Monday, March 9, 2009

Supreme Court Will Review Fund Fee Case

Today, the United States Supreme Court agreed to hear an appeal from the Seventh Circuit's decision in Jones v. Harris Associates. The Jones case is an excessive fees case brought by fund investors under section 36(b) of the Investment Company Act. The trial court dismissed the case using the traditional Gartenburg factors. On appeal, the Court of Appeals for the Seventh Circuit (which covers Illinois, Indiana and Wisconsin) affirmed the dismissal of the case. However, in doing so, it explicitly rejected use of the Gartenburg test, instead replacing it with a test that permits directors and management companies to enter into virtually any type of fee arrangement so long as there is no fraud or deception in the relationship between management and the board. The Seventh Circuit based its decision both on what it viewed as traditional concepts of fiduciary law as well as its view that the competitive fund marketplace placed an effective limit on fees.

The Supreme Court has now agreed to hear this case. The case is of fundamental importance to all fund independent directors, as the standard that the Court adopts will be the standard under which their decision to renew advisory contracts are reviewed in the courts, and thus will have a direct effect on the 15(c) contract renewal processes at all funds. The Court could take one of three steps:

  1. The Court could affirm the traditional Gartenburg analysis, and thus leave both the law and the nature of the renewal process at funds relatively untouched;

  2. The Court could adopt the test outlined by the Seventh Circuit in its Jones decision; or

  3. The Court could adopt some completely different test of its own.

No matter what position the Court adopts, it will have a direct effect on the work of independent directors. Because of the central importance of this issue to independent directors, we have decided to participate in the case as a “friend of the court,” and to file a brief outlining the views of you, our members.

The process is expected to move fairly quickly, with the Forum's brief filed by the end of the summer. The Court is likely to actually hear arguments on the case some time in the fall, with an anticipated final decision by June 2010.

For a summary of the issues behind Jones v. Harris, see Forum News Feed's October 10, 2008 post:

For the relevant documents in the case's record see: