://www.sec.gov/news/press/2010/2010-126.htm. 

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the Hartford Funds’ Boards of Directors with all information reasonably necessary to evaluate 

the Rule 12b-1 Distribution Plans and 12b-1 fees paid pursuant thereto; (d) the fees other mutual 

fund advisers charge for similar distribution services to similar mutual funds, and (e) 

Defendant’s costs and high profitability associated with providing distribution and marketing 

services to the Hartford Funds. 

11. The allegations in this Complaint are predicated on publicly-available 

information, including, but not limited to, information contained in the public filings with the 

Securities and Exchange Commission (“SEC” or the “Commission”) of HMF and HMFII 

(“Hartford Disclosure Materials”), and on information and belief after a reasonable 

investigation.4

III. PARTIES 

12. Plaintiff Mellinger owns shares and is therefore a security holder in the Hartford 

Growth Opportunities Fund and the Hartford Inflation Plus Fund. 

13. Plaintiff Menendez owns shares and is therefore a security holder in the 

Hartford Advisers Fund. 

14. Plaintiff Russell owns shares and is therefore a security holder in the Hartford 

Advisers Fund and the Hartford Growth Opportunities Fund. 

15. Plaintiff Robinson owns shares and is therefore a security holder in the Hartford 

Advisers Fund and the Hartford Inflation Plus Fund. 

 

4

 It should be noted that in shareholder claims against mutual funds, plaintiffs generally lack the 

inside information necessary to allege their claims in detail because the facts are peculiarly 

within the possession and control of defendant. For example, internal information about the 

Boards’ fee-approval process and the costs that advisers incur to operate these funds is solely 

within Defendant’s possession. Additionally Plaintiffs have not attached to the Complaint all of 

the public filings upon which Plaintiffs relied herein. Upon request, however, Plaintiffs will 

provide the Court with copies. 

 

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16. Plaintiff Kasilag owns shares and is therefore a security holder in the Hartford 

Conservative Allocation Fund, the Hartford Global Health Fund and the Hartford Money Market 

Fund. For the Hartford Money Market Fund, Plaintiff Kasilag only challenges the 12b-1 

distribution fees and not the investment management fees at this time. 

17. Defendant HIFSCO is the investment manager/adviser for each of the Hartford 

Funds. HIFSCO is incorporated in Delaware with its principal place of business in Simsbury, 

Connecticut. HIFSCO is an affiliate (indirect wholly-owned subsidiary) of Hartford Financial 

Services Group, Inc. (“HIG”) (together with its subsidiaries, the “Hartford” or “Company”),5 an 

insurance and financial services company having shares listed on the New York Stock Exchange. 

HIG, through its wholly-owned subsidiaries, provides a variety of investment management, 

administrative, and operational services for a large number of investment companies or mutual 

funds (the “Hartford Funds Complex”) and managed accounts, including HIG’s indirect whollyowned subsidiary HIFSCO.6

 See Table I. 

18. Defendant HIFSCO is registered as an investment adviser under the Investment 

Advisers Act of 1940 (“the Investment Advisers Act”). HMF and HMFII, on behalf of each of 

the Funds, have each entered into an Investment Management Agreement with HIFSCO. The 

Investment Management Agreements provide that HIFSCO, subject to the supervision and 

approval of HMF’s and HMFII’s Boards of Directors, shall: (a) provide investment advice and 

 

5

 Plaintiffs refer to HIG, together with its subsidiaries and/or affiliates that perform a variety of 

investment management, administrative, and operational services to mutual funds and managed 

accounts, collectively as “Hartford” or the “Company,” which is also how Hartford refers to 

itself in its public filings. 

6

 The Hartford Funds Complex is composed of 88+ mutual funds, which are contained in the 

following five management investment companies registered under the ICA: the Hartford HLS 

Series Fund II, Inc., the Hartford Series Fund, Inc., the Hartford Income Shares Fund, Inc., the 

Hartford Mutual Funds, Inc. and the Hartford Mutual Funds II, Inc., each containing mutual 

funds. The mutual funds at issue in this Complaint are contained in the Hartford Mutual Funds, 

Inc. and the Hartford Mutual Funds II, Inc. See ¶¶7-8; Tables I and II. 

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recommendations to each fund, (b) continuously supervise the investment program of each fund 

and determine what securities should be bought and sold by each fund, (c) arrange for the 

purchase and sale of investments for each fund, and (d) provide economic and statistical data 

and/or other information as HIFSCO shall deem appropriate or as shall be requested by the 

Boards of Directors. Since 1997, HIFSCO has continuously been the primary investment adviser 

to the Hartford Funds and/or their predecessors which are included in HMF pursuant to an 

Investment Management Agreement, and since 2002 to the Hartford Funds included in HMFII. 

See Composite Ex. 1, comprised of the March 3, 1997 Investment Management Agreement 

between HIFSCO and HMF, as amended, in pertinent part on April 27, 2000, October 31, 2002, 

and May 26, 2004; as well as the November 1, 2009 Investment Management Agreement 

(collectively, “HMF HIFSCO Agreement”); see also Composite Ex. 2, comprised of the 

February 19, 2002 and the November 1, 2009 Investment Management Agreements between 

HIFSCO and HMFII (collectively, “HMFII HIFSCO Agreement”)7

; see also Composite Ex. 3, 

comprised of the February 6, 2008 Expense Limitation Agreement between HMF and HMFII 

and HIFSCO, as amended and restated on November 1, 2008; November 1, 2009; and November 

1, 2010. 

19. Defendant HIFSCO is also a registered broker-dealer and serves as the Hartford 

Funds’ principal underwriter and distributor. HIFSCO receives 12b-1 distribution fees from 

each of the Hartford Funds pursuant to Rule 12b-1 Distribution Plans (“Distribution Plan” or 

“Distribution Plans”) adopted by HMF and HMFII on behalf of the Funds. See Ex. 4, the August 

2, 2006 HMF Amended and Restated Distribution Plan (“HMF Distribution Plan”); Ex. 5, the 

August 2, 2006 HMFII Amended and Restated Distribution Plan (“HMFII Distribution Plan”). 

 

7

 The HMF HIFSCO Agreement and the HMFII HIFSCO Agreement are collectively referred to 

as the “Investment Management Agreements.” 

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20. Defendant HIFSCO, as the underwriter, distributor, adviser, and control person 

of the Harford Funds received compensation from the Funds for providing investment 

management and other services to them. As such, Defendant HIFSCO owes fiduciary and other 

duties to the Plaintiffs and all shareholders of each of the Funds. 

IV. BACKGROUND INFORMATION ABOUT THE INVESTMENT MANAGEMENT 

INDUSTRY AND THE PURPOSE OF SECTION 36(b) 

21. A mutual fund is “typically created and managed by a pre-existing organization 

known as an investment adviser” that “generally supervises the daily operation of the fund and 

often selects affiliated persons to serve on the [fund’s] board of directors.” Daily Income Fund, 

Inc. v. Fox, 464 U.S. 523, 536 (1984) 

22. Section 36(b) imposes a fiduciary duty on mutual fund investment managers 

(and their affiliates) with respect to the receipt of compensation. As early as 1935 Congress 

recognized that because “a typical [mutual] fund is organized by its investment adviser which 

provides it with almost all management services and because its shares are bought by investors 

who rely on that service, a mutual fund cannot, as a practical matter, sever its relationship with 

the advisor.” S. Rep. No. 91-184, p. 5 (1969). Therefore, “the forces of arm’s-length bargaining 

do not work in the mutual fund industry in the same manner as they do in other sectors of the 

American economy.” Id. 

23. As a result in 1940, Congress enacted the ICA recognizing that: 

The national public interest and the interest of investors are 

adversely affected . . . when investment companies are organized, 

operated [and] managed . . . in the interest of . . . investment 

advisers . . . rather than in the interest of [shareholders] . . . or 

when the investment companies . . . are not subjected to adequate 

independent scrutiny. 

ICA § 1(b)(2), 15 U.S.C. § 80a-1(b)(1994). Accordingly, the ICA was designed to regulate and 

curb “abuses inherent in the structure of [the mutual fund industry],” Jones v. Harris Associates 

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L.P., 130 S.Ct. 1418, 1422 (2010) (quoting Daily Income Fund, 464 U.S. at 536), and to create 

standards of care applicable to investment advisers and their affiliates, such as Defendant. 

24. By the 1960s, it had become clear to Congress that investment advisers to 

equity mutual funds were charging those funds excessive fees, particularly by not taking 

economies of scale into account. As a result, Section 36(b) was added to the ICA in 1970, 

(primarily to remedy excessive fees charged by mutual funds such as those owned by Plaintiffs), 

which created a federal cause of action for breach of fiduciary duty by investment advisers. 

Section 36(b) imposes a fiduciary duty on mutual fund investment managers (and their affiliates) 

with respect to the receipt of compensation for services. 

25. Section 36(b) created a judicial remedy for breach of such fiduciary duty by 

authorizing litigation against investment advisers, their affiliates, and certain others by the SEC 

or by a security holder on behalf of the investment company with respect to payments made to 

such entities or persons by the investment company or by its security holders. Section 36(b) 

states, in pertinent part: 

[T]he investment adviser of a registered investment company shall 

be deemed to have a fiduciary duty with respect to the receipt of 

compensation for services, or of payments of a material nature, 

paid by such registered investment company, or by the security 

holders thereof, to such investment adviser or any affiliated person 

of such investment adviser. An action may be brought under this 

subsection . . . by a security holder of such registered investment 

company on behalf of such company, against such investment 

advisers, or an affiliated person of such investment advisor . . . for 

breach of fiduciary duty in respect to such compensation or 

payments paid by such registered investment company or by the 

security holders thereof to such investment adviser or person. 

ICA § 36(b), 15 U.S.C. § 80a-35(b). 

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26. Further, notwithstanding requirements regarding the increased disinterestedness 

of the boards of directors,8

 “Congress decided not to rely solely on the fund’s directors to assure 

reasonable adviser fees,” Daily Income Fund, 464 U.S. at 540, also adding a provision to Section 

36(b) that provides: 

In any such action approval by the board of directors of such 

investment company of such compensation or payments, or of 

contracts or other arrangements providing for such compensation 

payments, and ratification or approval of such compensation or 

payments, or of contracts or other arrangements providing for such 

compensation or payments, by the shareholders of such investment 

company shall be given such consideration by the court as is 

deemed appropriate under all the circumstances. 

ICA § 36(b)(2); 15 U.S.C. § 80a-35(b)(2) (emphasis added). 

27. Congress also chose not to rely only the ability or willingness of a fund’s 

directors to prevent excessive fees and other abuses. Through Section 36(b), Congress gave 

shareholders a “unique right,” Daily Income Fund, 464 U.S. at 536, empowering them with the 

ability to be an independent check on an adviser’s fulfillment of its fiduciary duties and receipt 

of unfair fees. By enacting § 36(b), Congress provided shareholders with a means to redress 

breaches of the adviser’s fiduciary duty to the funds it manages and distributes while leaving the 

“ultimate responsibility for the decision in determining whether the fiduciary duty has been 

breached [] with the court.” S. Rep. 91-184, at 6.

28. Although on a shareholder-by-shareholder basis, the fees charged and received 

by HIFSCO may appear to be very small, the cumulative effect of the excessive fees charged 

cause a dramatic decrease in Plaintiffs’ investment returns over time. Arthur Levitt, past 

Chairman of the SEC, was critical of what he called the “tyranny of compounding high costs:” 

 

8

 At least 40% of the Funds’ directors must be “disinterested” as defined in § 10 of the ICA.

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Instinct tells me that many investors would be shocked to know 

how seemingly small fees can over time, create such drastic 

erosion in returns . . . In the years ahead, what will mutual fund 

investors say if they realize too late their returns have fallen hard 

under the weight of compounding fees? 

Arthur Levitt, Jr., Inaugural Address: Costs Paid with Other People’s Money, Address at 

Fordham University School of Law (Nov. 3, 2000), 6 FORDHAM J. CORP. & FIN. L. 261, 259, 267 

(2001). 

29. For example, assume that an employee with 35 years until retirement has a 

current 401(k) account balance of $25,000. If returns on investments in his account over the next 

35 years average 7 percent, and fees and expenses reduce their average returns by 0.5 percent, 

his account balance would grow to $227,000 at retirement, even if there were no further 

contributions to their account. However, if fees and expenses being withheld are 1.5 percent, 

their account balance would grow to only $163,000 at retirement. The 1 percent increase in fees 

and expenses caused his account balance to be reduced at retirement by a shocking 28 percent or 

$64,000. See the following table:

See Department of Labor Publication “A Look at 401(k) Plan Fees,” available at 

http://www.dol.gov/ebsa/publications/401k_employee.html. 

