Of course, that doesn't mean it can't rebate the profit back to the funds which could then apply it as a fee rebate. That should be totally legal, as long as it pays taxes on the profit before it issues the rebate.
This whole territory has been explored before, by the way. Mutual insurance companies used to have this same problem, and eventually Congress just added another carveout to 501(c) and made the problem go away. That's the other alternative here, and it's definitely cleaner and probably better for society as a whole.
It's asset-weighted fees are approximately 1/6 of its competition. That seems pretty competitive to me.
Less bombastically, who decides what a competitive fee is? If they charged 1/2 market rate would this suit have ever been filed?
If they were operating at a loss I think it'd be pretty easy to claim they were avoiding taxes and should be operating at break even. But they are operating at break even, so I think it's hard to make the argument that they should be charging more "just because other firms do" and not come off as just some opportunist trying to cash in on a whistle-blower payout.
That being said, I sort of see how a legalistic argument could be made.
Forgone fees go to the fund's investers, who are also its owners. And capital gains by investers are taxed, just as they are for other funds. Maybe they're taxed at lower rates than profits of other funds are taxed. But that's just because the fund manager is a not-for-profit.
Right?