Supreme Court Creates Enhanced Gartenberg Standard for Fund Fees, Raises Plaintiff’s Burden
In a unanimous decision in Jones v. Harris Associates, the Supreme Court explicitly upheld the Gartenberg standard for determining fiduciary duty for receipt of mutual fund adviser fees and may have created a new enhanced Gartenberg standard that increases the burden on any plaintiff. Writing for the Court, Justice Alito states that “Gartenberg was correct in its basic formulation” and that an investment adviser will face liability only if it charges a fee “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 Court specifically rejected any requirement to compare fund fees to separate account fees. The Court also rejected any requirement that boards and courts must consider fees charged by other advisers to other mutual funds. The Court also requires substantial deference to board decisions. The Court rejected the argument that only full disclosure matters.
OUR TAKE: Even though the Court rejected the Seventh Circuit’s disclosure-only standard, this new enhanced Gartenberg standard will make it very difficult to pursue Section 36(b) claims.