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30. Section 36(b) itself does not set forth a list of factors to be considered in 

determining whether an investment adviser, such as HIFSCO, has breached its fiduciary duty 

with respect to its receipt of compensation for services paid by a mutual fund such as any of the 

Hartford Funds. “Fiduciary duty” includes the duties of good faith, loyalty, and due care. A 

breach of fiduciary duty occurs “when a fiduciary permits an unreasonable or excessive fee to be 

levied on the fund,” or “when compensation to the adviser for his services is excessive, in view 

of the services rendered – where the fund pays what is an unfair fee under the circumstances.” 

Mutual Fund Amendments: Hearing Before the Subcomm. on the Commerce on Interstate and 

Foreign Commerce, Investment Company Act of 1940 and The Securities Exchange Act of 

1934, H.R. 11995, S. 2224, H.R. 13754, and H.R. 14737, 91st Cong. (1st Sess. 1969) (“1969 

Hearings”), at 189-90. Indeed, an advisor “may not overreach in the amount of his fee even 

though the other party to the transaction, in full possession of all the facts, does not believe the 

fee is excessive.” Id., December 17, 1969 Letter from the Investment Company Institute included 

with Mutual Funds Amendments, at 441; see also S. Rep. 91-184, pp. 15-16 (“the ultimate test, 

even if the compensation or payments are approved by the directors and stockholders, . . . will be 

whether the investment adviser has fulfilled his fiduciary duty to the mutual fund shareholders in 

determining the fee”) (emphasis added). 

31. In Pepper v. Litton, 308 U.S. 295 (1939), Supreme Court Justice William O. 

Douglas (former SEC Chairman) further explained the fiduciary duty standard. He opined that 

fiduciaries’

dealings with the corporation are subjected to rigorous scrutiny and 

where any of their contracts or engagements with the corporation is 

challenged the burden is on the [fiduciary] not only to prove the 

good faith of the transaction but also to show its inherent fairness 

from the viewpoint of the corporation and those interested therein. 

The essence of the test is whether or not under all the 

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circumstances the transaction carries the earmarks of an arm’s 

length bargain. If it does not, equity will set it aside . . . He who is 

in such a fiduciary position cannot serve himself first and his 

cestuis second . . . He cannot use his power for his personal 

advantage and to the detriment of the stockholders and creditors no 

matter how absolute in terms that power may be and no matter how 

meticulous he is to satisfy technical requirements. For that power 

is at all times subject to the equitable limitation that it may not be 

exercised for the aggrandizement, preference, or advantage of the 

fiduciary to the exclusion or detriment of the cestuis. Where there 

is a violation of those principles, equity will undo the wrong or 

intervene to prevent its consummation. 

Id. at 306-311 (emphasis added). In Jones, the United States Supreme Court held that the 

formulation of the concept of fiduciary duty stated in Pepper “expresses the meaning of the 

phrase ‘fiduciary duty’ in § 36(b) . . . .” 130 S.Ct. at 1427. Thus, by reaffirming Pepper, the 

Supreme Court incorporated its fiduciary duty standard into § 36(b) requiring both good faith in 

the negotiation process and a fair outcome. 

32. Furthermore, independent directors have a duty to diligently bargain to ensure 

that the best possible deal is made on their corporation’s behalf. 

V. INHERENT CONFLICT IN THE STRUCTURE OF MUTUAL FUNDS 

GENERALLY AS EXEMPLIFIED BY THE HARTFORD FUNDS COMPLEX 

33. The relationship between investment advisers and mutual funds is fraught with 

potential conflicts of interest,” Burks v. Lasker, 441 U.S. 471, 481 (1979), and is “potentially 

incestuous.” Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 929 (2d Cir. 1982). 

34. Indeed, while mutual fund boards are supposed to be the “watchdogs” for the 

shareholders of the funds, noteworthy industry insiders have commented on the general failure of 

mutual fund boards to fulfill their responsibilities under the ICA. 

35. For example, in Strougo v. BEA Assoc., 188 F. Supp. 2d 373, 383 (S.D.N.Y. 

2002), the court quoted the following comment made by Warren Buffett, famous investor and 

chairman of Berkshire Hathaway: 

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I think independent directors have been anything but independent. 

The Investment Company Act, in 1940, made these provisions for 

independent directors on the theory that they would be the 

watchdogs for all these people pooling their money. The behavior 

of independent directors in aggregate since 1940 has been to 

rubber stamp every deal that’s come along from management – 

whether management was good, bad, or indifferent. Not negotiate 

for fee reductions and so on. A long time ago, an attorney said that 

in selecting directors, the management companies were looking for 

Cocker Spaniels and not Dobermans. I’d say they found a lot of 

Cocker Spaniels out there. 

Id. (citation omitted). 

36. The conflicts in the inherent structure of mutual funds, including those at issue 

here, exemplify the concern raised in the preamble to the ICA that “investment companies are 

organized, operated and managed in the interest of investment advisers, rather than in the interest 

of shareholders.” Indeed, the goal of ICA § 36(b) is to empower shareholders to independently 

police whether investment advisers have fulfilled their fiduciary obligations. 

37. Operating within this framework, the Hartford Funds Complex is also wrought 

with inherent structural conflicts. 

38. The Hartford Funds Complex consists of dozens of mutual funds, all of which 

were conceived and started by Defendant or its affiliates. Defendant’s, or its affiliates’, purpose 

in starting, maintaining, and servicing mutual funds is to make a profit on the management, 

administrative, and shareholder services sold to the Funds for fee income to the serviceproviders. 

39. The Hartford Funds Complex, like almost all other mutual fund complexes, 

operates under a single structure consisting of a group of related investment companies (the 

mutual funds themselves) that are owned by their shareholders and governed by a Board of 

Directors. See Table I. The mutual funds themselves, however, are basically corporate shells in 

that they have few or no employees. Rather, the mutual funds contract for all of the services they 

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need – including distribution of their securities, custodianship of their assets, auditing, servicing 

shareholder accounts, portfolio management, and day-to-day administration – all of which, in 

this case, are provided by or arranged for by Defendant and its affiliates. 

40. Each of the services provided by Hartford through its various affiliates is the 

subject of separate contracts, each of which gives rise to a separate fee paid by the Funds. See 

e.g., Ex. 6: the February 8, 2007 Master Custodian Contract; Ex. 7: the February 1, 2006 

Transfer Agency and Service Agreement; Ex. 8: the February 6, 2008 Transfer Agency Fee 

Waiver Agreement; Ex. 9: the July 22, 1996 Principal Underwriting Agreement, as amended July 

22, 1997; Ex. 10: the January 3, 2000 Fund Accounting Agreement; and Ex. 11: the May 3, 2004 

Share Purchase Agreement. 

41. While the Funds are charged a myriad of other fees, Plaintiffs’ Complaint is 

limited to the excessive investment management and 12b-1 fees charged by HIFSCO. 

42. Under the terms of the HMF HIFSCO Agreement and the HMFII HIFSCO 

Agreement, Defendant HIFSCO provides two categories of services: investment management 

services and administrative services. See Composite Exs. 1 and 2. Although the Investment 

Management Agreements purport to include administrative services, it bears noting that the 

Funds’ Annual Reports include a separate line item for administrative services fees already paid

by the Funds. Furthermore, HIFSCO cannot be performing many administrative services, given 

that, for example, for year ended October 31, 2010, the Inflation Plus Fund’s investment 

management fees were 188 times greater than the Fund’s administrative fees. Id. 

43. Although investment managers typically provide various services, such as 

custodian, transfer agency and service, underwriting, and accounting, HIFSCO does not provide 

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these services to the Hartford Funds. The Funds contract directly with other entities for the 

provision of these services. See Exs. 6-11. 

44. To the extent these services are included in the Investment Management 

Agreements, on information and belief, the administrative type services included are a very small 

percentage of the expenses incurred under these agreements, as transfer agency costs are 

typically by far the largest component of administrative costs but are provided to the Hartford 

Funds pursuant to a separate contract with Hartford Administrative Services Company 

(“HASCO”), a wholly-owned subsidiary of HIG. See Ex. 8. HASCO’s services include 

communications with each Hartford Fund’s shareholders as well as the preparation and 

distribution of reports, proxies, notices, confirmation of transactions, prospectuses, and tax 

information. In the aggregate, various miscellaneous administrative items, aside from the 

transfer agency costs, do not account for more than three basis points9

 (“bps”) of the average 

mutual fund’s advisory fee. See John P. Freeman, Stewart L. Brown and Steve Pomerantz, 

Mutual Fund Advisory Fees: New Evidence and a Fair Fiduciary Test, 61 OKLA. L. REV. 83, 

113, n. 104 (2008) (“Freeman, Brown & Pomerantz Study”), attached as Ex. 12. 

45. When Hartford starts a new mutual fund, it not only contracts to provide all the 

services the fund needs, it also nominates and elects the members of the fund’s Board (including 

all “independent”10 Board members). 

46. Each of the Hartford Funds is governed by a Board of Directors. These same 

individuals, including all independent board members, simultaneously serve on the Boards for 

 

9

 A basis point is a unit of measure used in finance to describe the percentage change in the value 

or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 

0.0001 in decimal form. See Investopedia.com, available at: 

http://www.investopedia.com/ask/answers/05/basispoint.asp. 

10 “Independent” board members are those who are not “interested persons” as defined under the 

1940 Act. See 15 U.S.C. § 80a-2(a). 

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each Fund overseeing all of the approximately 88 portfolios in the Hartford Funds Complex.11 

See Table I. 

47. The Board members are compensated for their services with a fee that consists 

of an annual retainer component and a meeting fee component, as well as retirement benefits. 

For the fiscal year ending October 31, 2009, according to publicly-available information, the 

Board members for the funds in the Hartford Funds Complex received total compensation in the 

following amounts: 

Lynn S. Birdsong $190,000 

Dr. Robert M. Gavin $266,500 

Duane E. Hill $170,000 

Sandra S. Jaffee $164,500 

William P. Johnston $196,500 

Phillip O. Peterson $196,500 

Lemma W. Senbet $159,000 

Lowndes A. Smith $189,000 

 

48. Lowndes A. Smith is an “interested” director by virtue of his prior position as a 

Hartford executive. David N. Levenson is also an “interested” director by virtue of his current 

position as a Hartford executive. Directors who are also employed by Hartford do not receive 

director compensation. 

49. As discussed below, the excessive fees charged to each of the Hartford Funds 

(except for the Hartford Money Market Fund) by HIFSCO for the investment management 

services are so large that they breach HIFSCO’s fiduciary duty to the Funds with respect to such 

compensation, especially in light of the fact that HIFSCO has delegated virtually all of its duties 

 

11 All Directors of the HMF and HMFII also hold corresponding positions with the Hartford 

Series Fund, Inc., the Hartford HLS Series Fund II, Inc., and the Hartford Income Shares Fund, 

Inc. overseeing the 88+ funds within the Hartford Fund Complex. See Table I. Mutual funds 

contained within the Hartford Series Fund, Inc., the Hartford HLS Series Fund II, Inc., and the 

Hartford Income Shares Fund, Inc. are not at issue in this Complaint. 

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to subcontractors at a fraction of HIFSCO’s fee, and when compared to the fees charged by 

Hartford to institutional accounts that bargain at arm’s length. 

50. Likewise, the 12b-1 fees charged to the Hartford Funds breach HIFSCO’s 

fiduciary duty to the Funds with respect to such compensation because those fees provide few, if 

any, benefits to the Funds and their shareholders but, rather, serve as a means by which 

Defendant can extract additional management compensation and because those fees were not 

approved in accordance with applicable statutory and/or regulatory requirements. 

VI. FACTORS GENERALLY RELEVANT TO A SECTION 36(b) CLAIM 

51. “A court’s evaluation of an investment adviser’s fiduciary duty must take into 

account both procedure and substance.” Jones, 130 S.Ct. at 1429. The test for determining 

whether fee compensation paid to Defendant violates ICA § 36(b) is “essentially whether the fee 

schedule represents a charge within the range of what would have been negotiated at arm’s 

length in light of all the surrounding circumstances.” Gartenberg, 694 F.2d at 928. 

52. In order to violate Section 36(b) of the ICA, the adviser must charge a fee that is 

“so disproportionately large that it bore no reasonable relationship to the services rendered and 

could not have been the product of arm’s length bargaining.” Jones, 130 S.Ct. at 1418 (quoting 

Gartenberg).

53. In the context of § 36(b) litigation, courts have historically considered, inter 

alia, the following factors (“Gartenberg Factors”): 

• the nature and quality of services being paid for by the fund and its investors; 

• whether the directors exercised a sufficient level of care and conscientiousness 

in approving the investment advisory or management agreements; 

• what fees are charged by the adviser to its other non-mutual fund customers, if 

any; 

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• what fees other mutual fund complexes or funds within the same fund family 

charge for similar services to similar mutual funds; 

• whether economies of scale were passed to the funds and their investors or kept 

by the investment adviser; and 

• the costs of providing those services and the profitability of providing the 

services. 

