OPINION OF THE COURT
JONES V. HARRIS ASSOCIATES L. P.
559 U. S. ____ (2010)
SUPREME COURT OF THE UNITED STATES
NO. 08-586
JERRY N. JONES, et al., PETITIONERS
v. HARRIS ASSOCIATES L. P.
on writ of certiorari to the united states court of
appeals for the seventh circuit
[March 30, 2010]
Justice Alito delivered the
opinion of the Court.
We consider in this case what a
mutual fund shareholder must prove in order to show that a mutual
fund investment adviser breached the “fiduciary duty with respect
to the receipt of compensation for services” that is imposed by
§36(b) of the Investment Company Act of 1940, 15 U. S. C.
§80a–35(b) (hereinafter §36(b)).
I
A
The Investment Company Act of
1940 (Act), 54 Stat. 789, 15 U. S. C. §80a–1
et seq.,
regulates investment companies, including mutual funds. “A mutual
fund is a pool of assets, consisting primarily of [a] portfolio
[of] securities, and belonging to the individual investors holding
shares in the fund.”
Burks v.
Lasker, 441 U. S.
471, 480 (1979). The following arrangements are typical. A separate
entity called an investment adviser creates the mutual fund, which
may have no employees of its own. See
Kamen v.
Kemper
Financial Services, Inc.,
500 U. S. 90, 93 (1991);
Daily Income Fund, Inc. v.
Fox,
464 U. S. 523, 536
(1984);
Burks, 441 U. S., at 480–481. The adviser selects
the fund’s directors, manages the fund’s investments, and provides
other services. See
id., at 481. Because of the
relationship between a mutual fund and its investment adviser, the
fund often “ ‘cannot, as a practical matter sever its
relationship with the adviser. Therefore, the forces of
arm’s-length bargaining do not work in the mutual fund industry in
the same manner as they do in other sectors of the American
economy.’ ”
Ibid. (quoting S. Rep. No. 91–184,
p. 5 (1969) (hereinafter S. Rep.)).
“Congress adopted the [Investment
Company Act of 1940] because of its concern with the potential for
abuse inherent in the structure of investment companies.”
Daily
Income Fund, 464 U. S., at 536 (internal quotation marks
omitted). Recognizing that the relationship between a fund and its
investment adviser was “fraught with potential conflicts of
interest,” the Act created protections for mutual fund
shareholders.
Id., at 536–538 (internal quotation marks
omitted);
Burks, supra, at 482–483. Among other things,
the Act required that no more than 60 percent of a fund’s directors
could be affiliated with the adviser and that fees for investment
advisers be approved by the directors and the shareholders of the
fund. See §§10, 15(c), 54 Stat. 806, 813.
The growth of mutual funds in the 1950’s and
1960’s prompted studies of the 1940 Act’s effectiveness in
protecting investors. See
Daily Income Fund, 464 U. S., at
537–538. Studies commissioned or authored by the Securities and
Exchange Commission (SEC or Commission) identified problems
relating to the independence of investment company boards and the
compensation received by investment advisers. See
ibid. In
response to such concerns, Congress amended the Act in 1970 and
bolstered shareholder protection in two primary ways.
First, the amendments strengthened the
“cornerstone” of the Act’s efforts to check conflicts of interest,
the independence of mutual fund boards of directors, which
negotiate and scrutinize adviser compensation.
Burks,
supra, at 482. The amendments required that no more than 60
percent of a fund’s directors be “persons who are interested
persons,”
e.g., that they have no interest in or
affiliation with the investment adviser.[
Footnote 1] 15 U. S. C. §80a–10(a); §80a–2(a)(19); see
also
Daily Income Fund,
supra, at 538. These
board members are given “a host of special responsibilities.”
Burks, 441 U. S., at 482–483. In particular, they must
“review and approve the contracts of the investment adviser”
annually,
id., at 483, and a majority of these directors
must approve an adviser’s compensation, 15 U. S. C.
§80a–15(c). Second, §36(b), 84 Stat. 1429, of the Act imposed upon
investment advisers a “fiduciary duty” with respect to compensation
received from a mutual fund, 15 U. S. C. §80a–35(b), and granted
individual investors a private right of action for breach of that
duty,
ibid.
