Having decided Jones v. Harris 559 U.S. 335, 346 (2010), the US Supreme Court sent the case back to the 7th Circuit Court of Appeals for application of its revised rule in 1940 Act Section 36(b) mutual fund excessive fee cases. The task before the 7th Circuit was to revisit the decision of the trial court, rendered in 2007. This the 7th Circuit finally did, on August 6, 2015, seemingly bringing the Harris Trust case to its end. In doing so, the 7th Circuit found that “the district court’s decision has held up well.” In taking up Jones v Harris once again, the 7th Circuit made plain that “[t]o face liability under [Section 36(b) of the Investment Company Act] and investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to an arm’s length bargaining.” Further, procedural errors (such as the potential lack of independence of one of the non-interested trustees) are not an “independent violation of Section 36(b)” even if one were to exist. Rather, the courts must focus solely on the question of whether or not the fees themselves were excessive. The 7th Circuit then put its finger on the essential outcome of the Jones v. Harriscase. “The district court granted summary judgment to Harris after applying a legal standard similar to the one eventually adopted by the Supreme Court.” This, of course, refers to the Second Circuit’s 1982 Gartenberg decision. However, the 7th Circuit took pains to point out that the District Court standard was too hard on investment advisers. The 7th Circuit noted, “The standards [of the District Court applying the Gartenberg rule and that of the Supreme Court] are not identical, because the Supreme Court’s approach does not allow a court to assess the fairness or reasonableness of advisers’ fees; the goal is to identify the outer bounds of arm’s length bargaining and not engage in rate regulation. This means that the Supreme Court’s standard is less favorable to plaintiffs than the one the district court used—yet plaintiffs lost even under the district court’s approach.” In what may be something of a breakthrough for fund boards, the 7th Circuit emphasized the significance of competitor fees in the mutual fund industry. “This record shows that Harris’s fee was comparable to that produced by bargaining at other mutual-fund complexes, which tells us the bargaining range” (emphasis added). The 7th Circuit again rejected plaintiff’s final try to compare mutual fund fees to managed account fees charged by Harris Trust to institutional separate accounts, but not because such comparisons are always irrelevant. Rather, in this instance “Plaintiffs have not proffered evidence that would tend to show that Harris provided pension funds (and other non-public clients) with the same sorts of services that it provided to the Oakmark funds, or that it incurred the same costs when serving different types of clients.”
The most recent decision in Harris Trust teaches us that Jones v. Harris offers fund boards some measure of assurance that a procedural slip up will not be fatal to the board’s overall decision making, that use of industry data such as that provided by Lipper or Morningstar is perfectly sensible, and that institutional separate account fees may be relevant, if services and costs are of the same as those associated with servicing mutual funds.