[JURIST] The US Supreme Court [official website; JURIST news archive] on Tuesday ruled [opinion, PDF] unanimously in Jones v. Harris Associates [Cornell LII backgrounder; JURIST report] that a shareholder does not have to show that a fund's investment adviser misled the fund's directors in order to have a cognizable claim of an excessive fee under § 36(b) of the Investment Company Act of 1940 [text]. The US Court of Appeals for the Seventh Circuit held [opinion, PDF] that the claim is not cognizable unless the shareholder can show that the adviser misled the fund's directors who approved the fee. In vacating the decision below, the court adopted the Gartenberg standard, which provides that "to face liability under § 36(b), an investment adviser must charge a fee that 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. Justice Samuel Alito wrote:
By focusing almost entirely on the element of disclosure, the Seventh Circuit panel erred. The Gartenberg standard, which the panel rejected, may lack sharp analytical clarity, but we believe that it accurately reflects the compromise that is embodied in § 36(b), and it has provided a workable standard for nearly three decades. The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual fund market is a matter for Congress, not the courts.Justice Clarence Thomas filed a concurring opinion.
The case was brought by several plaintiffs who own shares in funds advised by Harris Associates [corporate website]. The plaintiffs claimed that the fees were too high in violation of § 36(b).