Jones v. Harris Associates L. P. , 130 S. Ct. 1418 ( 2010 )

(Slip Opinion) OCTOBER TERM, 2009 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
JONES ET AL. v. HARRIS ASSOCIATES L. P.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
No. 08–586. Argued November 2, 2009—Decided March 30, 2010
Petitioners, shareholders in mutual funds managed by respondent in
vestment adviser, filed this suit alleging that respondent violated
§36(b)(1) of the Investment Company Act of 1940, which imposes a
“fiduciary duty [on investment advisers] with respect to the receipt of
compensation for services,” 15 U. S. C. §80a–35(b). Granting respon
dent summary judgment, the District Court concluded that petition
ers had not raised a triable issue of fact under the applicable stan
dard set forth in Gartenberg v. Merrill Lynch Asset Management, Inc.,
694 F. 2d 923, 928 (CA2): “[T]he test is essentially whether the fee
schedule represents a charge within the range of what would have
been negotiated at arm’s-length in light of all of the surrounding cir
cumstances. . . . To be guilty of a violation of §36(b), . . . the adviser
must charge a fee that is so disproportionately large it bears no rea
sonable relationship to the services rendered and could not have been
the product of arm’s length bargaining.” Rejecting the Gartenberg
standard, the Seventh Circuit panel affirmed based on different rea
soning.
Held: Based on §36(b)’s terms and the role that a shareholder action for
breach of the investment adviser’s fiduciary duty plays in the Act’s
overall structure, Gartenberg applied the correct standard. Pp. 7–17.
(a) A consensus has developed regarding the standard Gartenberg
set forth over 25 years ago: The standard has been adopted by other
federal courts, and the Securities and Exchange Commission’s regu
lations have recognized, and formalized, Gartenberg-like factors. Both
petitioners and respondents generally endorse the Gartenberg ap
proach but disagree in some respects about its meaning. Pp. 7–9.
(b) Section 36(b)’s “fiduciary duty” phrase finds its meaning in Pep
per v. Linton, 308 U. S. 295, 306–307, where the Court discussed the
2 JONES v. HARRIS ASSOCIATES L. P.
Syllabus
concept in the analogous bankruptcy context: “The essence of the test
is whether or not under all the circumstances the transaction carries
the earmarks of an arm’s length bargain. If it does not, equity will
set it aside.” Gartenberg’s approach fully incorporates this under
standing, insisting that all relevant circumstances be taken into ac
count and using the range of fees that might result from arm’s-length
bargaining as the benchmark for reviewing challenged fees. Pp. 9–
11.
(c) Gartenberg’s approach also reflects §36(b)’s place in the statu
tory scheme and, in particular, its relationship to the other protec
tions the Act affords investors. Under the Act, scrutiny of investment
adviser compensation by a fully informed mutual fund board, see
Burks v. Lasker, 441 U. S. 471, 482, and shareholder suits under
§36(b) are mutually reinforcing but independent mechanisms for con
trolling adviser conflicts of interest, see Daily Income Fund, Inc. v.
Fox, 464 U. S. 523, 541. In recognition of the disinterested directors’
role, the Act instructs courts to give board approval of an adviser’s
compensation “such consideration . . . as is deemed appropriate under
all the circumstances.” §80a–35(b)(1). It may be inferred from this
formulation that (1) a measure of deference to a board’s judgment
may be appropriate in some instances, and (2) the appropriate meas
ure of deference varies depending on the circumstances. Gartenberg
heeds these precepts. See 694 F. 2d, at 930. Pp. 11–12.
(d) The Court resolves the parties’ disagreements on several impor
tant questions. First, since the Act requires consideration of all rele
vant factors, §80a–35(b)(2), courts must give comparisons between
the fees an investment adviser charges a captive mutual fund and
the fees it charges its independent clients the weight they merit in
light of the similarities and differences between the services the cli
ents in question require. In doing so, the Court must be wary of in
apt comparisons based on significant differences between those ser
vices and must be mindful that the Act does not necessarily ensure
fee parity between the two types of clients. However, courts should
not rely too heavily on comparisons with fees charged mutual funds
by other advisers, which may not result from arm’s-length negotia
tions. Finally, a court’s evaluation of an investment adviser’s fiduci
ary duty must take into account both procedure and substance.