The “fiduciary duty” standard contained in
§36(b) represented a delicate compromise. Prior to the adoption of
the 1970 amendments, shareholders challenging investment adviser
fees under state law were required to meet “common-law standards of
corporate waste, under which an unreasonable or unfair fee might be
approved unless the court deemed it ‘unconscionable’ or
‘shocking,’ ” and “security holders challenging adviser fees
under the [Investment Company Act] itself had been required to
prove gross abuse of trust.”
Daily Income Fund, 464 U. S.,
at 540, n. 12. Aiming to give shareholders a stronger remedy,
the SEC proposed a provision that would have empowered the
Commission to bring actions to challenge a fee that was not
“reasonable” and to intervene in any similar action brought by or
on behalf of an investment company.
Id., at 538. This
approach was included in a bill that passed the House. H. R. 9510,
90th Cong., 1st Sess., §8(d) (1967); see also S. 1659, 90th Cong.,
1st Sess., §8(d) (1967). Industry representatives, however,
objected to this proposal, fearing that it “might in essence
provide the Commission with ratemaking authority.”
Daily Income
Fund, 464 U. S., at 538.
The provision that was ultimately enacted
adopted “a different method of testing management compensation,”
id., at 539 (quoting S. Rep., at 5 (internal quotation
marks omitted)), that was more favorable to shareholders than the
previously available remedies but that did not permit a
compensation agreement to be reviewed in court for
“reasonableness.” This is the fiduciary duty standard in
§36(b).
B
Petitioners are shareholders in
three different mutual funds managed by respondent Harris
Associates L. P., an investment adviser. Petitioners filed this
action in the Northern District of Illinois pursuant to §36(b)
seeking damages, an injunction, and rescission of advisory
agreements between Harris Associates and the mutual funds. The
complaint alleged that Harris Associates had violated §36(b) by
charging fees that were “disproportionate to the services rendered”
and “not within the range of what would have been negotiated at
arm’s length in light of all the surrounding circumstances.” App.
52.
The District Court granted
summary judgment for Harris Associates. Applying the standard
adopted in
Gartenberg v.
Merrill Lynch Asset
Management, Inc., 694 F. 2d 923 (CA2 1982), the court
concluded that petitioners had failed to raise a triable issue of
fact as to “whether the fees charged … were so disproportionately
large that they could not have been the result of arm’s-length
bargaining.” App. to Pet. for Cert. 29a. The District Court assumed
that it was relevant to compare the challenged fees with those that
Harris Associates charged its other clients.
Id., at 30a.
But in light of those comparisons as well as comparisons with fees
charged by other investment advisers to similar mutual funds, the
Court held that it could not reasonably be found that the
challenged fees were outside the range that could have been the
product of arm’s-length bargaining.
Id., at 29a–32a.
A panel of the Seventh Circuit affirmed based
on different reasoning, explicitly “disapprov[ing] the
Gartenberg approach.” 527 F. 3d 627, 632 (2008).
Looking to trust law, the panel noted that, while a trustee “owes
an obligation of candor in negotiation,” a trustee, at the time of
the creation of a trust, “may negotiate in his own interest and
accept what the settlor or governance institution agrees to pay.”
Ibid. (citing Restatement (Second) of Trusts §242, and
Comment
f)). The panel thus reasoned that “[a] fiduciary
duty differs from rate regulation. A fiduciary must make full
disclosure and play no tricks but is not subject to a cap on
compensation.” 527 F. 3d, at 632. In the panel’s view, the
amount of an adviser’s compensation would be relevant only if the
compensation were “so unusual” as to give rise to an inference
“that deceit must have occurred, or that the persons responsible
for decision have abdicated.”
Ibid.
The panel argued that this understanding of
§36(b) is consistent with the forces operating in the contemporary
mutual fund market. Noting that “[t]oday thousands of mutual funds
compete,” the panel concluded that “sophisticated investors” shop
for the funds that produce the best overall results, “mov[e] their
money elsewhere” when fees are “excessive in relation to the
results,” and thus “create a competitive pressure” that generally
keeps fees low.
Id., at 633–634. The panel faulted
Gartenberg on the ground that it “relies too little on
markets.” 527 F. 3d, at 632. And the panel firmly rejected a
comparison between the fees that Harris Associates charged to the
funds and the fees that Harris Associates charged other types of
clients, observing that “[d]ifferent clients call for different
commitments of time” and that costs, such as research, that may
benefit several categories of clients “make it hard to draw
inferences from fee levels.”