54. As set forth below, an examination of the Gartenberg Factors demonstrates that 

the fees charged to the Hartford Funds and their investors breached and continue to breach 

HIFSCO’s fiduciary duty to the Funds. Indeed, HIFSCO’s receipt of the advisory and 

distribution fees were so disproportionately large that they bore no reasonable relationship to the 

services rendered, and could not have been the product of arm’s length bargaining, and were thus 

unfair to Plaintiffs and the other shareholders of the Funds. 

A. THE NATURE AND QUALITY OF THE INVESTMENT MANAGEMENT 

AND DISTRIBUTION SERVICES PERFORMED BY HIFSCO DO NOT 

JUSTIFY HIFSCO’S FEE

1. Investment Management Services 

55. For investment management services, each of the Hartford Funds pays a 

monthly management fee to HIFSCO based on a stated percentage of the Fund’s average daily 

net asset value. As such, the investment management fees are not based on the services actually 

rendered or HIFSCO’s actual costs in providing services to the Hartford Funds. 

56. Pursuant to the terms of the Investment Management Agreements between 

HIFSCO and the Funds, the duties of HIFSCO, as the investment adviser to the Hartford Funds, 

are to manage the portfolio of securities, to research securities, and to make the purchase, sale 

and hold decisions for each of the portfolios. See Composite Exs. 1 and 2. 

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57. Rather than directly providing these investment management services, HIFSCO 

subcontracts with others to provide the services; and does so at a fraction of HIFSCO’s fee 

collected from each Hartford Fund. 

58. Since 1997, HIFSCO has sub-contracted its investment management duties to 

either Wellington Management Company, LLP (“Wellington”)12, pursuant to an Investment SubAdvisory Agreement, and/or to Hartford Investment Management Company (“HIMCO”)13

, 

pursuant to an Investment Services Agreement, and subsequently an Investment Sub-Advisory 

Agreement. See Composite Ex. 13: the HMF March 3, 1997 Investment Sub-advisory 

Agreement between HIFSCO and Wellington, as amended in pertinent part on April 28, 2000, as 

well as the October 1, 2009 Investment Sub-Advisory Agreement (“HMF Wellington 

Agreement”); Composite Ex. 14: the HMFII February 19, 2002 Investment Sub-advisory 

Agreement between HIFSCO and Wellington, as well as the October 1, 2009 Investment SubAdvisory Agreement (“HMFII Wellington Agreement”); Composite Ex. 15: the HMF March 3, 

1997 Investment Services Agreement between HIFSCO and HIMCO, as amended in pertinent 

part on October 31, 2002 and August 1, 2007; as well as the October 1, 2009 Investment SubAdvisory Agreement between HIFSCO and HIMCO (“HMF HIMCO Agreement”). See Table 

II. 

59. According to The Funds’ Annual Reports, “HIFSCO has overall investment 

supervisory responsibility for the [Funds]” and “provides administrative personnel, services, 

equipment, facilities and office space for proper operation of the [Funds].” 

 

12 Wellington provides sub-advisory services for the Hartford Global Health Fund, the Hartford 

Advisers Fund and the Hartford Growth Opportunities Fund. 

13 HIMCO provides sub-advisory services for the Hartford Conservative Allocation Fund and the 

Hartford Inflation Plus Fund. 

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60. The most recent Statement of Additional Information (“SAI”) for the Hartford 

Funds disclosed that “HIFSCO has the responsibility, subject to oversight by the [Hartford 

Funds’ Boards of Directors], to oversee the sub-advisers and recommend their hiring, 

termination, and replacement.” HIFSCO specifically will: “(a) set the applicable Fund’s overall 

investment strategies; (b) evaluate, select, and recommend sub-advisers to manage all or a part of 

the applicable Fund’s assets; (c) allocate and, when appropriate, reallocate the applicable Fund’s 

assets among multiple sub-advisers; (d) monitor and evaluate the investment performance of subadvisers; and (e) implement procedures reasonably designed to ensure that the sub-advisers 

comply with the applicable Fund’s investment objective, policies, and restrictions.” Id. In other 

words, HIFSCO makes a one-time, initial determination regarding investment objectives and 

selects sub-advisers. Other than HIFSCO’s initial involvement, it provides minimal services to 

the funds and it charges its sub-advisers with providing the substantive investment advisory 

services to the funds. 

61. Wellington is a sub-adviser to the Hartford Advisers Fund, the Hartford Growth 

Opportunities Fund and the Hartford Global Health Fund, and provides the day-to-day 

investment management for each of these Funds. Indeed, according to the HMF Wellington 

Agreement and the HMFII Wellington Agreement, it is Wellington that is charged with 

“evaluat[ing] and implement[ing] an investment program appropriate for each Portfolio” and 

“will make all determinations with respect to the investment of the assets for the Portfolios and 

the purchase or sale of portfolio securities, and shall take such steps as may be necessary to 

implement the same.” See Composite Exs. 13 and 14. 

62. According to the SAI, Wellington, subject to the general supervision of the 

applicable HMF and HMFII’s Boards of Directors and HIFSCO, is responsible for (among other 

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things) the day-to-day investment and reinvestment of the assets of such Funds and furnishing 

each such Fund with advice and recommendations with respect to investments and the purchase 

and sale of appropriate securities for each Fund. The most recent Annual Reports for the 

Hartford Advisers Fund, the Hartford Growth Opportunities Fund and the Hartford Global 

Health Fund also state that “HIFSCO has contracted with Wellington under a sub-advisory 

agreement for the provision of day-to-day investment management services to the Fund in 

accordance with the Fund’s investment objective and policies.” As such, virtually all of the 

investment management services are performed by Wellington. 

63. Further evidence that Wellington performs substantially all of the Funds’ 

management/advisory services is demonstrated by the fact that when Vanguard Group, Inc. 

(“Vanguard”) retains Wellington as its investment advisor for the Vanguard funds, Vanguard 

does not get paid. Although Wellington provides Vanguard with substantially similar services as 

it provides for the Hartford Funds, Vanguard does not charge any investment 

advisory/management fee, much less one that is up to 3.5 times greater than the fee paid to 

Wellington. 

64. HIMCO is a sub-adviser to the Hartford Inflation Plus Fund and the Hartford 

Conservative Allocation Fund, and provides the day-to-day investment management for this 

Fund. HIMCO is a wholly-owned subsidiary of HIG. Similar to Wellington, under the HMF 

HIMCO Agreement, “HIMCO shall evaluate and implement an investment program appropriate 

for each Portfolio” and “will make all determinations with respect to the investment of the assets 

for the Portfolios and the purchase or sale of portfolio securities, and shall take such steps as may 

be necessary to implement the same.” See Composite Ex. 15. 

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65. With respect to the Hartford Inflation Plus Fund and the Hartford Conservative 

Allocation Fund, HIFSCO has entered into an investment services agreement with HIMCO for 

the provision of the day-to-day investment management services. Further, the Hartford Inflation 

Plus Fund and the Hartford Conservative Allocation Fund’s most recent Annual Reports further 

state that “HIFSCO has contracted with HIMCO under a sub-advisory agreement for the 

provision of day-to-day investment management services to the Fund in accordance with the 

Fund’s investment objective and policies.” As such, virtually all of the investment management 

services are performed by HIMCO. 

66. Each of the Hartford Funds’ Prospectuses also provide that “the sub-advisers are 

responsible for the day-to-day portfolio management activities of the funds they sub-advise, 

including effecting securities transactions.” 

67. HIFSCO’s fee schedule varies for each of the Hartford Funds. Each Fund pays 

a fee to HIFSCO, which subcontracts with Wellington and/or HIMCO at a fraction of HIFSCO’s 

fee. The Hartford Funds employ a declining rate structure, known as “fee breakpoints,” in which 

the percentage fee rate decreases in steps or at designated breakpoints as assets increase. 

Notably, in the case of Wellington, who is a for-profit independent sub-advisor, upon 

information and belief, HIFSCO negotiated at arm’s length for the lowest possible sub-advisory 

fee, which contains breakpoints at much lower levels than HIFSCO charged those Funds for its 

advisory services. 

68. Virtually all of the portfolio management and investment management services 

required by the Funds are performed by Wellington and/or HIMCO and there is little, if any, 

work left to be done by HIFSCO. 

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69. Despite the fact that the sub-advisers provided the bulk of the investment 

advisory services to the Funds, in fiscal year 2009 alone, HIFSCO collected nearly $23 million 

in investment management fees from the Hartford Funds (see ¶154) paying its sub-advisers just a 

fraction of that fee: 

HARTFORD FUNDS’ FEE BREAKDOWN PURSUANT TO THE SAI

(“M” refers to “Million” and “B” refers to “Billion”)

 

Hartford Fund Investment 

Services/ 

Sub-Advisory 

Agreement 

HIFSCO Fee Schedule 

(annual rate based on average 

daily net assets) 

Sub-Advisor Fee Schedule 

(annual rate based on average 

daily net assets) 

Hartford 

Advisers Fund 

Wellington First $500 million – 0.6900% 

Next $500 million – 0.6250% 

Next $4 billion – 0.5750% 

Next $5 billion – 0.5725% 

Amt. over $10B – 0.5700% 

First $50 million – 0.2200%; 

Next $100 million – 0.1800% 

Next $350 million – 0.1500% 

Amt. over $500M – 0.1250% 

Hartford Growth 

Opportunities 

Fund 

Wellington First $100 million – 0.9000%; 

Next $150 million – 0.8000% 

Next $4.75 billion – 0.7000% 

Next $5 billion – 0.6975% 

Amt. over $10B – 0.6950% 

All Assets – 0.2700% 

Hartford Inflation 

Plus Fund 

HIMCO First $500 million – 0.5500% 

Next $4.5 billion – 0.5000% 

Next $5 billion – 0.4800% 

Amt. over $10B – 0.4700% 

All Assets – At Cost 

Hartford Global 

Health Fund 

Wellington First $500 million – 0.9000% 

Next $500 million – 0.8500% 

Next $4 billion – 0.8000% 

Next $5 billion – 0.7975% 

Amt. over $10B – 0.7950% 

First $100 million – 0.4500% 

Next $400 million – 0.3500% 

Amt. over $500M – 0.3000% 

Hartford 

Conservative 

Allocation Fund 

HIMCO First $500 million – 0.1500% 

Next $4.5 billion – 0.1000% 

Next $5 billion – 0.0800% 

Amt. over $10B – 0.0700% 

All Assets – At Cost 

70. While Wellington’s fees are a fraction of HIFSCO’s fee, upon information and 

belief, Wellington still makes a profit. Moreover, assuming arguendo that HIMCO’s “at cost” 

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fee represents the actual cost of performing services, HIFSCO’s fee of 2.5 to 6.5 times the “cost” 

is grossly disproportionate to the services it actually provides to the Funds. See ¶154. In 2009 

alone, HIFSCO was paid a total of $23,473,358 in investment management fees from the Funds 

at issue in this Complaint. Id. Of that sum, HIFSCO paid Wellington and HIMCO $9,579,617 

for sub-advisory services, retaining $13,893,741 for itself despite providing minimal additional 

advisory services to the Funds. Id. This is a clear breach of HIFSCO’s fiduciary duties and a 

violation of ICA § 36(b). 

71. Plaintiffs, on behalf of the Hartford Funds, are entitled to recover the investment 

management fees received (and continuing to be received) by HIFSCO in breach of its fiduciary 

duty to the Funds (except the Hartford Money Market Fund) with respect to such compensation. 

The excessive management fees represent additional compensation for advisory services, and 

thus, are subject to an ICA § 36(b) claim. 

2. 12b-1 Distribution Services 

72. Prior to 1980, the SEC prohibited the use of fund assets (which are owned by 

the shareholders) to sell new fund shares. The SEC had traditionally been reluctant to allow fund 

advisers to charge their shareholders for selling shares to others because: 

[T]he cost of selling and purchasing mutual fund shares should be 

borne by the investors who purchase them and thus presumably 

receive the benefits of the investment, and not, even in part, by the 

existing shareholders of the fund who often derive little or no 

benefit from the sale of new shares. 

Statement on the Future Structure of the Securities Markets, [Feb. 1972] Sec. Reg. & L. Rep. 

(BNA) No. 137 pt. II, at 7. 

