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Supreme Court Decides Jones v. Harris Case

March 30, 2010

Earlier today, the U.S. Supreme Court resolved the ambiguity caused by the Jones v. Harris excessive advisory fee case by affirming the long-standing "reasonableness" standard established in the seminal Gartenberg case and followed by federal courts and the mutual fund industry for more than 25 years. The Court concluded that the Gartenberg standard correctly provides that to be liable for a breach of fiduciary duty under §36(b) of the Investment Company Act, an 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.

When evaluating the reasonableness of advisory fees, the Court noted that the Investment Company Act requires a court to evaluate all relevant factors, which may include a comparison between the fees that an adviser charges a mutual fund client and an institutional client. However, such comparison may merit little weight if the services provided to each client are sufficiently different. The Court indicated that mutual fund board decisions regarding approval of advisory contracts should be afforded great deference if such decisions were made following a robust 15(c) review process. The Court's opinion states that the "standard for fiduciary breach under §36(b) does not call for judicial second-guessing of informed board decisions."

In light of the Jones decision, advisers should continue to provide boards with all necessary information concerning the advisory contract to enable boards to fulfill their 15(c) obligations.

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