Id., at 634.
The Seventh Circuit denied rehearing en banc
by an equally divided vote. 537 F. 3d 728 (2008). The dissent
from the denial of rehearing argued that the panel’s rejection of
Gartenberg was based “mainly on an economic analysis that
is ripe for reexamination.” 537 F. 3d, at 730 (opinion of Posner,
J.). Among other things, the dissent expressed concern that Harris
Associates charged “its captive funds more than twice what it
charges independent funds,” and the dissent questioned whether high
adviser fees actually drive investors away.
Id., at
731.
We granted certiorari to resolve a split among
the Courts of Appeals over the proper standard under
§36(b).[
Footnote 2] 556 U. S.
___ (2009).
II
A
Since Congress amended the
Investment Company Act in 1970, the mutual fund industry has
experienced exponential growth. Assets under management increased
from $38.2 billion in 1966 to over $9.6 trillion in 2008. The
number of mutual fund investors grew from 3.5 million in 1965 to 92
million in 2008, and there are now more than 9,000 open- and
closed-end funds.[
Footnote
3]
During this time, the standard
for an investment adviser’s fiduciary duty has remained an open
question in our Court, but, until the Seventh Circuit’s decision
below, something of a consensus had developed regarding the
standard set forth over 25 years ago in
Gartenberg, supra.
The
Gartenberg standard has been adopted by other federal
courts,[
Footnote 4] and “[t]he
SEC’s regulations have recognized, and formalized,
Gartenberg-like factors.” Brief for United States as
Amicus Curiae 23. See 17 CFR §240.14a–101, Sched. 14A,
Item 22, para. (c)(11)(i) (2009); 69 Fed. Reg. 39801, n. 31,
39807–39809 (2004). In the present case, both petitioners and
respondent generally endorse the
Gartenberg approach,
although they disagree in some respects about its meaning.
In
Gartenberg, the Second Circuit
noted that Congress had not defined what it meant by a “fiduciary
duty” with respect to compensation but concluded that “the test is
essentially whether the fee schedule represents a charge within the
range of what would have been negotiated at arm’s-length in the
light of all of the surrounding circumstances.” 694 F. 2d, at 928.
The Second Circuit elaborated that, “[t]o be guilty of a violation
of §36(b), … the adviser-manager must charge 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.”
Ibid. “To make this
determination,” the Court stated, “all pertinent facts must be
weighed,”
id., at 929, and the Court specifically
mentioned “the adviser-manager’s cost in providing the service, …
the extent to which the adviser-manager realizes economies of scale
as the fund grows larger, and the volume of orders which must be
processed by the manager.”
Id., at 930.[
Footnote 5] Observing that competition among
advisers for the business of managing a fund may be “virtually
non-existent,” the Court rejected the suggestion that “the
principal factor to be considered in evaluating a fee’s fairness is
the price charged by other similar advisers to funds managed by
them,” although the Court did not suggest that this factor could
not be “taken into account.”
Id., at 929. The Court
likewise rejected the “argument that the lower fees charged by
investment advisers to large pension funds should be used as a
criterion for determining fair advisory fees for money market
funds,” since a “pension fund does not face the myriad of daily
purchases and redemptions throughout the nation which must be
handled by [a money market fund].”
Id., at 930,
n. 3.[
Footnote 6]
B
The meaning of §36(b)’s reference
to “a fiduciary duty with respect to the receipt of compensation
for services”[
Footnote 7] is
hardly pellucid, but based on the terms of that provision and the
role that a shareholder action for breach of that duty plays in the
overall structure of the Act, we conclude that
Gartenberg
was correct in its basic formulation of what §36(b) requires: to
face liability under §36(b), an investment adviser must charge 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.
1
We begin with the language of
§36(b). As noted, the Seventh Circuit panel thought that the phrase
“fiduciary duty” incorporates a standard taken from the law of
trusts. Petitioners agree but maintain that the panel identified
the wrong trust-law standard. Instead of the standard that applies
when a trustee and a settlor negotiate the trustee’s fee at the
time of the creation of a trust, petitioners invoke the standard
that applies when a trustee seeks compensation after the trust is
created. Brief for Petitioners 20–23, 35–37. A compensation
agreement reached at that time, they point out, “ ‘will not
bind the beneficiary’ if either ‘the trustee failed to make a full
disclosure of all circumstances affecting the agreement’ ”
which he knew or should have known or if the agreement is unfair to
the beneficiary.
