Oral argument: Nov. 2, 2009
Appealed from: United States Court of Appeals for the Seventh Circuit (Aug. 8, 2008)
INVESTMENT COMPANY ACT, MUTUAL FUNDS, INVESTMENT ADVISOR FEES
In 2004, Jerry Jones sued Harris Associates, L.P. under § 36(b) of the Investment Company Act for breach of its fiduciary duty with respect to the fees it receives for advising mutual funds of which Jones was a shareholder. Harris Associates created and advised the mutual funds in question. The board of trustees for the mutual funds approved the fees Harris Associates received. Jones’s case was dismissed on summary judgment in the Northern District of Illinois. The district court applied the Second Circuit’s Gartenberg v. Merrill Lynch Asset Management, Inc. standard to analyze the advising fees and found that the fees could have been the product of a normal, arms-length negotiation. The Seventh Circuit affirmed, but rejected the Gartenberg standard, and adopted a more lenient standard that allows court interference in fee arrangements only when there is evidence that the adviser failed to disclose relevant information or misled the board during fee negotiations. The Supreme Court’s decision will define the contours of a mutual fund adviser’s fiduciary duty with regard to compensation.