Non-Enforcement Matters Supreme Court Hears Case on Allegedly Excessive Investment Advisory Fees Earlier this month, the United States Supreme Court (Court) heard the case of Jones v. Harris Associates, which we reported on in our March 2009 Update ( http://www.foley.com/publications/pub_detail.aspx?pubid=5873). When the Court granted certiorari to hear the case, the question presented was whether an investment adviser charged an impermissibly excessive fee to mutual fund shareholders when the fee was more than twice the amount charged to institutional investors. The oral arguments, however, focused on the issue of whether Harris Associates violated its fiduciary duty with respect to compensation by charging this higher fee on the mutual funds.
Under the Investment Company Act of 1940 (Company Act), as amended, investment advisers have a fiduciary duty with respect to compensation for services. Although investment-adviser compensation must be approved by a fund's board of directors, the fund shareholders retain the right to bring a lawsuit against the investment adviser in some situations. Just what those situations are, though, was the heart of this argument.
The lower court had held that the advisory fee was not excessive because the fees were the product of market forces. Simply put, the investment adviser disclosed the fees to the fund, whose board of directors approved the fees. Based on that logic, the lower court did not believe this was a situation in which fund shareholders could successfully bring a claim. However, even the investment adviser's lawyer was not willing to agree with the test the lower court used.
Instead, the investment adviser argued that the lower court got the answer right, even if it did not apply the precise test for when a fund shareholder may bring a claim. Where a fee is fair, the adviser argued, no successful claim may be brought. Here, the adviser argued the fee was fair because it met the two requirements laid out by law: (1) the fee was the product of a fair process, having obtained the consent of the fund's board of directors, and (2) the fee amount was fair, in that it was in line with what other advisers were charging mutual fund shareholders.
Meanwhile, the fund shareholders, together with the U.S. government, argued that this is the precise situation in which fund shareholders are permitted to bring a successful claim under the Company Act. The fund shareholders argued that the Court should send...