Where disinterested directors consider all of the relevant factors,
their decision to approve a particular fee agreement is entitled to
considerable weight, even if the court might weigh the factors differ
ently. Cf. Lasker, 441 U. S., at 486. In contrast, where the board’s
process was deficient or the adviser withheld important information,
the court must take a more rigorous look at the outcome. Id., at 484.
Gartenberg’s “so disproportionately large” standard, 694 F. 2d, at
Cite as: 559 U. S. ____ (2010) 3
Syllabus
928, reflects Congress’ choice to “rely largely upon [independent]
‘watchdogs’ to protect shareholders interests,” Lasker, supra, at 482.
Pp. 12–16.
(e) The Seventh Circuit erred in focusing on disclosure by invest
ment advisers rather than the Gartenberg standard, which the panel
rejected. That standard may lack sharp analytical clarity, but it ac
curately reflects the compromise embodied in §36(b) as to the appro
priate method of testing investment adviser compensation, and it has
provided a workable standard for nearly three decades. Pp. 16–17.
527 F. 3d 627, vacated and remanded.
ALITO, J., delivered the opinion for a unanimous Court. THOMAS, J.,
filed a concurring opinion.
Cite as: 559 U. S. ____ (2010) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 08–586
_________________
JERRY N. JONES, ET AL., PETITIONERS v. HARRIS
ASSOCIATES L. P.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE SEVENTH CIRCUIT
[March 30, 2010]
JUSTICE ALITO delivered the opinion of the Court.
We consider in this case what a mutual fund share
holder must prove in order to show that a mutual fund
investment adviser breached the “fiduciary duty with
respect to the receipt of compensation for services” that is
imposed by §36(b) of the Investment Company Act of 1940,
15 U. S. C. §80a–35(b) (hereinafter §36(b)).
I
A
The Investment Company Act of 1940 (Act), 54 Stat.
789, 15 U. S. C. §80a–1 et seq., regulates investment com
panies, including mutual funds. “A mutual fund is a pool
of assets, consisting primarily of [a] portfolio [of] securi
ties, and belonging to the individual investors holding
shares in the fund.” Burks v. Lasker, 441 U. S. 471, 480
(1979). The following arrangements are typical. A sepa
rate entity called an investment adviser creates the mu
tual fund, which may have no employees of its own. See
Kamen v. Kemper Financial Services, Inc., 500 U. S. 90, 93
(1991); Daily Income Fund, Inc. v. Fox, 464 U. S. 523, 536
(1984); Burks, 441 U. S., at 480–481. The adviser selects
2 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
the fund’s directors, manages the fund’s investments, and
provides other services. See id., at 481. Because of the
relationship between a mutual fund and its investment
adviser, the fund often “ ‘cannot, as a practical matter
sever its relationship with the adviser. Therefore, the
forces of arm’s-length bargaining do not work in the mu
tual fund industry in the same manner as they do in other
sectors of the American economy.’ ” Ibid. (quoting S. Rep.
No. 91–184, p. 5 (1969) (hereinafter S. Rep.)).
“Congress adopted the [Investment Company Act of
1940] because of its concern with the potential for abuse
inherent in the structure of investment companies.” Daily
Income Fund, 464 U. S., at 536 (internal quotation marks
omitted). Recognizing that the relationship between a
fund and its investment adviser was “fraught with poten
tial conflicts of interest,” the Act created protections for
mutual fund shareholders. Id., at 536–538 (internal quo
tation marks omitted); Burks, supra, at 482–483. Among
other things, the Act required that no more than 60 per
cent of a fund’s directors could be affiliated with the ad
viser and that fees for investment advisers be approved by
the directors and the shareholders of the fund. See §§10,
15(c), 54 Stat. 806, 813.
