Jones v. Harris Assocs., 527 F.3d 627 (7th Cir. 2008)

• Author: Scott L. Jeffrey
• Pages: 09

Page 60

On November 2, 2009, the Supreme Court heard oral arguments for Jones v. Harris Associates, a case arising from the Seventh Circuit, to determine whether a mutual fund advisor has breached his fiduciary duty to the fund by receiving excessive fees. Petitioners alleged that Harris Associates violated Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-36(b), which imposes a fiduciary duty on a mutual fund's investment advisors "with respect to the receipt of compensation of services" from the fund. By deciding this case, the Court will resolve a split among the circuit courts as well as a split within the Seventh Circuit between Chief Judge Frank Easterbrook's majority opinion and Judge Richard Posner's dissent.

The petitioners, shareholders in mutual funds advised by Harris Associates, allege that the advisor's compensation was too high; therefore, the company had breached its fiduciary duty to the shareholders. Writing the opinion for the Seventh Circuit, Chief Judge Easterbrook did not follow the Gartenberg approach, a test created almost 30 years ago in the Second Circuit. Gartenberg articulated that advisors breach their fiduciary duties when they "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 Disagreeing with this test, Easterbrook characterized it as relying "too little on markets," which he believes should form the basis of fee regulation, as opposed to the judiciary. Additionally, he acknowledged that a fiduciary is required to make full disclosure. Because plaintiffs brought forth no claims of non-disclosure, Easterbrook reasoned the fees charged were a product of market forces and should be upheld.

On appeal, the Seventh Circuit denied rehearing en banc by a vote of five to five.² Judge Posner dissented, maintaining that competition in markets is an unreliable tool for...