On March 9, the U.S. Supreme Court granted certiorari in Jones v. Harris Associates L.P., 527 F.3d 627 (7th Cir. 2008). The Court, which will hear oral arguments in its October 2009 term, will resolve a circuit split regarding what constitutes a breach of fiduciary duty with respect to excessive investment company advisor fees under Section 36(b) of the Investment Company Act of 1940, as amended.
The Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir. 1982) established a multiple-factor fairness test long used by fund directors in reviewing advisory agreements to avoid advisor and fund director liability for excessive fee payments under Section 36(b). In 2008, the Seventh Circuit’s Jones decision sharply criticized the Gartenberg approach and adopted a much more relaxed standard based on whether the advisor had deceived the fund’s board or the board acted in bad faith. The Jones court, showing an appreciation for how fund investors behave, stated that “[t]he trustees (and in the end the investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth.”