The growth of mutual funds in the 1950’s and 1960’s
prompted studies of the 1940 Act’s effectiveness in protect
ing investors. See Daily Income Fund, 464 U. S., at 537–
538. Studies commissioned or authored by the Securities
and Exchange Commission (SEC or Commission) identi
fied problems relating to the independence of investment
company boards and the compensation received by in
vestment advisers. See ibid. In response to such con
cerns, Congress amended the Act in 1970 and bolstered
shareholder protection in two primary ways.
First, the amendments strengthened the “cornerstone”
of the Act’s efforts to check conflicts of interest, the inde
pendence of mutual fund boards of directors, which nego
Cite as: 559 U. S. ____ (2010) 3
Opinion of the Court
tiate and scrutinize adviser compensation. Burks, supra,
at 482. The amendments required that no more than 60
percent of a fund’s directors be “persons who are inter
ested persons,” e.g., that they have no interest in or affilia
tion with the investment adviser.1 15 U. S. C. §80a–
10(a); §80a–2(a)(19); see also Daily Income Fund, supra, at
538. These board members are given “a host of special
responsibilities.” Burks, 441 U. S., at 482–483. In par
ticular, they must “review and approve the contracts of the
investment adviser” annually, id., at 483, and a majority
of these directors must approve an adviser’s compensation,
15 U. S. C. §80a–15(c). Second, §36(b), 84 Stat. 1429, of
the Act imposed upon investment advisers a “fiduciary
duty” with respect to compensation received from a mu
tual fund, 15 U. S. C. §80a–35(b), and granted individual
investors a private right of action for breach of that duty,
ibid.
The “fiduciary duty” standard contained in §36(b) repre
sented a delicate compromise. Prior to the adoption of the
1970 amendments, shareholders challenging investment
adviser fees under state law were required to meet “com
mon-law standards of corporate waste, under which an
unreasonable or unfair fee might be approved unless the
——————
1 An “affiliated person” includes (1) a person who owns, controls, or
holds the power to vote 5 percent or more of the securities of the in
vestment adviser; (2) an entity which the investment adviser owns,
controls, or in which it holds the power to vote more than 5 percent of
the securities; (3) any person directly or indirectly controlling, con
trolled by, or under common control with the investment adviser; (4) an
officer, director, partner, copartner, or employee of the investment
adviser; (5) an investment adviser or a member of the investment
adviser’s board of directors; or (6) the depositor of an unincorporated
investment adviser. See §80a–2(a)(3). The Act defines “interested
person” to include not only all affiliated persons but also a wider swath
of people such as the immediate family of affiliated persons, interested
persons of an underwriter or investment adviser, legal counsel for the
company, and interested broker-dealers. §80a–2(a)(19).
4 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
court deemed it ‘unconscionable’ or ‘shocking,’ ” and “secu
rity holders challenging adviser fees under the [Invest
ment Company Act] itself had been required to prove gross
abuse of trust.” Daily Income Fund, 464 U. S., at 540,
n. 12. Aiming to give shareholders a stronger remedy, the
SEC proposed a provision that would have empowered the
Commission to bring actions to challenge a fee that was
not “reasonable” and to intervene in any similar action
brought by or on behalf of an investment company. Id., at
538. This approach was included in a bill that passed the
House. H. R. 9510, 90th Cong., 1st Sess., §8(d) (1967); see
also S. 1659, 90th Cong., 1st Sess., §8(d) (1967). Industry
representatives, however, objected to this proposal, fearing
that it “might in essence provide the Commission with
ratemaking authority.” Daily Income Fund, 464 U. S., at
538.
The provision that was ultimately enacted adopted “a
different method of testing management compensation,”
id., at 539 (quoting S. Rep., at 5 (internal quotation
marks omitted)), that was more favorable to shareholders
than the previously available remedies but that did not
permit a compensation agreement to be reviewed in court
for “reasonableness.” This is the fiduciary duty standard
in §36(b).
B
Petitioners are shareholders in three different mutual
funds managed by respondent Harris Associates L. P., an
investment adviser. Petitioners filed this action in the
Northern District of Illinois pursuant to §36(b) seeking
damages, an injunction, and rescission of advisory agree
ments between Harris Associates and the mutual funds.
