Kristen J. Freeman and Amy Y. Yeung
The Supreme Court, in Jones v. Harris, broadly affirmed the Second Circuit’s Gartenberg v. Merrill Lynch Asset Management, Inc. analysis of section 36(b) of the Investment Company Act of 1940, holding that the standard of liability under the statute is whether the fee charged 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.” Adding to this narrow holding, the Supreme Court set forth a fresh approach to judicial review of an investment adviser’s fiduciary obligation with respect to receipts of compensation for services, or of payments of a material nature.
Following an examination of the divergent interpretations of Gartenberg addressed by the Supreme Court in its opinion, the authors interpret the Court’s focus on “all relevant circumstances, ” as opposed to the Gartenberg Factors, to be a more nuanced approach to section 36(b) liability. The authors then contend that the Supreme Court adopted a dependent bifurcated analysis that incorporates a sliding scale of substantive scrutiny based on the level of procedural fairness. Finally, the authors argue that the Court’s critique of fund fee comparisons prevents their use as evidence to demonstrate that a fee charged is within the range of arm’s-length bargaining.