73. After intense lobbying by the mutual fund industry, however, the SEC agreed to 

consider modifying its objections to allow current fund shareholders to pay distribution 

expenses. In early comment letters and in proxy statements proposing adoption of plans of 

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distribution, the mutual fund industry argued that adding assets to an existing mutual fund would 

create economies of scale that would allow the advisers to provide the same quality and nature of 

services to mutual fund shareholders at dramatically lower costs. 

74. Accepting the mutual fund industry’s argument that a growth in assets would 

lead to a quid pro quo reduction in fees and other expenses, the Commission tentatively 

approved Rule 12b-1. The SEC feared that “the use of mutual fund assets to finance distribution 

activities would benefit mainly the management of a mutual fund rather than its shareholders, 

and therefore that such use of fund assets should not be permitted.” Bearing of Distribution 

Expenses by Mutual Funds, Investment Company Act Release No. 9915, 1977 SEC LEXIS 943 

(Aug. 31, 1977). Indeed, the SEC attached numerous conditions to the use of fund assets to pay 

distribution expenses. For example, the SEC wanted to be certain that investment advisers 

would not “extract additional compensation for advisory services by excessive distributions 

under a 12b-1 plan.” Meyer v. Oppenheimer Management Corp., 895 F.2d 861, 866 (2d Cir. 

1990). 

75. Unfortunately, that is precisely what Defendant HIFSCO has done: charged and 

collected additional compensation for its retail management services by causing the Plaintiffs 

and other Hartford Fund shareholders to pay Defendant HIFSCO’s marketing expenses to 

acquire new shareholders so that these new shareholders could pay additional investment 

management fees to Defendant. Existing shareholders are thus forced to pay additional fees 

because, along with new shareholders, assets under management increase thereby increasing the 

12b-1 fees. 

76. Under this regime, Defendant HIFSCO has fashioned yet another way to 

increase its financial benefit while leaving Plaintiffs and other shareholders to bear the financial 

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burden. Indeed, Plaintiffs and the other shareholders of the Hartford Funds pay Rule 12b-1 

distribution fees for marketing, selling, and distributing mutual fund shares to new shareholders 

pursuant to distribution plans that Defendant adopted for the Hartford Funds pursuant to SEC 

Rule 12b-1. HMF and HMFII, on behalf of their respective Funds, have each adopted a separate 

Distribution Plan for each of the Class A, Class B, Class C and Class L shares of each Fund, 

pursuant to appropriate resolutions of HMF’s and HMFII’s Boards of Directors. See HMF 

Distribution Plan, Ex. 4; HMFII Distribution Plan, Ex. 5. 

77. Pursuant to the HMF and HMFII’s Class A Distribution Plans, a Fund may 

compensate HIFSCO for its expenditures in financing any activity primarily intended to result in 

the sale of Fund shares and for maintenance and personal service provided to existing Class A 

shareholders. The HMF and HMFII’s Boards of Directors authorized Rule 12b-1 payments of 

0.25% of each Fund’s average daily net assets attributable to Class A shares. 

78. Hartford’s 2009 SEC filings state that the 12b-1 Distribution Plans create 

“potential benefits ... [which] include ... the ability to provide investors with an alternative to 

paying front-end sales loads.” (Emphasis added). Class A shares of the Hartford Funds, 

however, are charged significant front-end sales loads in addition to the 12b-1 fees. 

79. Pursuant to the HMF and HMFII’s Class B and Class C Distribution Plans, a 

Fund may pay HIFSCO a fee of up to 1.00% of the average daily net assets attributable to those 

classes, 0.75% of which is a fee for distribution financing activities and 0.25% of which is for 

shareholder account services. 

80. Pursuant to the HMF and HMFII’s Class L Distribution Plans, a Fund may pay 

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related services attributable to Class L shares, calculated and payable monthly at an annual rate 

of 0.25% of the Fund’s average daily net assets attributable to Class L shares. 

81. Each of the Hartford Funds’ most recent Annual Reports further provides that 

each Fund’s 12b-1 fees are accrued daily and paid monthly. 

82. Defendant HIFSCO’s wrongdoing is especially blatant in the case of the Class 

B shares of the Hartford Funds – a class that was closed to new investments as of September 30, 

2009 (“Close Date”). Effective at the close of business on the Close Date, no new or additional 

investments were allowed in Class B shares of the Funds. 

83. Nonetheless, Defendant continues to charge the holders of the Hartford Funds’ 

Class B shares 12b-1 fees for distribution and marketing activities for this share class, even 

though the sale of Class B shares is closed to new investments. For instance, a shareholder of the 

Hartford Funds may pay HIFSCO a fee of up to 1.00% of the average daily net assets attributable 

to Class B shares, 0.75% of which is a fee for distribution financing activities and 0.25% of 

which is for shareholder account services. Class B shareholders are also required to pay a 

significant back-load charge when the holders of this class seek to redeem their investment(s) in 

the Funds’ Class B shares. According to the Harford Disclosure Materials, the maximum 

deferred sales charge (load) (as a percentage of purchase price or redemption proceeds, 

whichever is less) is 5.00% for Class B shares for the Hartford Funds. Class B shareholders are 

therefore forced to either: (1) stay in a class of shares that is closed to new investments and 

continue to pay significant distribution and marketing fees, or (2) pay a significant back-load 

charge if the shareholder seeks to redeem his/her Class B shares and avoid such useless 

distribution and marketing fees.

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84. Not only are the Class B 12b-1 fees that Plaintiffs paid to HIFSCO excessive for 

the reasons detailed above, the amounts HIFSCO charged with respect to Class A, Class B, Class 

C and Class L shares combined are improperly high. In one case, the 12b-1 fees are 3 times 

higher than the advisory and sub-advisory fees combined. See Table below: 

Hartford Fund 2009 

Total Advisory 

and SubAdvisory Fees 

2009 

Total 12b-1 

Fees 

12b-1 fees as a 

Percentage of 

Advisory and SubAdvisory Fees 

Combined

Advisers Fund $4,928,966 $3,144,687 63.80% 

Growth Opportunities Fund $15,948,779 $5,274,826 33.07% 

Inflation Plus Fund $6,321,876 $5,245,536 82.97%% 

Conservative Allocation Fund $298,999 $896,293 299.76% 

Global Health Fund $5,554,355 $1,812,431 32.63%% 

Totals $33,052,975 $16,373,773 49.54%

85. As an example of HIFSCO’s gouging on the 12b-1 fees paid by the Plaintiffs, 

the Hartford Funds issue Class Y shares, which pay no 12b-1 Distribution Fees. This class of 

shares was created to meet the demands of institutional investors who refused to purchase mutual 

fund shares obligating them to pay 12b-1 Distribution Fees because they, and Defendant 

HIFSCO, unlike Plaintiffs and the holders of shares in other share classes in the Funds, clearly 

understand that the payment of such fees benefits only Defendant HIFSCO. This further 

underscores the absence of any benefit to Plaintiffs. 

86. The existence of this “12b-1-fee free” class of shares (Class Y) demonstrates 

that the Funds’ Distribution Plans, including the 12b-1 fees, should never have been adopted or 

continued year after year. If the benefits achieved by virtue of these services or the economies of 

scale created by additional assets were shared with the Funds (as required by the enabling rule), 

then the institutional holders of the “12b-1-free” Class Y shares would be eager to pay them and 

obtain their benefit. The benefits created by economies of scale, however, were not shared with 

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the Plaintiffs or the Funds. The adoption and continuation of the distribution fees, therefore, is 

contrary to Rule 12b-1 and their receipt by Defendant HIFSCO violates Section 36(b). 

87. The 12b-1 fees paid by the Funds are excessive because they are based on the 

net asset value of the Hartford Funds and not on the distribution activity, if any, by Defendant 

HIFSCO, such as number of shares sold. Indeed, any portion of the fees paid to Defendant 

HIFSCO that are derived from market increases in the net asset value of the fund, rather than any 

distribution activity by Defendant HIFSCO, constitutes a breach of HIFSCO’s fiduciary duty to 

the Funds with respect to such compensation. 

88. Although Plaintiffs, and the other shareholders of the Hartford Funds, pay for 

marketing, selling and distributing each fund through the 12b-1 fees, the monetary benefits 

derived from attracting new shareholders largely accrue to Defendant HIFSCO, not the existing 

shareholders. As such, the 12b-1 fees are entirely a waste of fund assets. 

89. Plaintiffs, on behalf of the Hartford Funds, are entitled to recover the 12b-1 fees 

received (and continuing to be received) by HIFSCO in breach of its fiduciary duty to the Funds 

with respect to such compensation. The excessive distribution fees represent additional 

compensation for advisory services, and thus, are subject to an ICA § 36(b) claim.

B. THE HARTFORD FUNDS’ BOARDS OF DIRECTORS WERE NOT 

ACTING CONSCIENTIOUSLY IN APPROVING THE INVESTMENT 

MANAGEMENT AGREEMENTS AND RULE 12b-1 DISTRIBUTION 

PLANS 

90. In Jones, the Supreme Court adopted a fiduciary duty standard for § 36(b) that 

requires both a fair outcome and good faith in the negotiation process. See ¶31. Defendant 

failed to provide the Funds’ Directors with all necessary information, and the Directors did not 

act with sufficient care and conscientiousness in reviewing and approving the management and 

12b-1 fees. The fee-setting process undertaken by the Boards lacked the requisite integrity, care 

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and good faith and was, therefore, defective. It is this defective process that has produced the 

excessive fees paid to HIFSCO in violation of ICA § 36(b). 

91. Fund directors have a fiduciary duty to mutual funds and to their shareholders 

(who individually have no power to negotiate such fees for the funds) to negotiate fees that are 

both beneficial to the mutual funds and are comparable to fees that would be negotiated at arm’s 

length. 

92. Each Hartford Board, in this case the identical nine people for all 88+ funds, has 

a separate and distinct fiduciary duty to each Hartford Fund to enter into serious and substantive 

negotiations with respect to all fees charged by Hartford Management, including HIFSCO. See

Am. Bar. Ass’n, Fund Director’s Guidebook (2d ed. 2003), at 10 (“Although there are areas of

common interest among the funds, the directors must exercise their specific board 

responsibilities on a fund-by-fund basis.”). Correspondingly, Hartford Management, including 

HIFSCO, has a reciprocal fiduciary duty to each mutual fund under its management, including 

each Hartford Fund, to assure that the fees it charges for services rendered are reasonably related 

to the services provided and correspond with fees that would be charged in an arm’s length 

negotiation. 

1. Investment Management Agreements 

93. Congress has fortified fund directors’ oversight responsibilities by adopting § 

15(c) of the ICA, requiring directors to be adequately informed of the terms of any investment 

management contracts. 

94. ICA § 15(c) requires investment advisers to furnish documents and other 

information so that fund directors can make informed and independent decisions when 

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evaluating investment advisory contracts. See 15 U.S.C. § 80a-15(c). This section also gives 

directors the authority to demand such information from advisers. Id.

95. The Hartford Disclosure Materials indicate that the Boards of Directors for 

HMF and HMFII are composed of the identical nine people, who meet and make decisions for 

all of the Hartford Funds. This same group of directors oversees and makes decisions for all 

approximately 88 funds in the Hartford Funds Complex. No public information is disclosed on 

the length of the meetings of these Boards of Directors other than the fact that they took place 

over two consecutive days. The issues that would need to be covered in these board meetings 

include the numerous corporate governance, portfolio management, portfolio pricing, audit and 

accounting issues that a mutual fund board must review annually under applicable statutes, rules 

and regulations in overseeing or governing a particular mutual fund, and would also include the 

annual renewals of the Investment Management Agreements and the Rule 12b-1 Distribution Fee 

Agreements. 

96. The Hartford Directors are well compensated for their services with a fee that 

consists of an annual retainer component and a meeting fee component as well as retirement 

benefits. See ¶47. As a result of the compensation they receive, Board membership in the 

Hartford Funds Complex is a lucrative part-time job for the Fund Directors. Further, the 

Directors’ continuation in the role of an Independent Director from year to year is at least 

partially dependent on the continued good will and support of Defendant HIFSCO. 

97. The independent or “non-interested” directors are supposed to be “watchdogs” 

for the Funds’ shareholders. However, since the same directors are charged with the oversight of 

all of the mutual funds (including over 88 funds) in the Hartford Funds Complex, regardless of 

the dedication, sophistication, and the individual educational and business qualifications of the 

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independent members of the Boards of Directors of the Hartford Funds, many of whom are 

otherwise fully employed in demanding positions of responsibility, the amount of documentation 

that must be reviewed for each meeting would be daunting if the directors were to look at each 

fund individually. 

98. The Boards do not hold separate meetings for each mutual fund. Instead, upon 

information and belief, the Boards’ practice has been to consider all funds at one time. 