Id., at 23 (quoting Restatement (Second)
of Trusts §242, Comment
i). Respondent, on the other hand,
contends that the term “fiduciary” is not exclusive to the law of
trusts, that the phrase means different things in different
contexts, and that there is no reason to believe that §36(b)
incorporates the specific meaning of the term in the law of trusts.
Brief for Respondent 34–36.
We find it unnecessary to take
sides in this dispute. In
Pepper v.
Litton, 308
U. S. 295 (1939), we discussed the meaning of the concept of
fiduciary duty in a context that is analogous to that presented
here, and we also looked to trust law. At issue in
Pepper
was whether a bankruptcy court could disallow a dominant or
controlling shareholder’s claim for compensation against a bankrupt
corporation. Dominant or controlling shareholders, we held, are
“fiduciar[ies]” whose “powers are powers [held] in trust.”
Id., at 306. We then explained:
“Their dealings with the corporation are subjected
to rigorous scrutiny and where any of their contracts or
engagements with the corporation is challenged the burden is on the
director or stockholder not only to prove the good faith of the
transaction but also to show its inherent fairness from the
viewpoint of the corporation and those interested therein… .
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.”
Id., at 306–307 (emphasis added; footnote omitted); see
also
Geddes v.
Anaconda Copper Mining Co.,
254 U. S. 590,
599 (1921) (standard of fiduciary duty for interested
directors).
We believe that this formulation expresses the
meaning of the phrase “fiduciary duty” in §36(b), 84 Stat. 1429.
The Investment Company Act modifies this duty in a significant way:
it shifts the burden of proof from the fiduciary to the party
claiming breach, 15 U. S. C. §80a–35(b)(1), to show that the
fee is outside the range that arm’s-length bargaining would
produce.
The
Gartenberg approach fully
incorporates this understanding of the fiduciary duty as set out in
Pepper and reflects §36(b)(1)’s imposition of the burden
on the plaintiff. As noted,
Gartenberg insists that all
relevant circumstances be taken into account, see 694 F. 2d,
at 929, as does §36(b)(2), 84 Stat. 1429 (“[A]pproval by the board
of directors … shall be given such consideration by the court as is
deemed appropriate under
all the circumstances ”
(emphasis added)). And
Gartenberg uses the range of fees
that might result from arm’s-length bargaining as the benchmark for
reviewing challenged fees.
2
Gartenberg’s approach
also reflects §36(b)’s place in the statutory scheme and, in
particular, its relationship to the other protections that the Act
affords investors.
Under the Act, scrutiny of
investment adviser compensation by a fully informed mutual fund
board is the “cornerstone of the … effort to control conflicts of
interest within mutual funds.”
Burks, 441 U. S., at 482.
The Act interposes disinterested directors as “independent
watchdogs” of the relationship between a mutual fund and its
adviser.
Id., at 484 (internal quotation marks omitted).
To provide these directors with the information needed to judge
whether an adviser’s compensation is excessive, the Act requires
advisers to furnish all information “reasonably … necessary to
evaluate the terms” of the adviser’s contract, 15 U. S. C.
§80a–15(c), and gives the SEC the authority to enforce that
requirement. See §80a–41. Board scrutiny of adviser compensation
and shareholder suits under §36(b), 84 Stat. 1429, are mutually
reinforcing but independent mechanisms for controlling conflicts.
See
Daily Income Fund, 464 U. S., at 541 (Congress
intended for §36(b) suits and directorial approval of adviser
contracts to act as “independent checks on excessive fees”);
Kamen, 500 U. S., at 108 (“Congress added §36(b) to the
[Act] in 1970 because it concluded that the shareholders should not
have to rely solely on the fund’s directors to assure reasonable
adviser fees, notwithstanding the increased disinterestedness of
the board” (internal quotation marks omitted)).
In recognition of the role of the
disinterested directors, 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)(2). Cf.
