• Supreme Court Will Hear Appeal in Mutual Fund Advisory Fee Case
  • March 13, 2009 | Authors: Lea Anne Copenhefer; W. Hardy Callcott; Frances S. Cohen; Roger P. Joseph; Neal E. Sullivan
  • Law Firms: Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - San Francisco Office; Bingham McCutchen LLP - Boston Office; Bingham McCutchen LLP - Washington Office
  • Today the United States Supreme Court granted certiorari to hear an appeal in the Harris Associates case. This action presages potentially significant developments in the law concerning the review and approval of mutual fund investment adviser compensation under Section 36(b) of the Investment Company Act of 1940.

    As you may recall, in May 2008 a panel of the U.S. Court of Appeals for the Seventh Circuit, although rejecting the plaintiffs’ challenge to advisory fees as excessive, “disapproved” the long-standing Gartenberg decision from the Second Circuit. See Bingham Client Alert, Seventh Circuit ‘Disapproves’ Gartenberg, But Is This New Approach Fundamentally Different? Gartenberg delineated the factors that most federal courts have subsequently applied to determine whether the advisory fees paid by mutual funds violate the fiduciary duty imposed on mutual fund advisers under Section 36(b). In Gartenberg, the Second Circuit stated that, for an adviser to be guilty of violating Section 36(b), its fee must be so disproportionately large that it is not reasonably related to the services provided and could not have resulted from arm’s-length bargaining between the adviser and the mutual fund. The panel in Harris Associates concluded that a court need only determine whether the adviser negotiated the advisory fee in a manner consistent with its fiduciary duty to the fund. In August 2008, the Seventh Circuit voted against rehearing the panel’s decision en banc. See Bingham Client Alert, Dissent in Mutual Fund Advisory Fee Case Makes U.S. Supreme Court Review More Likely.

    The United States Supreme Court has now entered the fray, and it is possible that the Court’s decision may involve a fundamental re-evaluation of the measures that mutual fund boards of directors undertake to evaluate advisory compensation arrangements. The Court expects to hear argument in October 2009 and will decide the case thereafter. Until the Court reaches a decision, however, we believe that boards and advisers should continue to follow the processes that they have implemented to satisfy the Gartenberg standard.