According to each Fund’s Annual Report, the information related to the Boards’ discussion of 

the Gartenberg Factors is copied substantially verbatim for each Fund, and provides little, if any, 

supporting facts to conclude that the Boards undertook a thorough discussion of the relevant 

information for all 88+ funds within the Hartford Funds Complex during their two-day meeting. 

99. By analyzing the Funds on an aggregated basis, the Boards likely overlook 

Defendant’s higher profitability attributable to larger funds and prevents the Boards from 

carefully reviewing the fairness of investment management fees for individual funds. 

100. Furthermore, even if statutorily “non-interested,” the Directors are in all 

practical respects dominated and unduly influenced by Defendant in reviewing the fees paid by 

the Funds and their shareholders. In particular, upon information and belief, Defendant does not 

provide the directors with sufficient information to fulfill their obligations, a factor 

demonstrating that the fee-setting process lacked good faith and integrity, in violation of ICA § 

36(b). 

101. Truly independent boards of directors acting conscientiously would not have 

tolerated the investment management fees charged by Defendant HIFSCO, (which performed 

minimal, if any, advisory services), if they had obtained adequate information regarding, among 

other things: (1) the sub-advisory fees Defendant paid for the Hartford Funds and the services 

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received by the Funds from Defendant for the additional “premium” charged on top of the subadvisory fees; (2) the management fees charged and services provided by competitors with 

similar fund structures; the management fees charged and services provided to pension funds and 

other institutional clients of Defendant or its affiliates; (3) the economies of scale enjoyed by 

Defendant; and (4) the profitability of the Funds to Defendant (and how to evaluate the 

profitability data in light of economies of scale). 

102. In fact, Hartford has been the subject of SEC Cease and Desist proceedings 

regarding HIFSCO’s Financial Arrangements with Broker-Dealers for Shelf Space and 

HIFSCO’s failure to disclose the uses of Fund assets to the Board, resulting in a financial 

settlement. See November 8, 2006 Order, attached as Ex. 16. Under the November 8, 2006 SEC 

Order setting forth the terms of the settlement reached with HIFSCO and two other HIG 

subsidiaries, resolving the SEC’s Division of Enforcement’s investigation of HIG’s variable 

annuity and mutual fund operations related to directed brokerage and revenue sharing, HIFSCO 

(along with the other two HIG subsidiaries) was ordered to pay $55 million to settle charges of 

misrepresenting and failing to disclose to HMF and HMFII fund shareholders that fund assets 

were improperly used, in the form of directed brokerage commissions, to satisfy financial 

obligations to certain broker-dealers for the marketing and distribution of funds. Id. In light of 

the SEC Cease-and-Desist Order, the Boards should have been especially diligent in reviewing 

and approving any HIFSCO fee agreements. 

103. On information and belief, the Fund Directors rarely, if ever, questioned the 

adequacy or completeness of any information or recommendations provided by Defendant, 

including, for example, misleading representations by HIFSCO that it is difficult to anticipate 

whether and to what extent that economies of scale may be realized by HIFSCO as fund assets 

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grow over time. The evidence needed to establish the truth of these allegations is believed to be 

exclusively in the control of Defendant and is not in Plaintiffs’ possession at this time. 

104. The foregoing assures that the HMF and HMFII Directors do not understand 

Defendant HIFSCO’s true cost structure and, in particular, the economies of scale HIFSCO 

enjoyed in providing investment management services to the Funds. Indeed, the Boards of the 

HMF and HMFII knew that most, it not all, of the investment management services to the Funds 

were being provided by the Funds’ sub-adviser and not by Defendant HIFSCO, and that 

HIFSCO had previously been cited by the SEC for misappropriating fund assets through 

improper fees. Accordingly, the HMF and HMFII Boards violated their fiduciary responsibilities 

when they approved the payment of HIFSCO’s excessive investment management fees. 

2. 12b-1 Distribution Plans 

105. In addition to their annual review of the Investment Management Agreements, 

the Directors must also review the 12b-1 Plans on an annual basis. In particular, the directors 

must “request and evaluate . . . such information as may reasonably be necessary to an informed 

decision of whether such plan should be implemented or continued.” 17 C.F.R. § 270.12b-1(d). 

In addition, minutes must be maintained to record all aspects of the directors’ deliberation, and 

the directors must conclude “in light of their fiduciary duties under state law and under Sections 

36(a) and (b) of the ICA, that there is a reasonable likelihood that the Distribution Plans will 

benefit the company and its shareholders.” 17 C.F.R. § 270.12b-l(e). 

106. The Hartford Funds’ 12b-1 Distribution Plans have not been adopted in 

accordance with these requirements. In particular, the Boards could not have found that the 

Distribution Plans in general, or the 12b-1 fees in particular, benefit the Funds or their 

shareholders by generating savings from economies of scale in excess of the cost of the plan. In 

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fact, despite yearly increases in total assets held by the Funds, both the management fee and total 

12b-l fees received by Defendant increased as assets grew, thus depriving the Funds of the 

benefit of these economies of scale. 

107. A recent report written by Dr. Lori Walsh, a financial economist at the SEC, 

studied “whether shareholders do, in fact, reap the benefits of 12b-1 plans” and concluded that 

shareholders, as distinguished from the fund advisers, do not benefit from 12b-1 fees: 

Prior studies have provided evidence that shareholders are not 

receiving sufficient benefits from expense scale economies to 

offset the 12b-1 fee. In fact most of the studies show that expense 

ratios are higher for funds with 12b-1 fees by almost the entire 

amount of the fee. This study confirms these results using a more 

recent dataset . . . In all, the evidence demonstrates that 12b-1 

plans are successful at attaining faster asset growth; however, 

shareholders do not obtain any of the benefits from the asset 

growth. This result validates the concerns raised by opponents of 

12b-1 plans about the conflicts of interest created by these plans. . . 

12b-1 plans do seem to be successful in growing fund assets, but 

with no apparent benefits accruing to the shareholders of the fund. 

Although it is hypothetically possible for most types of funds to 

generate sufficient scale economies to offset the 12b-1 fee, it is not 

an efficient use of shareholder assets. ... Fund advisers use 

shareholder money to pay for asset growth from which the adviser 

is the primary beneficiary through the collection of higher fees. 

Lori Walsh, The Costs and Benefits to Fund Shareholders of 12b-1 Plans: An Examination of 

Fund Flows, Expenses and Returns (2004), at 4, 18. 

108. Despite the fact that Plaintiffs and the other shareholders of the Hartford Funds 

have enjoyed no benefits from the Distribution Plans, and despite the fact that the Distribution 

Plans have allowed Defendant to extract additional unreasonable and excessive compensation 

from Plaintiffs and the other shareholders of the Funds, the Hartford Funds’ Directors 

nevertheless have continued to approve, year after year, continuation of the Distribution Plans in 

violation of both Rule 12b-1 and ICA §§ 12 thereby establishing a violation of § 36(b). 

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109. A truly independent board would not have tolerated the 12b-1 fees charged by 

Defendant if it had obtained adequate information regarding the Distribution Plans and the 

benefit (or lack thereof) to the shareholders of the Plans (such as whether the Distribution Plans 

should have been implemented and whether they should have been continued). 

110. Based on the foregoing, the Hartford Funds Boards did not (and, indeed, were 

unable to) act conscientiously and fulfill their fiduciary duty when they approved fees. In 

contravention of its duty to provide to the Boards all information necessary to evaluate terms of 

the Hartford Funds Investment Management Agreements and Distribution Plans, HIFSCO did 

not furnish such necessary information to the Boards for purposes of its review of the Funds’ 

investment management agreements and 12b-1 Distribution Plans. See 15 U.S.C. § 80a-15(c); 

17 C.F.R. § 270.12b-1(d). Thus, the Boards were unable to conduct informed arm’s-length 

negotiations when approving the fees charged to the Funds. 

111. Alternatively, if HIFSCO did provide the Boards with the necessary information 

to review the Funds’ Investment Management Agreements and 12b-1 Distribution Plans, then the 

Boards acted unconscientiously by continuing to approve the excessive management and 12b-1 

fees. 

112. The Supreme Court has instructed that where, as here, “the board’s process was 

deficient [and/] or the adviser withheld important information, the court must take a more 

rigorous look at the outcome.” Jones, 120 S. Ct. at 1430. As described herein, the deficient feesetting process resulted in fees that constitute a § 36(b) breach of HIFSCO’s fiduciary duty to the 

Funds with respect to such compensation. 

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C. COMPARATIVE FEE STRUCTURES CHARGED TO NON-MUTUAL 

FUND CUSTOMERS AND OTHER MUTUAL FUND COMPLEXES FOR 

SIMILAR INVESTMENT MANAGEMENT SERVICES DEMONSTRATE 

THAT HIFSCO HAS CHARGED THE FUNDS EXCESSIVE FEES THAT 

BREACHED HIFSCO’S FIDUCIARY DUTY

113. An analysis of: (1) the fees paid by Defendant’s sub-advisors, (2) investment 

management fees charged by Defendant’s competitors to mutual funds comparable to the 

Hartford Funds, and (3) the management fees charged by Hartford to third-party institutional 

clients, including non-mutual fund customers, demonstrates that HIFSCO has charged the 

Hartford Funds excessive investment management and distribution fees that violate HIFSCO’s 

fiduciary duty with respect to the receipt of compensation. The following relevant comparative 

fee structures establish that HIFSCO is charging advisory fees to the Funds that are 

disproportionate to the value of the services rendered. 

1. Fee Structure of Defendant’s Sub-Advisors 

114. Defendant HIFSCO hired sub-advisors for all of the Hartford Funds that 

assumed the obligation of providing essentially all of the substantive investment advisory 

services to their designated funds. As each sub-advisor is a for-profit investment management 

company that negotiated its fee with Defendant, the fees they charge provide a guidepost of the 

cost of the investment advisory services provided to the Hartford Funds, presumably including a 

comfortable profit margin. Compared to the fees charged by the sub-advisors who actually 

perform the substantive advisory services to the Hartford Funds, the additional fees charged by 

Defendant for the little, if any, services to the Hartford Funds are unfair and excessive. 

115. While Plaintiffs do not challenge the fees paid to the sub-advisers of the 

Hartford Funds, those rates do provide a measure of how much the investment advisory services 

cost (and the economies of scale realized by the advisors). Indeed, the fees charged by each 

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Funds’ sub-adviser is indicative of the fee the Funds should pay for the investment management 

services. See ¶154. Defendant charges far more than the sub-advisors it hires for the Funds (i.e., 

Wellington and HIMCO) even though the sub-advisors assume the obligations of HIFSCO to 

provide investment advisory services to their designated funds. 

116. Since Defendant HIFSCO’s investment management fees charged to the 

Plaintiffs, and the other shareholders of the Hartford Funds, and collected by HIFSCO were far 

in excess of the sub-adviser fee amount, Defendant HIFSCO’s fees were necessarily so 

disproportionately large that they bore no reasonable relationship to services rendered and could 

not have been the product of arm’s-length bargaining. 

2. Fees Charged to Other Mutual Fund Complexes For Similar 

Investment Management Services 

117. Other investment advisers who offer services to funds similar to the Hartford 

Funds charge substantially less than Defendant. On information and belief, the services provided 

by these other advisers are the same or substantially similar management services that Defendant 

HIFSCO provides to shareholders of the Hartford Funds. Indeed, the fee structure imposed by 

HIFSCO on the Hartford Funds far exceeded the fees that would be paid as a result of arm’slength bargaining. 

118. For example, Wellington, the sub-adviser to the Hartford Global Health Fund, 

the Hartford Growth Opportunities Fund and the Hartford Advisers Fund, has also been engaged 

by Vanguard to provide investment advisory services to a number of the Vanguard mutual funds. 

While Vanguard provides services to the Vanguard funds at cost, the investment management 

services for its actively managed funds are provided by external managers, such as Wellington, 

who subcontract with Vanguard for a negotiated fee and earn a reasonable profit for its services. 