The complaint alleged that Harris Associates had violated
§36(b) by charging fees that were “disproportionate to the
services rendered” and “not within the range of what
would have been negotiated at arm’s length in light of all
Cite as: 559 U. S. ____ (2010) 5
Opinion of the Court
the surrounding circumstances.” App. 52.
The District Court granted summary judgment for
Harris Associates. Applying the standard adopted in
Gartenberg v. Merrill Lynch Asset Management, Inc., 694
F. 2d 923 (CA2 1982), the court concluded that petitioners
had failed to raise a triable issue of fact as to “whether the
fees charged . . . were so disproportionately large that they
could not have been the result of arm’s-length bargaining.”
App. to Pet. for Cert. 29a. The District Court assumed
that it was relevant to compare the challenged fees with
those that Harris Associates charged its other clients. Id.,at 30a. But in light of those comparisons as well as com
parisons with fees charged by other investment advisers to
similar mutual funds, the Court held that it could not
reasonably be found that the challenged fees were outside
the range that could have been the product of arm’s-length
bargaining. Id., at 29a–32a.
A panel of the Seventh Circuit affirmed based on differ
ent reasoning, explicitly “disapprov[ing] the Gartenberg
approach.” 527 F. 3d 627, 632 (2008). Looking to trust
law, the panel noted that, while a trustee “owes an obliga
tion of candor in negotiation,” a trustee, at the time of the
creation of a trust, “may negotiate in his own interest and
accept what the settlor or governance institution agrees to
pay.” Ibid. (citing Restatement (Second) of Trusts §242,
and Comment f)). The panel thus reasoned that “[a] fidu
ciary duty differs from rate regulation. A fiduciary must
make full disclosure and play no tricks but is not subject
to a cap on compensation.” 527 F. 3d, at 632. In the
panel’s view, the amount of an adviser’s compensation
would be relevant only if the compensation were “so un
usual” as to give rise to an inference “that deceit must
have occurred, or that the persons responsible for decision
have abdicated.” Ibid.The panel argued that this understanding of §36(b) is
consistent with the forces operating in the contemporary
6 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
mutual fund market. Noting that “[t]oday thousands of
mutual funds compete,” the panel concluded that “sophis
ticated investors” shop for the funds that produce the best
overall results, “mov[e] their money elsewhere” when fees
are “excessive in relation to the results,” and thus “create
a competitive pressure” that generally keeps fees low. Id.,
at 633–634. The panel faulted Gartenberg on the ground
that it “relies too little on markets.” 527 F. 3d, at 632.
And the panel firmly rejected a comparison between the
fees that Harris Associates charged to the funds and the
fees that Harris Associates charged other types of clients,
observing that “[d]ifferent clients call for different com
mitments of time” and that costs, such as research, that
may benefit several categories of clients “make it hard to
draw inferences from fee levels.” Id., at 634.
The Seventh Circuit denied rehearing en banc by an
equally divided vote. 537 F. 3d 728 (2008). The dissent
from the denial of rehearing argued that the panel’s rejec
tion of Gartenberg was based “mainly on an economic
analysis that is ripe for reexamination.” 537 F. 3d, at 730(opinion of Posner, J.). Among other things, the dissent
expressed concern that Harris Associates charged “its
captive funds more than twice what it charges independ
ent funds,” and the dissent questioned whether high ad
viser fees actually drive investors away. Id., at 731.
We granted certiorari to resolve a split among the
Courts of Appeals over the proper standard under §36(b).2
556 U. S. ___ (2009).
——————
2 See 527 F. 3d 627 (CA7 2008) (case below); Migdal v. Rowe Price-
Fleming Int’l, Inc., 248 F. 3d 321 (CA4 2001); Krantz v. Prudential Invs.
