The United States Supreme Court Upholds Gartenberg Standard for Claims Alleging Excessive Advisory Fees

March 31, 2010
The United States Supreme Court recently handed down its long awaited decision in Jones v. Harris Associates L.P., interpreting section 36(b) of the Investment Company Act of 1940. In a unanimous opinion written by Justice Samuel Alito, the Court held that the correct standard in determining whether a fund’s investment adviser has breached its fiduciary duty with respect to the receipt of compensation was the standard applied by the Second Circuit Court of Appeals in Gartenberg v. Merrill Lynch Asset Mgmt., Inc. The Court noted that Gartenberg has provided a “workable standard” for nearly three decades. The Supreme Court vacated the decision of the Seventh Circuit Court of Appeals, which rejected the Gartenberg standard in favor a market competition-based approach, and remanded the case to the Seventh Circuit for further proceedings consistent with the Court’s decision. This update provides highlights of the opinion.