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119. Among others, Wellington provides management services to the Vanguard 

Health Care Fund, which is classified as a health fund; to the Vanguard Wellington Fund, which 

is classified as a moderate allocation fund; and to the Vanguard Morgan Growth, which is 

classified as a large cap growth fund. Shareholders of these Vanguard Funds pay significantly 

lower investment management fees than the Hartford Global Health Fund, the Hartford Advisers 

Fund, and the Hartford Growth Opportunities Fund, which are classified as health, moderate 

allocation and large cap growth funds, respectively. The following table contains a side-by-side 

comparison of the management fee schedules for the Hartford Funds, including the fees that 

Wellington charges for providing substantially similar advisory services to the Hartford Funds, 

with the fee schedules charged to comparable Vanguard funds: 

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Hartford Fund HIFSCO Fee Schedule 

(annual rate based on 

average daily net assets) 

Wellington Fee for 

Providing Sub-Advisory 

Services to the Hartford 

Funds 

Vanguard 

Fund 

(comparable 

investment 

classification) 

Most Recent Fee 

Schedule for 

Vanguard 

Funds (based on 

average daily 

net assets) 

Hartford Global 

Health Fund 

(Health) 

First $500 million – 0.9000% 

Next $500 million – 0.8500% 

Next $4 billion – 0.8000% 

Next $5 billion – 0.7975% 

Amt. over $10B – 0.7950% 

First $100 million – 0.4500% 

Next $400 million – 0.3500% 

Amt. over $500M – 0.3000% 

Vanguard 

Health Care 

Fund 

(Health) 

For the six 

months ended 

July 31, 2010, 

investment 

advisory fee 

represented: 

Annual rate of 

0.15% of the 

fund’s average 

net assets 

Hartford 

Advisers Fund 

(Moderate 

Allocation) 

First $500 million – 0.6900% 

Next $500 million – 0.6250% 

Next $4 billion – 0.5750% 

Next $5 billion – 0.5725% 

Amt. over $10B – 0.5700% 

First $50 million – 0.2200% 

Next $100 million – 0.1800% 

Next $350 million – 0.1500% 

Amt. over $500M – 0.1250% 

Vanguard 

Wellington 

Fund 

(Moderate 

Allocation) 

For the year 

ended November 

30 2010, the 

investment 

advisory fee 

represented: 

Annual rate of 

0.07% of the 

fund’s average 

net assets 

Hartford 

Growth 

Opportunities 

Fund 

(Large Cap 

Growth) 

First $100 million – 0.9000% 

Next $150 million – 0.8000% 

Next $4.75 billion – 0.7000% 

Next $5 billion – 0.6975% 

Amt. over $10B – 0.6950% 

All Assets – 0.2700% Vanguard 

Morgan 

Growth Fund 

(Large Cap 

Growth) 

For the year 

ended September 

30, 2010, the 

investment 

advisory fee 

represented: 

Annual rate of 

0.16% of the 

fund’s average 

net assets 

120. Had the Vanguard investment management fee schedules been applicable to the 

Hartford Global Health Fund, the Hartford Advisers Fund and the Hartford Growth 

Opportunities Fund, those Funds would have saved millions of dollars in 2009 alone. For 

example, the first breakpoint that HIFSCO charges to the Hartford Growth Opportunities Fund 

does not start until $100 million at 90 basis points, which is almost 5.5 times greater than the 

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advisory fee schedule for Vanguard’s comparable large cap growth funds. See ¶69. In the case 

of the Harford Global Health Fund, the first breakpoint in HIFSCO’s fee schedule does not even 

start until $500 million at 90 basis points, which is 6 times greater than the advisory fee schedule 

for Vanguard’s comparable health fund. Id. Similarly, the Harford Advisers Fund’s first 

breakpoint of 69 basis points at $500 million in HIFSCO’s fee schedule is almost 10 times 

greater than the advisory fee schedule for Vanguard’s comparable moderate allocation fund. Id.

121. The Vanguard fees set forth in the above table (¶119) are appropriate fee 

comparisons for the fees Defendant HIFSCO should have been charging Plaintiffs, and the other 

shareholders of the Hartford Funds for investment management services. As evidenced by the 

following table, the services provided by Wellington to the Vanguard Funds are substantially 

comparable to the services Defendant HIFSCO provides to the Hartford Funds. 

Investment 

Advisor 

Funds Investment Management Services Performed by 

Investment Advisor 

HIFSCO Hartford Funds (a) provide investment advice and recommendations 

to each fund, (b) supervise continuously the 

investment program of each fund and determine what 

securities should be bought and sold by each fund, 

(c) arrange for the purchase and sale of investments 

for each fund, and (d) provide economic and 

statistical data and/or other information as HIFSCO

shall deem appropriate or as shall be requested by the 

Board of Directors. 

Wellington Vanguard Funds (a) manage the investment and reinvestment of the 

assets of the fund; (b) continuously review, 

supervise, and administer an investment program for

the fund; (c) determine the securities to be purchased 

or sold for the fund; (d) provide the fund with records 

concerning Wellington’s activities; and (d) render 

regular reports to the Board of Trustees. 

122. Further, HIFSCO’s 12b-1 fee structure imposed by HIFSCO on the Hartford 

Funds far exceeded the fees that would be paid as a result of arm’s-length bargaining. For 

example, the comparable Vanguard funds discussed above do not charge any 12b-1 fees: 

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Hartford Fund 12b-1 Fee 

Class A 

12b-1 Fee

Class B 

12b-1 Fee 

Class C 

12b-1 Fee 

Class Y 

Vanguard Fund 

(comparable 

investment 

classification) 

12b-1 Fee

Investor 

Share 

Class 

Hartford Global 

Health Fund 

(Health) 

0.25 % 1.00 % 1.00 % None Vanguard Health 

Care Fund 

(Health) 

None 

Hartford 

Advisers Fund 

(Moderate 

Allocation) 

0.25 % 1.00 % 1.00 % None Vanguard 

Wellington Fund 

(Moderate 

Allocation) 

None 

Hartford 

Growth 

Opportunities 

Fund 

(Large Cap 

Growth) 

0.25 % 1.00 % 1.00 % None Vanguard 

Morgan Growth 

Fund 

(Large Cap 

Growth) 

None 

3. Fees Charged By Hartford to Institutional Clients for Similar 

Investment Management Services 

123. Defendant and/or its affiliated entities also provide investment management 

services to third-party institutional, or separately managed, accounts. 

124. In Jones, the Supreme Court indicated that a court, in assessing an investment 

adviser’s fiduciary duty, should give comparisons between management fees charged to an 

adviser’s mutual funds and management fees charged to its independent clients “the weight that 

they merit in light of the similarities and differences between the services.” 130 S. Ct. at 1428. 

125. Here, the services that Hartford provides to the institutional accounts are 

substantially similar, if not identical, to the investment management services Defendant provides 

to the Funds. Indeed, the Hartford Funds pay separately pursuant to separate agreements for 

services that are not provided to non-mutual fund clients.14 As a result, the comparison of the 

 

14 For example, the Hartford Funds have entered into a separate Fund Accounting Agreement 

pursuant to which they pay fees to Hartford Life Insurance Co. for accounting services. See Ex. 

10. Similarly, the Funds pay Hartford Administrative Services Company separately for 

administrative and transfer agency services. See Ex. 7. 

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investment management fees HIFSCO charges to the Funds to the fees charged by Hartford to 

the institutional accounts is entitled to considerable weight. 

126. Although the investment management services provided to the Funds are 

virtually identical to services provided to the institutional accounts, and therefore are directly 

comparable, the fees charged to the Funds are materially higher than the fees charged to the 

institutional accounts. 

127. While a “manager may encounter different levels of fixed and variable research 

costs depending on the type of the portfolio, . . . the fundamental management process is 

essentially the same for large and small portfolios, as well as for pension funds and mutual funds. 

The portfolio owner’s identity (pension fund versus mutual fund) should not logically provide a 

reason for portfolio management costs being higher or lower.” See John P. Freeman & Stewart 

L. Brown, Mutual Fund Advisory Fees: The Cost of Conflicts of Interest, 26 J. CORP. L. 610, at 

627-28 (2001) (the “Freeman & Brown Study”), attached as Ex. 17. Indeed, “a mutual fund, as 

an entity, actually is an institutional investor. When it comes to fee discrepancies, the difference 

between funds and other institutional investors does not turn on ‘institutional status,’ it turns on 

self-dealing and conflict of interest.” Id. at 629 n.93. Accordingly, the “‘apples-to-apples’ fee 

comparisons between equity pension managers and equity fund managers can be most difficult 

and embarrassing for those selling advice to mutual funds.” Id. at 671-72. 

128. For example, HIMCO, an affiliate of HIFSCO and sub-adviser to two of the 

Hartford Funds at issue here, provides investment management services to employee benefit 

plans and/or mutual funds unaffiliated with Hartford, such as the State Board of Administration 

of Florida, the State of Connecticut, and Montgomery Street Income Securities, Inc. 

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129. Although the investment management services that HIMCO provides these 

institutional accounts are the same as the investment management services that HIFSCO 

provides to the Funds (to whom HIFSCO owes a fiduciary duty), the Funds pay investment 

management fees that are significantly higher than those paid by the institutional clients, who 

bargain at arm’s-length over fees. For example: 

a. For the fiscal year ending December 31, 2009, HIMCO 

charged Montgomery Street Income Securities, Inc., a closed 

end mutual fund, a total annual investment management fee of 

approximately 0.25% of the average net assets managed. 

b. HIMCO provides investment management services to a fixed 

income account for the State of Connecticut. In exchange for 

these investment management services, the State of 

Connecticut pays approximately 9 to 11 basis points (.09% to 

.11%).15 In fiscal year 2009, HIMCO received a fee of 

approximately $444,000 for advising an approximately $407 

million account. Meanwhile, in 2009, the Hartford Inflation 

Plus Fund, a fixed income fund, with average assets under 

management of $1.5 billion, paid approximately $4.5 million 

for the same investment management services that the State of 

Connecticut received at a fraction of the price. In exchange for 

these investment management services provided by HIFSCO, 

Plaintiffs, and other shareholders, invested in the Hartford 

Inflation Plus Fund paid approximately 52 basis points. 

c. HIMCO also manages an approximately $2 billion fixed 

income account for the State Board of Administration of 

Florida. For fiscal years 2007-2008 and 2008-2009, the State 

Board of Administration of Florida paid 8 basis points and 10 

basis points, respectively, to the investment advisers of its 

fixed income accounts.16

 

130. In 2009, the Hartford Inflation Plus Fund, a fixed income fund, paid investment 

management fees to HIFSCO that were as much as 5 to 6 times higher in basis points than what 

 

15 These figures are derived from reported fiscal year end assets managed by HIMCO and total 

fees paid to HIMCO by fiscal year. 

16 Although the precise fee charged by HIMCO is not reported, it is unlikely that the fees 

HIMCO charges would deviate materially from the reported aggregate fee, particularly given 

that the fee is in line with what HIMCO charges the State of Connecticut. 

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HIMCO charges institutional clients to provide investment management services to fixed income 

accounts. See ¶69. At the Harford Inflation Plus Fund’s current level of assets ($1.5 billion), the 

difference in investment management fees that HIFSCO charged that Fund, as compared to the 

investment management fees that HIMCO charges its institutional clients, translates to over $6 

million per year.

131. That Defendant and its affiliates charge third parties far lower fees than they are 

charging the Hartford Funds, to whom they owe a fiduciary duty, for the same services 

demonstrates that the investment management fees charged constitute a breach of HIFSCO’s 

fiduciary duty to the Funds with respect to such compensation. 

D. THE ECONOMIES OF SCALE ENJOYED IN CONNECTION WITH THE 

INVESTMENT MANAGEMENT AND DISTRIBUTION SERVICES 

WERE NOT PASSED ON TO THE PLAINITFFS AND OTHER 

SHAREHOLDERS OF THE FUNDS AS REQUIRED BY SECTION 36(b), 

BUT WERE KEPT BY DEFENDANT HIFSCO IN VIOLATION OF ITS 

FIDUCIARY DUTY 

132. The amount of the compensation received by the adviser should be evaluated in 

context with the economies of scale realized by a fund. Economies of scale are created when 

assets under management increase more quickly than the cost of advising and managing those 

assets. The work required to operate a mutual fund does not increase proportionately with the 

assets under management. 

[I]nvestment management efforts, the most important (and most 

expensive) input into portfolio management, do not increase along 

with portfolio size. A portfolio manager can invest $5 billion 

nearly as easily as $1 billion and $20 billion nearly as easily as $10 

billion. (Size may impair performance, but it imposes little 

logistical challenge.) 

Swensen, Unconventional Success: A Fundamental Approach to Personal Investment 238. 

Therefore, “[a]s scale increases, fees as a percentage of assets ought to decline, allowing both 

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fund manager and fund shareholders to benefit.” Id. Indeed, break points “reflect the economic 

reality of the direct relationship between decreasing marginal costs and increasing portfolio 

size.” Id. According to another fund industry expert, John C. Bogle, the economies of scale 

generated in the mutual fund portfolio management and research business are “little short of 

staggering.” John C. Bogle, The Battle for the Soul of Capitalism 154 (2005). 

133. As an example, if a fund has fifty million dollars ($50,000,000) of assets under 

management and is charged a fee of 75 basis points (100 basis points = 1%), the fee equals 

$375,000 per year. A comparable mutual fund with five hundred million dollars ($500,000,000) 

of assets under management would generate a fee of three million seven hundred and fifty 

thousand dollars ($3,750,000). Similarly, a mutual fund worth five billion dollars 

($5,000,000,000) would generate a fee of thirty-seven million, five hundred thousand dollars 

($37,500,000) per year. 

