On Wednesday, the Supreme Court issued an opinion in the matter of Jones v. Harris Associates L.P., which approved the use of the multi-factor standard of review for investment advisory fees charged by investment company advisers first adopted in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982).
The Seventh Circuit’s opinion, 527 F.3d 627 (7th Cir. 2008) had created a split in the circuits concerning standards for the review of potentially excessive investment advisory fees charged to mutual funds, closed-end funds, exchange-traded funds and other investment companies. The Seventh Circuit, focused on investor disclosure, stated that the propriety of advisory fees under the Investment Company Act could be challenged only where there was fraud.
Gartenberg requires an investment company board to review specific criteria in determining whether to oppose an advisory fee. The Supreme Court adopted the Gartenberg standard as controlling law and rejected the Seventh Circuit’s holding in Harris Associates. The fiduciary duty standard for investment advisers under Section 36(b) of the Investment Company Act, the Supreme Court held, is that advisory fees must represent “a charge within the range of what would have been negotiated at arm’s-length in light of all of the surrounding circumstances.” The Court noted that the Gartenberg standard operates well with the statutory framework requiring analysis and review of advisory agreements by independent trustees of investment companies. In disposing of this case, the Supreme Court remanded the matter back to the Seventh Circuit for consideration under the Gartenberg standard.