The United States Supreme Court will review a decision by the United States Court of Appeals for the Seventh Circuit rejecting the so-called Gartenberg test, which looks to the “reasonableness” of advisory fees charged by investment advisors.
For our discussion of the Seventh Circuit’s decision, please click here.
Plaintiffs petitioned the Supreme Court after that decision to decide whether the Seventh Circuit erroneously held, in apparent conflict with the decisions of three other circuits, that a fund investor’s claim that the fund’s investment adviser charged excessive fees is not actionable under Section 36(b) of the Investment Company Act unless the investor can show that the adviser misled the fund’s directors who approved the fees.
In the case, investors in the Oakmark complex of mutual funds accused the funds’ investment advisor, Harris Associates L.P., of charging excessive advisory fees in violation of Section 36(b) of the Investment Company Act. To support those claims, the plaintiffs argued that the fees charged to the funds failed the “reasonableness” test originally set forth in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982) because they were substantially higher than fees charged to other institutional investors.
The Seventh Circuit, however, rejected both variations of the Gartenberg test commonly used by courts in analyzing mutual fund advisory fees: (1) whether the fee represents a charge within the range of what would have been negotiated at arm’s-length in light of all surrounding circumstances; and (2) whether the fee is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining. Instead, the Seventh Circuit ruled that Section 36(b) requires neither that fees be “reasonable” nor that the courts engage in judicial rate regulation. To the contrary, according to the court, Section 36(b) merely states that the adviser has a fiduciary duty to its clients.
The Seventh Circuit then ruled that in the absence of any evidence that an advisor had failed to make full disclosures or otherwise deceived investors, courts should not second guess the fees negotiated by the funds’ trustees. The Seventh Circuit also held that it was irrelevant what Harris had charged its other institutional clients. According to the Seventh Circuit, mutual funds are more complicated and often require more work from advisors than simply managing the investments of institutional investors.
Plaintiffs (petitioners) have until June 10, 2009 to file their brief with the Supreme Court.