134. As assets under management increase, however, the cost of providing services 

to additional assets does not increase at the same rate, resulting in tremendous economies of 

scale. In other words, it simply does not cost a fund’s adviser ten times as much to render 

services to a ten billion dollar ($10,000,000,000) fund as compared to a one billion dollar 

($1,000,000,000) fund. In fact, the investment management services or securities selection 

process for a ten billion dollar fund and a one billion dollar fund, or even a one million dollar 

fund, are virtually identical, generating enormous economies of scale. Indeed, at some point, the 

additional cost to advise each additional dollar in the fund (whether added because of a rise in 

the value of the securities or additional contributions by current or new shareholders) approaches 

a number at or close to zero. 

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135. The existence of economies of scale in the mutual fund industry has been 

confirmed by both the SEC and the Governmental Accounting Office (the “GAO”). Both 

conducted in-depth studies of mutual fund fees in 2000, and both concluded that economies of 

scale exist in the provision of management services. See SEC Division of Investment 

Management: Report on Mutual Fund Fees and Expenses (Dec. 2000) (“SEC Report”), at 30-31, 

attached as Ex. 18; GAO, Report on Mutual Fund Fees to the Chairman, Subcommittee on 

Finance and Hazardous Materials; and the Ranking Member, Committee on Commerce, House 

of Representatives (June 2000) (“GAO Report”), at 9, attached as Ex. 19. The GAO has 

estimated as much as 64% of mutual fund asset growth has been the result of market appreciation 

rather than additional purchases of new shares of a fund. Id.

136. In addition, the most significant academic research undertaken since the 

Wharton School study in the 1960s (see Wharton School of Finance & Commerce, 87th Cong., A 

Study of Mutual Funds 493 (Comm. Print 1962)) has proven that economies of scale are not 

being passed along to mutual fund shareholders – in violation of Defendant’s duty to do so under 

§ 36(b) and Rule 12b-1. See Freeman & Brown Study at 661, Ex. 17. The Freeman & Brown 

Study noted: “The existence of economies of scale has been admitted in SEC filings made by 

fund managers and is implicit in the industry’s frequent use of fee rates that decrease as assets 

under management increase. Fund industry investment managers are prone to cite economies of 

scale as justification for business combinations.” Id. at 620. 

137. Economies of scale exist not only fund by fund but also exist with respect to an 

entire fund complex and even with respect to an investment adviser’s entire scope of operations, 

including services provided to institutional and other clients. Id. at 621 n.62 (citing Victoria E. 

Schonfeld & Thomas M.J. Kerwin, Organization of a Mutual Fund, 49 BUS. LAW 107 (1993)). 

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138. As fund portfolios grow, they quickly create economies of scale and eventually 

the incremental cost of servicing additional assets approaches zero. As the GAO confirms, it is 

possible for the adviser to service the additional assets with zero additional costs. See GAO 

Report, at 9, Ex. 19 (noting that growth from portfolio appreciation is unaccompanied by costs). 

The Freeman & Brown Study at 619, n.43, Ex. 17, also noted that investment advisors have 

benefited by garnering “increased fees from the general increase in market prices with no 

commensurate efforts on their part.” 

139. Although significant economies of scale exist for each of the Hartford Funds, 

the associated cost savings largely have been appropriated for the benefit of Defendant rather 

than being shared with the Funds. The economies-of-scale benefits that have been captured and 

misappropriated by Defendant can and have generated huge unreasonable and excessive, 

undeserved profits for HIFSCO in breach of its fiduciary duty to the Funds with respect to such 

compensation. 

140. The management fees received by HIFSCO are paid as a varying percentage of 

assets under management. The fees vary based on the amount of assets under management, and 

are reduced as the total amount of assets under management increase. This fee structure, known 

as “breakpoints,” implicitly recognizes the economies of scale and gives the appearance that the 

Funds share in those benefits. 

141. The 12b-1 distribution fees are also paid to HIFSCO based upon a percentage of 

net assets of each of the Funds. Defendant HIFSCO purportedly collects these fees in order to 

grow or stabilize the assets of the Hartford Funds so that the Funds can benefit from economies 

of scale through reductions in other fees, such as management and administrative fees. 

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142. These benefits can and should have been shared with mutual funds and their 

shareholders by reducing and/or eliminating the management and distribution fees and other 

costs charged to the funds by Defendant. 

143. In the case of the Hartford Funds, however, HIFSCO has failed to share any 

meaningful savings with the Funds. While the Investment Management Agreements include 

advisory fee breakpoints, these breakpoints are meaningless, because as a practical matter, they 

did not pass on any of the economies of scale to Plaintiffs, and the other shareholders of the 

Funds. The mere existence of breakpoints does not mean that economies of scale are adequately 

passed on to shareholders of the Funds. Indeed, the breakpoints are designed by Defendant 

HIFSCO to benefit itself rather than the Funds. As described below, the initial breakpoints are 

too high, the breakpoints are spaced too far apart, and the reductions made at breakpoints are far 

too small, thereby depriving Plaintiffs and the Funds of the benefits of the economies of scale 

created by the contribution of their capital to the Funds. 

144. For instance, the first breakpoint occurs at $500 million for the Hartford 

Advisers Fund, the Hartford Inflation Plus Fund, the Hartford Global Health Fund, and the 

Hartford Conservative Allocation Fund, and at $250 million for the Hartford Growth 

Opportunities Fund. See ¶69. Significant economies of scale are created by the Plaintiffs’ and 

the other shareholders’ investments in the Funds long before this initial breakpoint, but they are 

not shared with the Funds. Defendant HIFSCO retains for itself the benefits created by the 

economies of scale between breakpoints. A flat management fee (in dollars, not percentage) or a 

breakpoint approaching zero would allow the Funds to capture economies of scale that rightfully 

belongs to them under Section 36(b), while also allowing Defendant HIFSCO to earn a fair and 

competitive profit for its services. 

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145. HIFSCO has also negotiated a breakpoint schedule with Wellington on at least 

two of its funds (Hartford Advisers Fund and Hartford Global Health Fund) by which Wellington 

grants fee reductions at several levels prior to $500 million in assets under management. See

¶69. On the other hand, the breakpoint schedule that HIFSCO charges to those Funds does not 

even start until $500 million. Id. For example, when HIFSCO negotiated the breakpoint 

schedule with Wellington, the sub-advisor for the Hartford Advisers Fund, HIFSCO negotiated a 

schedule under which Wellington granted fee reductions beginning after this Fund reaches $50 

million in assets and drops to just 12.5 basis points on any amount over $500 million. Id. In 

contrast, HIFSCO offers Plaintiffs, and the other shareholders of the Hartford Advisers Fund, 

their first breakpoint only after assets reach $500 million at 69 basis points, and HIFSCO’s fee 

only drops to 57 basis points when there are more than $10 billion in assets under management. 

Id.

146. The cost of Defendant’s minimal oversight function should not increase as fund 

assets increase. As a result, HIFSCO fails to share with the Funds’ shareholders the benefits of 

economies of scale realized from the HMF Wellington Agreement and generally fails to 

meaningfully share economies of scale with the Fund’s shareholders regarding the fees HIFSCO 

collects from the Funds. 

147. Wellington’s sub-advisory fees are substantially lower than HIFSCO’s advisory 

fees for the Funds Wellington sub-advises. HIMCO charges a sub-advisory fee “at cost” and 

which is substantially lower than HIFSCO’s advisory fees for the two Funds sub-advised by 

HIMCO. By subcontracting with Wellington and/or HIMCO to provide sub-advisory and/or 

investment services at a fraction of HIFSCO’s fee, HIFSCO receives fees that are 

disproportionate to the services it renders. HIFSCO’s receipt of these fees is particularly 

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egregious given that the cost of the “oversight” function it performs for the Funds should not 

increase as Fund assets increase, resulting in enormous economies-of-scale benefits that HIFSCO 

retains for itself but that should be shared with the Funds and their shareholders. 

148. As assets under management have grown, the management and distribution fees 

paid to HIFSCO have grown dramatically, despite the economies of scale realized by Defendant. 

Defendant has not shared with the Plaintiffs, and other shareholders of the Funds, the economies 

of scale it has gained from that growth. 

149. Given that the investment management and distribution fees paid to HIFSCO 

are unfair, unreasonable, and excessive, especially when compared to the rates charged by the 

sub-advisers, by competitors or to institutional clients, the excess profits resulting from these 

economies of scale belong to the Plaintiffs and the other shareholders of the Funds. 

Nevertheless, the economies of scale enjoyed by Defendant HIFSCO with respect to the Hartford 

Funds have not been adequately shared with the Funds, as required by § 36(b) and Rule 12b-1, in 

breach of HIFSCO’s § 36(b) fiduciary duty to the Funds with respect to such compensation. 

E. THE COSTS AND PROFITABILITY OF PROVIDING INVESTMENT 

MANAGEMENT AND DISTRIBUTION SERVICES DID NOT JUSTIFY 

HIFSCO’S EXCESSIVE FEE 

150. “[T]he ‘profitability of the fund to the adviser’ [must] be studied in order that 

the price paid by the fund to its advisor be equivalent to ‘the product of arm’s-length 

bargaining.’” See Freeman & Brown Study, at 661, Ex. 17. The profitability of a fund to an 

adviser-manager is a function of revenues minus the costs of providing services. 

151. Following discovery, Defendant’s true profitability can be determined on either 

an incremental basis or a full-cost basis. Defendant’s incremental costs of providing 

management services to Plaintiffs are believed to be nominal while the additional fees received 

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by Defendant are unreasonable and hugely excessive given that the nature, quality, and level of 

the services remain the same in breach of HIFSCO’s fiduciary duty to the Funds with respect to 

such compensation. On information and belief, a review of Defendant’s full costs of providing 

management services will also demonstrate the enormous profitability to Defendant of managing 

the Hartford Funds. 

152. The table in Paragraph 69 shows the investment management fee schedule that 

HIFSCO charges to each of the Funds as compared to the fee schedule that HIFSCO pays its 

sub-advisers to whom HIFSCO delegates the core of the investment management duties. 

153. While fees of less than 1% may seem inconsequential, these percentages 

translate into substantial fees when applied to Fund assets in the hundreds of millions, or even 

billions, of dollars. 

154. HIFSCO has collected investment management fees of over $250 thousand per 

year for its smallest funds (while paying the sub-adviser only $39 thousand per year) to nearly 

$11 million per year for the largest funds (while paying the sub-adviser only $5 million). See the 

following table. 

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2009 HARTFORD FUNDS HIFSCO FEES RETAINED AFTER PAYMENT TO SUBADVISERS WELLINGTON & HIMCO PURSUANT TO THE SAI 

Fund Investment 

Services/SubAdvisory 

Agreement 

Net Paid 

HIFSCO 

Net Paid 

Sub-Advisor

Difference Percent 

Retained 

by 

HIFSCO 

Hartford 

Advisers 

Fund 

Wellington $3,821,451 $1,107,515 $2,713,936 71.02% 

Hartford 

Growth 

Opportunities 

Fund 

Wellington $10,981,675 $4,967,104 $6,014,571 54.77% 

Hartford 

Inflation Plus 

Fund 

HIMCO $4,540,815 $1,781,061 $2,759,754 60.78% 

Hartford 

Conservative 

Allocation 

Fund 

HIMCO $259,330 $39,669 $219,661 84.70% 

Hartford 

Global 

Health Fund 

Wellington $3,870,087 $1,684,268 $2,185,819 56.48% 

Totals $23,473,358 $9,579,617 $13,893,741 

155. “[F]und managers ... routinely add a hefty ‘premium’ or ‘monitoring fee’ to the 

sub-advisers’ charge. True, the sub-adviser may charge only 30 bps for its investment advice, 

but the manager will typically pad the bill, adding an additional twenty to thirty basis points 

‘premium’ before passing along the advisory charge to fund shareholders.” Freeman, Brown & 

Pomerantz Study, at 117-118, Ex. 12. Indeed, “overall fee levels for sub-advised funds are 

substantially higher than for funds managed in-house.” Id. at 118. As demonstrated above, 

HIFSCO is no different, padding the bill by approximately $14 million dollars in fiscal year 2009 

alone, for providing few, if any, additional services to the Hartford Funds. 

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156. Despite delegating all or substantially all of its investment management duties 

to sub-advisers and performing little, if any additional work, HIFSCO retains between 55% and 

85% of these investment management fees, resulting in exorbitant profits. See ¶154. 

157. Put another way, the true cost of investment management services should 

represent 15% to 45% of HIFSCO’s fee to the Hartford Funds, which correlates to the fees 

charged by Wellington and/or HIMCO. In fact, as an external, for-profit sub-adviser, the fees 

charged by Wellington to HIFSCO include Wellington’s costs plus a reasonable profit. 