Fund Management LLC, 305 F. 3d 140 (CA3 2002) (per curiam). After
we granted certiorari in this case, another Court of Appeals adopted the
standard of Gartenberg v. Merrill Lynch Asset Management, Inc., 694
F. 2d 923 (CA2 1982). See Gallus v. Ameriprise Financial, Inc., 561
F. 3d 816 (CA8 2009).
Cite as: 559 U. S. ____ (2010) 7
Opinion of the Court
II
A
Since Congress amended the Investment Company Act
in 1970, the mutual fund industry has experienced expo
nential growth. Assets under management increased from
$38.2 billion in 1966 to over $9.6 trillion in 2008. The
number of mutual fund investors grew from 3.5 million in
1965 to 92 million in 2008, and there are now more than
9,000 open- and closed-end funds.3
During this time, the standard for an investment ad
viser’s fiduciary duty has remained an open question in
our Court, but, until the Seventh Circuit’s decision below,
something of a consensus had developed regarding the
standard set forth over 25 years ago in Gartenberg, supra.
The Gartenberg standard has been adopted by other fed
eral courts,4 and “[t]he SEC’s regulations have recognized,
and formalized, Gartenberg-like factors.” Brief for United
States as Amicus Curiae 23. See 17 CFR §240.14a–101,
Sched. 14A, Item 22, para. (c)(11)(i) (2009); 69 Fed. Reg.
39801, n. 31, 39807–39809 (2004). In the present case,
both petitioners and respondent generally endorse the
Gartenberg approach, although they disagree in some
respects about its meaning.
In Gartenberg, the Second Circuit noted that Congress
had not defined what it meant by a “fiduciary duty” with
——————
3 Compare H. R. Rep. No. 2337, 89th Cong., 2d Sess., p. vii (1966),
with Investment Company Institute, 2009 Fact Book 15, 20, 72 (49th
ed.), online at http://www.icifactbook.org/pdf/2009_factbook.pdf (as
visited Mar. 9, 2010, and available in Clerk of Court’s case file).
4 See, e.g., Gallus, supra, at 822–823; Krantz, supra; In re Franklin
Mut. Funds Fee Litigation, 478 F. Supp. 2d 677, 683, 686 (NJ 2007);
Yameen v. Eaton Vance Distributors, Inc., 394 F. Supp. 2d 350, 355
(Mass. 2005); Hunt v. Invesco Funds Group, Inc., No. H–04–2555, 2006
WL 1581846, *2 (SD Tex., June 5, 2006); Siemers v. Wells Fargo & Co.,
No. C 05–4518 WHA, 2006 WL 2355411, *15–*16 (ND Cal., Aug. 14,
2006); see also Amron v. Morgan Stanley Inv. Advisors Inc., 464 F. 3d
338, 340–341 (CA2 2006).
8 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
respect to compensation but concluded that “the test is
essentially whether the fee schedule represents a charge
within the range of what would have been negotiated at
arm’s-length in the light of all of the surrounding circum
stances.” 694 F. 2d, at 928. The Second Circuit elabo
rated that, “[t]o be guilty of a violation of §36(b), . . . the
adviser-manager must charge a fee that is so dispropor
tionately large that it bears no reasonable relationship to
the services rendered and could not have been the product
of arm’s-length bargaining.” Ibid. “To make this determi
nation,” the Court stated, “all pertinent facts must be
weighed,” id., at 929, and the Court specifically mentioned
“the adviser-manager’s cost in providing the service, . . .
the extent to which the adviser-manager realizes econo
mies of scale as the fund grows larger, and the volume of
orders which must be processed by the manager.” Id., at
930.5 Observing that competition among advisers for the
business of managing a fund may be “virtually non
existent,” the Court rejected the suggestion that “the
principal factor to be considered in evaluating a fee’s
fairness is the price charged by other similar advisers to
funds managed by them,” although the Court did not
suggest that this factor could not be “taken into account.”
Id., at 929. The Court likewise rejected the “argument
that the lower fees charged by investment advisers to
large pension funds should be used as a criterion for de
termining fair advisory fees for money market funds,”
——————
5 Other factors cited by the Gartenberg court include (1) the nature
and quality of the services provided to the fund and shareholders; (2)
the profitability of the fund to the adviser; (3) any “fall-out financial
benefits,” those collateral benefits that accrue to the adviser because of
its relationship with the mutual fund; (4) comparative fee structure
(meaning a comparison of the fees with those paid by similar funds);
and (5) the independence, expertise, care, and conscientiousness of the
board in evaluating adviser compensation. 694 F. 2d, at 929–932
(internal quotation marks omitted).
