6.15.2009 Less than one week after Petitioners filed their brief, the SEC and the Justice Department filed an amicus curiae brief where the Supreme Court granted certiorari to decide “whether the United States Court of Appeals for the Seventh Circuit erroneously held, in conflict with the decisions of three other circuits, that a shareholder’s claim that the fund’s investment adviser charged an excessive fee—more than twice the fee it charged to funds with which it was not affiliated—is not cognizable under § 36(b) [of the Investment Company Act of 1940], unless the shareholder can show that the adviser misled the fund’s directors who approved the fee.”
Congress enacted the Investment Company Act of 1940 (1940 Act) to mitigate the conflicts of interest inherent in the relationship between investment advisers and the mutual funds they create and manage. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984). Section 36(b) of the 1940 Act imposes on investment advisers “a fiduciary duty with respect to the receipt of compensation for services” and authorizes fund shareholders to bring a claim for “breach of [that] fiduciary duty.” 15 U.S.C. § 80a-35(b). The 1940 Act further provides that, in such an action, “approval by the board of directors” of the fund is not conclusive, but “shall be given such consideration by the court as is deemed appropriate under all the circumstances.” Id. § 80a-35(b)(2).
The SEC and the Justice Department argue in their brief that the appellate court erred when it affirmed the dismissal of an investor’s lawsuit against a mutual fund adviser who allegedly received excessive compensation. They argue that the standard for determining the appropriateness of a fee should be done by following the Court’s approach in Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923, 928 (2d Cir. 1982). In Gartenberg, according to the SEC and the Department of Justice, the Second Circuit stressed that “all pertinent facts must be weighed” in making the determination of whether the adviser-manager charged a disproportionately large fee.
The SEC and the Department of Justice disagree with the Seventh Circuit’s application of a “market-based approach,” with which the court concluded that the market for funds is so competitive that § 36(b) requires only that the adviser not mislead the fund’s board during the fee-setting process. The SEC and the Justice Department believe that this approach undermines the intent of the statute and the fiduciary duty that Congress intentionally incorporated into the statute. They argue that a court should not act as a rate-setter but instead “should determine whether the adviser’s fee is within the range of fees that arm’s-length bargaining might have produced.”
Click http://www.abanet.org/publiced/preview/briefs/pdfs/07-08/08-586_PetitionerAmCuUSA.pdf to access the brief filed by the Justice Department and the SEC.