Jones v. Harris Associates L.P.
527 F.3d 627



PROCEDURE: Plaintiff shareholders appealed from a judgment of the United States District Court for the Northern District of Illinois, Eastern Division, which granted summary judgment to defendant advisor on plaintiffs' claim that defendant violated § 36(b) of the Investment Company Act of 1940.

FACTS: Ps brought suit claiming that D violated § 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-35(b). D was paid 1% (per year) of the first $2 billion of the fund's assets, 0.9% of the next Si billion, 0.8% of the next $2 billion, and 0.75% of anything over $5 billion. It was undisputed that these fees are roughly the same (in both level and breakpoints) as those that other funds of similar size and investment goals pay their advisers, and that the fee structure is lawful under the Investment Advisers Act. P appealed.

ISSUE:Does the existence of a fiduciary duty in regards to compensation imply judicial review for reasonableness of the compensation?

RULE: Under section 36(b) of the Investment Company Act, a financial adviser has a fiduciary duty and owes an obligation of candor in negotiation, as well as honesty in performance, but may negotiate compensation in his own interest and accept what the financial institution agrees to pay.

HOLDING:
The Court of Appeals, held that:
Mutual fund had to be party to action in order to direct funds to comply with provision that required at least 40% of mutual fund's trustees to be disinterested in advisor and provision that obliged fund to reveal financial links between its trustees and advisor;
2 investment advisor could not be required to return compensation that it had received; and

ANALYSIS:Fees for investment advisor that were roughly identical in both level and breakpoints as those that other funds of similar size and investment goals paid their advisors, and otherwise had fee structure that was lawful under Investment Advisers Act, were not excessive; disapproving Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923. Affirmed.