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Jones v. Harris Assocs. L.P., No. 08-586

By FindLaw Staff on March 30, 2010 4:51 PM

Jones v. Harris Assocs. L.P., No. 08-586, involved an action by shareholders in mutual funds managed by defendant investment adviser alleging that defendant violated section 36(b)(1) of the Investment Company Act of 1940.  The Supreme Court vacated the Seventh Circuit's order affirming the district court on alternative grounds, holding that, based on section 36(b)'s terms and the role that a shareholder action for breach of the investment adviser's fiduciary duty plays in the Act's overall structure, Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F. 2d 923 (2d Cir. 1982), applied the correct standard to section 36(b) claims.  More specifically, to be guilty of a violation of section 36(b), an adviser must charge a fee that is so disproportionately large it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.

As the Court wrote:  "Petitioners, shareholders in mutual funds managed by respondent investment adviser, filed this suit alleging that respondent violated § 36(b)(1) of the Investment Company Act of 1940, which imposes a 'fiduciary duty [on investment advisers] with respect to the receipt of compensation for services,' 15 U. S. C. § 80a-35(b). Granting respondent summary judgment, the District Court concluded that petitioners had not raised a triable issue of fact under the applicable standard set forth in Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F. 2d 923, 928 (CA2): '[T]he test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm's length in light of all of the surrounding circumstances. . . . To be guilty of a violation of §36(b), . . . the adviser must charge a fee that is so disproportionately large it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining.' Rejecting the Gartenberg standard, the Seventh Circuit panel affirmed based on different reasoning."

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