In Jones v. Harris
Associates, L.P., the U.S. Supreme Court last week decided an issue
involving the fiduciary duty of investment advisors. Many legal
scholars have already started to comment on this decision, e.g. here,
adding to the prolific analysis that preceded this long-awaited
SCOTUS decision today. See, e.g., here.
The syllabus from the Court's
opinion provides as follows:
Based on §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 applied the correct
(a) A consensus has developed
regarding the standard Gartenberg set forth over 25 years ago: The
standard has been adopted by other federal courts, and the Securities and
Exchange Commission's regulations have recognized, and formalized, Gartenberg-like
(b) Section 36(b)'s "fiduciary duty"
phrase finds ts meaning in Pepper v. Linton, 308 U. S. 295, 306-307,
where the Court discussed the concept in the analogous bankruptcy context: "The
essence of the test is whether or not under all the circumstances the
transaction carries the earmarks of an arm's length bargain. If it does not,
equity will set it aside." Gartenberg's approach fully incorporates this
understanding, insisting that all relevant circumstances be taken into account
and using the range of fees that might result from arm's-length bargaining as
the benchmark for reviewing challenged fees. ...
(c) Gartenberg's approach also
reflects §36(b)'s place in the statutory scheme and, in particular, its
relationship to the other protections the Act affords investors. Under the Act,
scrutiny of investment adviser compensation by a fully informed mutual fund
board, see Burks v. Lasker, 441 U. S. 471, 482, and shareholder
suits under §36(b) are mutually reinforcing but independent mechanisms for
controlling adviser conflicts of interest, see Daily Income Fund,
Inc. v. Fox, 464 U. S. 523, 541. In recognition of the disinterested directors'
role, the Act instructs courts to give board approval of an adviser's
compensation "such consideration . . . as is deemed appropriate under all the
circumstances." §80a-35(b)(1). It may be inferred from this formulation that
(1) a measure of deference to a board's judgment may be appropriate in some
instances, and (2) the appropriate measure of deference varies depending on the
circumstances. Gartenberg heeds these precepts.
(d) First, since the Act requires
consideration of all relevant factors, §80a-35(b)(2), courts must give
comparisons between the fees an investment adviser charges a captive mutual
fund and the fees it charges its independent clients the weight they merit in
light of the similarities and differences between the services the clients in
question require. In doing so, the Court must be wary of in-apt comparisons
based on significant differences between those services and must be mindful
that the Act does not necessarily ensure fee parity between the two types of
clients. However, courts should not rely too heavily on comparisons with fees
charged mutual funds by other advisers, which may not result from arm's-length
negotiations. Finally, a court's evaluation of an investment adviser's
fiduciary duty must take into account both procedure and substance.Where
disinterested directors consider all of the relevant factors, their decision to
approve a particular fee agreement is entitled to considerable weight, even if
the court might weigh the factors differently. Cf. Lasker, 441 U.
S., at 486. In contrast, where the board's process was deficient or the adviser
withheld important information, the court must take a more rigorous look at the
outcome. Id., at 484. Gartenberg's "so disproportionately large"
standard, reflects Congress' choice to "rely largely upon [independent]
'watchdogs' to protect shareholders interests," Lasker, supra, at
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