158. Indeed, the Hartford Funds’ disclosures characterize the HIMCO fees charged 

as “at cost.” See ¶69. Assuming arguendo that HIMCO’s sub-advisory services truly are 

provided “at cost” and do not include any markup or built-in profit, HIMCO’s cost to provide 

advisory services to the Hartford Inflation Plus Fund and the Hartford Conservative Allocation 

Fund in 2009 were at most approximately 12 basis points, and 1.8 basis points, respectively. For 

performing little, if any, additional services to the funds, HIFSCO nevertheless charged the 

Hartford Inflation Plus Fund a fee that is nearly 2.5 times, and in the case of the Hartford 

Conservative Allocation Fund a fee that is almost 6.5 times, HIMCO’s costs. 

159. This subcontracting arrangement led to fees that were disproportionate to 

services actually rendered and to enormous profits to HIFSCO for little or no work. 

160. These markups could not be the product of negotiations conducted at arm’s 

length and therefore constitute a breach of HIFSCO’s fiduciary duty to the Funds with respect to 

the receipt of such compensation. 

161. HIFSCO has also collected 12b-1 distribution fees of over $17,000,000 for the 

Funds. See the following table. 

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2009 HARTFORD FUNDS 12B-1 DISTRIBUTION FEES PURSUANT TO THE SAI 

Fund Class A Class B Class C Class L 

Hartford Advisers Fund $1,369,789 $825,322 $949,576 

Hartford Growth Opportunities Fund $2,265,142 $346,912 $1,747,200 $915,572 

Hartford Inflation Plus Fund $1,115,490 $859,514 $3,270,532 

Hartford Conservative Allocation Fund $287,954 $212,525 $395,814 

Hartford Global Health Fund $641,795 $364,786 $805,850 

Hartford Money Market Fund $383,511 $228,059 $439,974 

Totals $6,063,681 $2,837,118 $7,608,946 $915,572 

162. The cost of providing distribution and marketing services does not justify 

charging such an excessive fee, especially since Class B shares have been closed to new 

investments and the fees are not tied to any distribution activities. 

163. The 12b-1 fees were therefore disproportionate to the services actually rendered 

resulting in huge profits for HIFSCO. 

164. The 12b-1 fees could not be the product of negotiations conducted at arm’s 

length, especially given that institutional investors, investors with greater negotiating authority, 

refuse to pay 12b-1 fees, and therefore constitute a breach of HIFSCO’s fiduciary duty to the 

Funds with receipt of such compensation. 

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COUNT I 

AGAINST DEFENDANT HIFSCO PURSUANT TO ICA § 36(b) DERIVATIVELY 

ON BEHALF OF THE HARTFORD ADVISERS FUND, THE HARTFORD GLOBAL 

HEALTH FUND, THE HARTFORD GROWTH OPPORTUNITIES FUND, THE 

HARTFORD INFLATION PLUS FUND AND THE HARTFORD CONSERVATIVE 

ALLOCATION FUND (“COUNT I FUNDS”) 

(Investment Management Fees) 

165. The Plaintiffs repeat and reallege each and every allegation contained prior to 

Count I as if fully set forth herein. 

166. The Defendant had a fiduciary duty to the Count I Funds and their investors 

with respect to the receipt of compensation for services and payments of a material nature made 

by and to such Defendant. 

167. The fees charged by Defendant for providing investment management and/or 

advisory services to the Count I Funds breach HIFSCO’s fiduciary duty to the Count I Funds 

with respect to such compensation. 

168. This Count is brought by Plaintiffs derivatively on behalf of the Count I Funds 

against Defendant HIFSCO for breach of its fiduciary duties with respect to the receipt of 

compensation as defined by § 36(b). 

169. The fees received by Defendant breach HIFSCO’s fiduciary duty to the Count I 

Funds with respect to such compensation. By reason of the conduct described above, Defendant 

violated § 36(b) of the ICA. 

170. As a direct, proximate and foreseeable result of Defendant’s breaches of 

fiduciary duties in its role as investment adviser to the Count I Funds and their investors, the 

Count I Funds and their shareholders have sustained many millions of dollars in damages. 

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171. In charging and receiving inappropriate and unlawful compensation, and in 

failing to put the interests of the Plaintiffs, and other shareholders of the Count I Funds ahead of 

its own interests, Defendant has breached and continues to breach its statutory fiduciary duty to 

Plaintiffs in violation of § 36(b). 

172. The Plaintiffs seek, pursuant to § 36(b)(3) of the ICA, the “actual damages 

resulting from the breach of fiduciary duty” by Defendant, up to and including, “the amount of 

compensation or payments received from” the Count I Funds and earnings that would have 

accrued to Plaintiffs had that compensation not been paid. 

173. Alternatively, the Plaintiffs seek rescission of the contracts and restitution of all 

fees paid pursuant thereto. See 15 U.S.C. § 80a-46(a-b) of the ICA. When a violation of the 

ICA has occurred, a court may order that the Investment Management Agreements between 

Defendant and the Count I Funds on behalf of the Count I Funds be rescinded, thereby requiring 

restitution of all investment management fees paid to it by the Count I Funds from one year prior 

to the commencement of this action through the date of trial, together with interest, costs, 

disbursements, attorneys’ fees, fees of expert witnesses, and such other items as may be allowed 

to the maximum permitted by law. 

COUNT II 

AGAINST DEFENDANT HIFSCO PURSUANT TO ICA § 36(b) DERIVATIVELY 

ON BEHALF OF THE HARTFORD FUNDS 

(Unreasonable and Excessive Rule 12b-1 Distribution Fees and Extraction of Additional 

Compensation for Investment Management Services) 

174. The Plaintiffs repeats and reallege each and every allegation contained prior to 

Count II as if fully set forth herein. 

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175. The 12b-1 fees charged and received by Defendant HIFSCO were designed to, 

and did, extract additional compensation for Defendant’s management services in violation of 

Defendant’s fiduciary duty under ICA § 36(b). Even to the extent that the 12b-1 fees (as 

opposed to market forces, continued participant contributions or appreciation) contributed to the 

growth in assets of the Hartford Funds, the resulting economies of scale benefited only 

Defendant, and not the Hartford Funds or their shareholders, such as the Plaintiffs. 

176. In failing to pass along economies-of-scale benefits from the 12b-1 fees, and in 

continuing to assess 12b-1 fees pursuant to the HMF Distribution Plan and the HMFII 

Distribution Plan despite the fact that no benefits inured to the Hartford Funds or their 

shareholders, Defendant HIFSCO has violated, and continues to violate, the ICA and has 

breached and continues to breach its statutory fiduciary duty to Plaintiffs and the Funds in 

violation of § 36(b), both as a result of a negotiation process that lacked good faith and integrity 

and/or with respect to the substantive amounts of the fees. 

177. Plaintiffs seek, pursuant to ICA § 36(b)(3), the “actual damages resulting from 

the breach of fiduciary duty” by Defendant, up to and including, the “amount of compensation or 

payments received from” the Hartford Funds as well as earnings that would have accrued to 

Plaintiffs had that compensation not been paid. 

178. Alternatively, the Plaintiffs seeks rescission of the Rule 12b-1 Distribution 

Plans and restitution of all fees paid pursuant thereto. See 15 U.S.C. § 80a-46(a-b) of the ICA. 

When a violation of the ICA has occurred, a court may order that the contracts between the 

Defendant and the Hartford Funds on behalf of the Hartford Funds be rescinded, thereby 

requiring restitution of all 12b-1 fees paid to it by the Hartford Funds from one year prior to the 

commencement of this action through the date of trial, together with interest, costs, 

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disbursements, attorneys’ fees, fees of expert witnesses, and such other items as may be allowed 

to the maximum permitted by law. 

WHEREFORE, Plaintiffs demand judgment as follows: 

 (1) An order declaring that Defendant has violated and continues to violate ICA §§ 12, 

36(b) and Rule 12b-1 through the receipt of fees from the Hartford Funds that breach 

Defendant’s fiduciary duty with respect to the receipt of compensation. 

(2) An order preliminarily and permanently enjoining Defendant from further violations 

of the Investment Company Act. 

 (3) An order awarding compensatory damages on behalf of the Hartford Funds against 

Defendant, including repayment of all unlawful and/or excessive fees paid to it by the Hartford 

Funds or their security holders from one year prior to the commencement of this action through 

the date of the trial of this case, together with interest, costs, disbursements, attorneys’ fees, fees 

of expert witnesses, and such other items as may be allowed to the maximum extent permitted by 

law. Plaintiff reserves the right to seek punitive damages where applicable. 

 (4) An order rescinding the HMF HIFSCO Agreement and the HMFII HIFSCO 

Agreement between Defendant and the Count I Funds; and rescinding the Rule 12b-1 

Distribution Plans between the Defendant and the Hartford Funds, pursuant to 15 U.S.C. § 80a46(b), including restitution of all investment management fees paid to Defendant by the Count I 

Funds and the 12b-1 fees paid to it by the Hartford Funds from a period commencing one year 

prior to the commencement of this action through the date of the trial of this case, together with 

interest, costs, disbursements, attorneys’ fees, fees of expert witnesses, and such other items as 

may be allowed to the maximum extent permitted by law. 

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(5) The Plaintiffs respectfully request a trial by jury for all issues above so triable. 

 (6) Such other and further relief as may be just and proper under the circumstances. 

Dated: February 25, 2011 

 Respectfully submitted, 

 LEVY PHILLIPS & KONIGSBERG, LLP 

 

 By: s/ Danielle Disporto

 Danielle Disporto 

 Moshe Maimon 

 800 Third Ave. 

 New York, NY 10022 

 (212) 605-6200 

 SZAFERMAN, LAKIND, BLUMSTEIN, & BLADER, 

 P.C. 

 Arnold C. Lakind 

 Robert L. Lakind 

 101 Grovers Mill Road, Suite 200 

 Lawrenceville, NJ 08648 

 (609) 275-4511 

 

 Attorneys for Plaintiffs 

Case 1:11-cv-01083-RMB-KMW Document 1 Filed 02/25/11 Page 66 of 68 PageID: 66
64

HARTFORD FINANCIAL SERVICES GROUP, INC. 

HIG

HARTFORD FUNDS COMPLEX 

(including 5 investment management companies containing 88+ funds)

BOARDS OF DIRECTORS 

SAME 9 PEOPLE 

FOR ALL 88+ FUNDS 

(contained in 5 investment 

management companies)

HARTFORD MUTUAL 

FUNDS, INC.

HMF

Advisers Fund 

Global Health Fund

Inflation Plus Fund

Conservative Allocation Fund

Money Market Fund

HARTFORD MUTUAL 

FUNDS II, INC. 

HMFII

Growth Opportunities Fund

HARTFORD HLS SERIES FUND II, INC.

HARTFORD SERIES FUND, INC.

HARTFORD INCOME SHARES FUND, INC.

(Hartford investment management companies with funds that are 

not at issue in this complaint) 

 DEFENDANT HIFSCO

(wholly owned subsidiary of HIG)

INVESTMENT ADVISER/MANAGER FOR ALL FUNDS 

AT ISSUE IN THIS COMPLAINT

 • provides management and distribution services 

 • collects management fees & 12b-1 fees

TABLE I

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65

ADVISERS FUND

Adviser: HIFSCO

Fees: Advisory 

 12b-1

Sub-adviser: WELLINGTON

Fees: Sub-advisory (not 

challenged in Complaint)

GLOBAL HEALTH FUND

Adviser: HIFSCO

Fees: Advisory 

 12b-1

Sub-adviser: WELLINGTON

Fees: Sub-advisory (not 

 challenged in Complaint)

INFLATION PLUS FUND

Adviser: HIFSCO

Fees: Advisory 

 12b-1

Sub-adviser: HIMCO

Fees: Sub-advisory (not 

challenged in Complaint)

CONSERVATIVE ALLOCATION 

FUND

Adviser: HIFSCO

Fees: Advisory 

 12b-1

Sub-adviser: HIMCO

Fees: Sub-advisory (not 

 challenged in Complaint)

GROWTH OPPORTUNITIES FUND

Adviser: HIFSCO

Fees: Advisory

 12b-1

Sub-Adviser: WELLINGTON

Fees: Sub-advisory (not 

challenged in Complaint)

HMFII

open-end management investment company registered 

under the ICA 

TABLE II

HMF

open-end management investment company registered under the ICA

MONEY MARKET FUND

Adviser: HIFSCO

Fees: Advisory (not 

challenged in Complaint)

 12b-1

Sub-adviser: HIMCO

Fees: Sub-advisory (not 

 challenged in Complaint)

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