Burks, 441 U. S., at 485 (“[I]t would have been
paradoxical for Congress to have been willing to rely largely upon
[boards of directors as] ‘watchdogs’ to protect shareholder
interests and yet, where the ‘watchdogs’ have done precisely that,
require that they be totally muzzled”).
From this formulation, two inferences may be
drawn. First, a measure of deference to a board’s judgment may be
appropriate in some instances. Second, the appropriate measure of
deference varies depending on the circumstances.
Gartenberg heeds these precepts.
Gartenberg advises that “the expertise of the independent
trustees of a fund, whether they are fully informed about all facts
bearing on the [investment adviser’s] service and fee, and the
extent of care and conscientiousness with which they perform their
duties are important factors to be considered in deciding whether
they and the [investment adviser] are guilty of a breach of
fiduciary duty in violation of §36(b).” 694 F. 2d, at 930.
III
While both parties in this case
endorse the basic
Gartenberg approach, they disagree on
several important questions that warrant discussion.
The first concerns comparisons
between the fees that an adviser charges a captive mutual fund and
the fees that it charges its independent clients. As noted, the
Gartenberg court rejected a comparison between the fees
that the adviser in that case charged a money market fund and the
fees that it charged a pension fund. 694 F. 2d, at 930,
n. 3 (noting the “[t]he nature and extent of the services
required by each type of fund differ sharply”). Petitioners contend
that such a comparison is appropriate, Brief for Petitioners 30–31,
but respondent disagrees. Brief for Respondent 38–44. Since the Act
requires consideration of all relevant factors, 15 U. S. C.
§80a–35(b)(2); see also §80a–15(c), we do not think that there can
be any categorical rule regarding the comparisons of the fees
charged different types of clients. See
Daily Income Fund,
supra, at 537 (discussing concern with investment advisers’
practice of charging higher fees to mutual funds than to their
other clients). Instead, courts may give such comparisons the
weight that they merit in light of the similarities and differences
between the services that the clients in question require, but
courts must be wary of inapt comparisons. As the panel below noted,
there may be significant differences between the services provided
by an investment adviser to a mutual fund and those it provides to
a pension fund which are attributable to the greater frequency of
shareholder redemptions in a mutual fund, the higher turnover of
mutual fund assets, the more burdensome regulatory and legal
obligations, and higher marketing costs. 527 F. 3d, at 634
(“Different clients call for different commitments of time”). If
the services rendered are sufficiently different that a comparison
is not probative, then courts must reject such a comparison. Even
if the services provided and fees charged to an independent fund
are relevant, courts should be mindful that the Act does not
necessarily ensure fee parity between mutual funds and
institutional clients contrary to petitioners’ contentions. See
id., at 631. (“Plaintiffs maintain that a fiduciary may
charge its controlled clients no more than its independent
clients”).[
Footnote 8]
By the same token, courts should not rely too
heavily on comparisons with fees charged to mutual funds by other
advisers. These comparisons are problematic because these fees,
like those challenged, may not be the product of negotiations
conducted at arm’s length. See 537 F. 3d, at 731–732 (opinion
dissenting from denial of rehearing en banc);
Gartenberg,
supra, at 929 (“Competition between money market funds for
shareholder business does not support an inference that competition
must therefore also exist between [investment advisers] for fund
business. The former may be vigorous even though the latter is
virtually non-existent”).
Finally, a court’s evaluation of an investment
adviser’s fiduciary duty must take into account both procedure and
substance. See 15 U. S. C. §80a–35(b)(2) (requiring deference
to board’s consideration “as is deemed appropriate under all the
circumstances”); cf.
Daily Income Fund, 464 U. S., at 541
(“Congress intended security holder and SEC actions under §36(b),
on the one hand, and directorial approval of adviser contracts, on
the other, to act as independent checks on excessive fees”). Where
a board’s process for negotiating and reviewing investment-adviser
compensation is robust, a reviewing court should afford
commensurate deference to the outcome of the bargaining process.
See
Burks, 441 U. S., at 484 (unaffiliated directors serve
as “independent watchdogs”). Thus, if the 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. Cf
. id.,
at 485. This is not to deny that a fee may be excessive even if it
was negotiated by a board in possession of all relevant
information, but such a determination must be based on evidence
that the fee “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.”
Gartenberg,
supra, at 928.
