Investment advisers have a “fiduciary duty with respect to the receipt of compensation for services” pursuant to §36(b) of the Investment Company Act of 1940. In the absence of a Supreme Court opinion on the issue, most courts had relied on the U.S. Court of Appeals for the Second Circuit’s decision in Gartenberg v. Merrill Lynch Asset Management Inc., 694 F.2d 923 (2d Cir. 1982), in evaluating whether an investment adviser breached this duty. This consensus approach was recently challenged by Jones v. Harris Associates L.P., 527 F. 3d 627, 632 (7th Cir. 2008), a decision in which the U.S. Court of Appeals for the Seventh Circuit explicitly rejected the Gartenberg standard.
In the appeal of the Seventh Circuit’s decision, the Supreme Court for the first time addressed what standard courts should apply in evaluating whether investment advisers have complied with their duty. On March 30, 2010, the Court unanimously held that an investment adviser breaches its duty where it charges “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.” Jones v. Harris Associates L.P., —U.S.—, 130 S. Ct. 1418, 1426 (2010). Although the Supreme Court expressly adopted the Gartenberg standard and vacated the Seventh Circuit’s decision, the Court did not provide further guidance regarding how the standard should be applied and, in fact, recognized that the approach “may lack sharp analytical clarity.”
The ‘Gartenberg’ Standard
