Originally published March 11, 2009
Keywords: Investment Company Act, fiduciary duty, investment advisers, congress, mutual fund investors, Jones v Harris, shares,
Congress passed the Investment Company Act of 1940, 15 U.S.C. §§ 80a-1 et seq., to protect mutual fund investors. Section 36(b) of the Act imposes on investment advisers, who often create and manage mutual funds, "a fiduciary duty with respect to the receipt of compensation for services" from a mutual fund, and gives fund shareholders a private right of action for breach of that duty. Id. § 80a-35(b). The Act further provides that, in such an action, "approval by the [fund's] board of directors" of the fee paid "shall be given such consideration by the court as is deemed appropriate under all the circumstances." Id. § 80a-35(b)(2). In Jones v. Harris Associates (No. 08-586), in which certiorari was granted on March 9, 2009, the Supreme Court will consider the circumstances in which a shareholder's claim that the fund's investment adviser charged an excessive fee is cognizable under Section 36(b).
The plaintiffs in Jones own shares in several funds advised by Harris Associates L.P., the defendant. Plaintiffs contend that Harris Associates was paid excessive fees in violation of Section 36(b). The district court granted summary judgment to the defendant, and the Seventh Circuit affirmed. In an opinion by Judge Easterbrook, the Seventh Circuit, observing that the modern mutual fund industry is highly competitive and that information about fund fees is readily available to investors, considered an array of factors to determine that plaintiffs had failed to make out a claim under Section 36(b). Those factors included the nature and quality of the service provided to the fund, the fees paid to advisers by funds of similar size and goals, and the approval of the fees by the fund's independent trustees. The court also recognized that adviser compensation may be "so unusual" as to provide evidence of a breach of fiduciary duty. Judge Posner dissented, while recognizing that the result reached by the majority "may be correct." Other courts of appeals, while uniformly rejecting claims under Section 36(b), have articulated the standard using slightly different language. E.g., Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d 923 (2d Cir. 1982).
Absent extensions, which are likely, amicus briefs in support of the petitioner are due April 30, and amicus briefs in support of the respondent are due June 2.
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