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. When an investment
adviser fails to disclose material information to the board,
greater scrutiny is justified because the withheld information
might have hampered the board’s ability to function as “an
independent check upon the management.”
Burks,
supra, at 484 (internal quotation marks omitted). “Section
36(b) is sharply focused on the question of whether the fees
themselves were excessive.”
Migdal v.
Rowe
Price-Fleming Int’l, Inc., 248 F. 3d 321, 328 (CA4 2001);
see also 15 U. S. C. §80a–35(b) (imposing a “fiduciary duty
with respect to the
receipt of compensation for
services
, or of payments of a material natur
e”
(emphasis added)). But an adviser’s compliance or noncompliance
with its disclosure obligations is a factor that must be considered
in calibrating the degree of deference that is due a board’s
decision to approve an adviser’s fees.
It is also important to note that the standard
for fiduciary breach under §36(b) does not call for judicial
second-guessing of informed board decisions. See
Daily Income
Fund,
supra, at 538; see also
Burks, 441 U.
S., at 483 (“Congress consciously chose to address the
conflict-of-interest problem through the Act’s
independent-directors section, rather than through more drastic
remedies”). “[P]otential conflicts [of interests] may justify some
restraints upon the unfettered discretion of even disinterested
mutual fund directors, particularly in their transactions with the
investment adviser,” but they do not suggest that a court may
supplant the judgment of disinterested directors apprised of all
relevant information, without additional evidence that the fee
exceeds the arm’s-length range.
Id., at 481. In reviewing
compensation under §36(b), the Act does not require courts to
engage in a precise calculation of fees representative of
arm’s-length bargaining. See 527 F. 3d, at 633 (“Judicial
price-setting does not accompany fiduciary duties”). As recounted
above, Congress rejected a “reasonableness” requirement that was
criticized as charging the courts with rate-setting
responsibilities. See
Daily Income Fund,
supra,
at 538–540. Congress’ approach recognizes that courts are not well
suited to make such precise calculations. Cf.
General Motors
Corp. v.
Tracy,
519 U. S. 278, 308
(1997) (“[T]he Court is institutionally unsuited to gather the
facts upon which economic predictions can be made, and
professionally untrained to make them”);
Verizon Communications
Inc. v.
FCC, 535 U. S. 467, 539 (2002); see also
Concord v.
Boston Edison Co., 915 F. 2d 17, 25
(CA1 1990) (opinion for the court by Breyer, C. J.) (“[H]ow is
a judge or jury to determine a ‘fair price’?”).
Gartenberg’s “so disproportionately large” standard, 694
F. 2d, at 928, reflects this congressional choice to “rely
largely upon [independent director] ‘watchdogs’ to protect
shareholders interests.”
Burks, supra, at 485.
By focusing almost entirely on the element of
disclosure, the Seventh Circuit panel erred. See 527 F. 3d, at
632 (An investment adviser “must make full disclosure and play no
tricks but is not subject to a cap on compensation”). The
Gartenberg standard, which the panel rejected, may lack
sharp analytical clarity, but we believe that it accurately
reflects the compromise that is embodied in §36(b), and it has
provided a workable standard for nearly three decades. The debate
between the Seventh Circuit panel and the dissent from the denial
of rehearing regarding today’s mutual fund market is a matter for
Congress, not the courts.
IV
For the foregoing reasons, the
judgment of the Court of Appeals is vacated, and the case remanded
for further proceedings consistent with this opinion.
It is so ordered.
Footnote 1
An “affiliated person” includes (1) a person
who owns, controls, or holds the power to vote 5 percent or more of
the securities of the investment adviser; (2) an entity which the
investment adviser owns, controls, or in which it holds the power
to vote more than 5 percent of the securities; (3) any person
directly or indirectly controlling, controlled by, or under common
control with the investment adviser; (4) an officer, director,
partner, copartner, or employee of the investment adviser; (5) an
investment adviser or a member of the investment adviser’s board of
directors; or (6) the depositor of an unincorporated investment
adviser. See §80a–2(a)(3). The Act defines “interested person” to
include not only all affiliated persons but also a wider swath of
people such as the immediate family of affiliated persons,
interested persons of an underwriter or investment adviser, legal
counsel for the company, and interested broker-dealers.
§80a–2(a)(19).
