An Update on Excessive Fee Litigation under the Investment Company Act

In 2010, the Supreme Court, in Jones v. Harris Associates, L.P., 559 U.S. 335 (2010), issued a significant decision concerning section 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty on mutual fund advisors with respect to the fees they receive from the funds they manage. The Court approved the so-called Gartenberg standard (first articulated by the Second Circuit in 1982), holding that liability exists only where the advisor “charge[s] 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 Supreme Court held that all relevant factors matter when analyzing this standard, including the independence and conscientiousness of the fund’s board of directors, the nature and quality of the services provided by the advisor, the advisor’s profitability, any ancillary monetary benefits received by the advisor in connection with operating the fund (“fall-out” benefits), whether the advisor shared economies of scale with shareholders, and the comparative fee structures of other similar funds. However, the Court also made clear that “the standard for fiduciary breach under [section] 36(b) does not call for judicial second-guessing of informed board decisions”; rather, the Court stated that if “disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently.”