Supreme Court Decides Jones v. Harris Associates and Establishes Standard for Mutual Fund Excessive Fee Claims

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The United States Supreme Court today released its decision in Jones v. Harris Associates, which definitively establishes the standard governing claims of excessive mutual fund fees under § 36(b) of the Investment Company Act of 1940. Rejecting plaintiffs’ arguments that judges should be authorized to re-examine fees with little deference to the decisions of independent fund boards, the Supreme Court embraced the seminal Gartenberg standard as the law of the land: “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.” The Jones decision reaffirms the central role of independent directors in setting advisory fees, and rejects the plaintiffs’ central argument that mutual fund fees should be judged primarily by comparison to fees charged by other types of accounts.

The Jones case was one of 12 actions brought by the same group of plaintiffs’ attorneys against the leading firms in the mutual fund industry. Their strategy was to attack the widely followed standard for evaluating mutual fund adviser compensation first established in the 1982 case Gartenberg v. Merrill Lynch Asset Management, Inc., primarily by comparing mutual fund fees to charges for institutional funds and separate accounts. The Supreme Court today emphatically rejected that approach, holding that the Gartenberg standard properly reflects both the text and the structure of the statute. Under that standard, the door to plaintiffs’ lawsuits was open only to the extent they could make a showing of a fee that was “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.” Today’s decision in Jones opens that door no further, and it contains helpful language further limiting fee challenges.

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