Footnote 2
See 527 F. 3d 627 (CA7 2008) (case
below);
Migdal v.
Rowe Price-Fleming Int’l, Inc.,
248 F. 3d 321 (CA4 2001);
Krantz v.
Prudential
Invs. Fund Management LLC, 305 F. 3d 140 (CA3 2002)
(per curiam). After we granted certiorari in this case,
another Court of Appeals adopted the standard of
Gartenberg v.
Merrill Lynch Asset Management,
Inc., 694 F. 2d 923 (CA2 1982). See
Gallus v.
Ameriprise Financial, Inc., 561 F. 3d 816 (CA8
2009).
Footnote 3
Compare H. R. Rep. No. 2337, 89th Cong., 2d
Sess., p. vii (1966), with Investment Company Institute, 2009 Fact
Book 15, 20, 72 (49th ed.), online at
http://www.icifactbook.org/pdf/2009_factbook.pdf (as visited Mar.
9, 2010, and available in Clerk of Court’s case file).
Footnote 4
See,
e.g., Gallus,
supra, at 822–823;
Krantz,
supra;
In re Franklin Mut. Funds Fee Litigation, 478
F. Supp. 2d 677, 683, 686 (NJ 2007);
Yameen v.
Eaton Vance Distributors, Inc., 394 F. Supp. 2d 350,
355 (Mass. 2005);
Hunt v.
Invesco Funds Group,
Inc., No. H–04–2555, 2006 WL 1581846, *2 (SD Tex., June 5,
2006);
Siemers v.
Wells Fargo & Co., No. C
05–4518 WHA, 2006 WL 2355411, *15–*16 (ND Cal., Aug. 14, 2006); see
also
Amron v.
Morgan Stanley Inv. Advisors Inc.,
464 F. 3d 338, 340–341 (CA2 2006).
Footnote 5
Other factors cited by the
Gartenberg court include (1) the nature and quality of the
services provided to the fund and shareholders; (2) the
profitability of the fund to the adviser; (3) any “fall-out
financial benefits,” those collateral benefits that accrue to the
adviser because of its relationship with the mutual fund; (4)
comparative fee structure (meaning a comparison of the fees with
those paid by similar funds); and (5) the independence, expertise,
care, and conscientiousness of the board in evaluating adviser
compensation. 694 F. 2d, at 929–932 (internal quotation marks
omitted).
Footnote 6
A money market fund differs from a mutual
fund in both the types of investments and the frequency of
redemptions. A money market fund often invests in short-term money
market securities, such as short-term securities of the United
States Government or its agencies, bank certificates of deposit,
and commercial paper. Investors can invest in such a fund for as
little as a day, so, from the investor’s perspective, the fund
resembles an investment “more like a bank account than [a]
traditional investment in securities.”
Id., at 925.
Footnote 7
Section 36 (b) provides as follows:
“[T]he investment adviser of a registered
investment company shall be deemed to have a fiduciary duty with
respect to the receipt of compensation for services, or of payments
of a material nature, paid by such registered investment company,
or by the security holders thereof, to such investment adviser.” 84
Stat. 1429 (codified at 15 U. S. C. §80a–35(b)).
Footnote 8
Comparisons with fees charged to
institutional clients, therefore, will not “doo[m] [a]ny [f]und to
[t]rial.” Brief for Respondent 49; see also
Strougo v.
BEA Assocs., 188 F. Supp. 2d 373, 384 (SDNY 2002)
(suggesting that fee comparisons, where permitted, might produce a
triable issue). First, plaintiffs bear the burden in showing that
fees are beyond the range of arm’s-length bargaining.
§80a–35(b)(1). Second, a showing of relevance requires courts to
assess any disparity in fees in light of the different markets for
advisory services. Only where plaintiffs have shown a large
disparity in fees that cannot be explained by the different
services in addition to other evidence that the fee is outside the
arm’s-length range will trial be appropriate. Cf
. App. to
Pet. for Cert. 30a; see also
In re AllianceBernstein Mut.
Fund Excessive Fee Litigation, No. 04 Civ. 4885 (SWK), 2006 WL
1520222, *2 (SDNY, May 31, 2006) (citing report finding that fee
differential resulted from different services and different
liabilities assumed).
Comments
Be the first to comment
Leave a Comment