Last November, on the day the U.S. Supreme Court heard argument in an Investment Company Act case over fees that mutual funds pay their advisers, Blawgletter wrote:
Supremes Listen to Fee Fight
The U.S. Supreme Court today heard what "fiduciary" means for an investment adviser when it charges mutual funds more than institutional investors pay for similar services. See Transcript, Jones v. Harris Assocs. L.P., No 08-586 (U.S. Nov. 2, 2009). Briefs here.
Blawgletter predicts a close decision — probably by one vote – in favor of mutual fund investors, who claim the adviser breached its fiduciary duty under section 36(b) of the Investment Company Act.
The system for setting fees looks odd to us. Mutual funds come into the world through the will of a Fidelity, a Templeton, a Vanguard, or some other outfit that aims to make money by selling its investment advice. The money-making part comes in the form of adviser fees, which the creator/sponsor more or less negotiates with mutual fund offspring. An independent board must okay the pay.
But can the board, however independent, guard against too-high fees ex post facto? In 1970, Congress feared not. It said "the investment adviser . . . shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services". 15 U.S.C. 80a-35(b). Congress also created a cause of action to recover excessive fees. And it provided that the board's clearing of the fees didn't end the inquiry but that the okay “shall be given such consideration by the court as is deemed appropriate under all the circumstances". `15 U.S.C. 80a-35(b)(2).
The Justices grappled with the idea of a "fiduciary" duty that an independent board mediates but that a court may then review afresh. Two of them — Chief Justice Roberts and Justice Scalia – vocally doubted the practicability of having judges second-guess board decisions.
Five others spoke more charitably about the excessive fee claim. The petitioners, who lost in the district court and the Seventh Circuit, pointed out that the fees at issue far exceeded the fees that the same adviser charged its more savvy institutional investors for the same kinds of services. Justices Breyer, GInsburg, Kennedy, Sotomayor, and Stevens seemed to want to give "fiduciary" more meaning than the courts below did.
Today the Court, 9-0, held that the Seventh Circuit applied too easy a test for judging whether an investment adviser met its duty as a "fiduciary" in negotiating its fee for advice to a mutual fund. Jones v. Harris Assocs. L.P., No 08-586 (U.S. Mar. 30, 2010). The Court adopted a flexible definition of fiduciary duty and rejected the Seventh Circuit's approach that apotheosized the notion that the "market" adequately protects mutual fund shareholders against abuses. Justice Sam Alito wrote the Court's opinion, which remanded the case for proceedings consistent with the opinion.