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Opinion of the Court
since a “pension fund does not face the myriad of daily
purchases and redemptions throughout the nation which
must be handled by [a money market fund].” Id., at 930,
n. 3.6
B
The meaning of §36(b)’s reference to “a fiduciary duty
with respect to the receipt of compensation for services”7 is
hardly pellucid, but based on the terms of that provision
and the role that a shareholder action for breach of that
duty plays in the overall structure of the Act, we conclude
that Gartenberg was correct in its basic formulation of
what §36(b) requires: to face liability under §36(b), an
investment adviser must charge a fee that is so dispropor
tionately large that it bears no reasonable relationship to
the services rendered and could not have been the product
of arm’s length bargaining.
1
We begin with the language of §36(b). As noted, the
Seventh Circuit panel thought that the phrase “fiduciary
duty” incorporates a standard taken from the law of
trusts. Petitioners agree but maintain that the panel
——————
6 A money market fund differs from a mutual fund in both the types
of investments and the frequency of redemptions. A money market
fund often invests in short-term money market securities, such as
short-term securities of the United States Government or its agencies,
bank certificates of deposit, and commercial paper. Investors can
invest in such a fund for as little as a day, so, from the investor’s
perspective, the fund resembles an investment “more like a bank
account than [a] traditional investment in securities.” Id., at 925.
7 Section 36 (b) provides as follows:
“[T]he investment adviser of a registered investment company shall
be deemed to have a fiduciary duty with respect to the receipt of com
pensation for services, or of payments of a material nature, paid by
such registered investment company, or by the security holders thereof,
to such investment adviser.” 84 Stat. 1429 (codified at 15 U. S. C.
§80a–35(b)).
10 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
identified the wrong trust-law standard. Instead of the
standard that applies when a trustee and a settlor negoti
ate the trustee’s fee at the time of the creation of a trust,
petitioners invoke the standard that applies when a trus
tee seeks compensation after the trust is created. Brief for
Petitioners 20–23, 35–37. A compensation agreement
reached at that time, they point out, “ ‘will not bind the
beneficiary’ if either ‘the trustee failed to make a full
disclosure of all circumstances affecting the agreement’ ”
which he knew or should have known or if the agreement
is unfair to the beneficiary. Id., at 23 (quoting Restate
ment (Second) of Trusts §242, Comment i). Respondent,
on the other hand, contends that the term “fiduciary” is
not exclusive to the law of trusts, that the phrase means
different things in different contexts, and that there is no
reason to believe that §36(b) incorporates the specific
meaning of the term in the law of trusts. Brief for Re
spondent 34–36.
We find it unnecessary to take sides in this dispute. In
Pepper v. Litton, 308 U. S. 295 (1939), we discussed the
meaning of the concept of fiduciary duty in a context that
is analogous to that presented here, and we also looked to
trust law. At issue in Pepper was whether a bankruptcy
court could disallow a dominant or controlling share
holder’s claim for compensation against a bankrupt corpo
ration. Dominant or controlling shareholders, we held, are
“fiduciar[ies]” whose “powers are powers [held] in trust.”
Id., at 306. We then explained:
“Their dealings with the corporation are subjected to
rigorous scrutiny and where any of their contracts or
engagements with the corporation is challenged the
burden is on the director or stockholder not only to
prove the good faith of the transaction but also to
show its inherent fairness from the viewpoint of the
corporation and those interested therein. . . . The es
Cite as: 559 U. S. ____ (2010) 11
Opinion of the Court
sence of the test is whether or not under all the circum
stances the transaction carries the earmarks of an
arm’s length bargain. If it does not, equity will set it
aside.” Id., at 306–307 (emphasis added; footnote
omitted); see also Geddes v. Anaconda Copper Mining
Co., 254 U. S. 590, 599 (1921) (standard of fiduciary
duty for interested directors).
We believe that this formulation expresses the meaning of
the phrase “fiduciary duty” in §36(b), 84 Stat. 1429. The
Investment Company Act modifies this duty in a signifi
cant way: it shifts the burden of proof from the fiduciary to
the party claiming breach, 15 U. S. C. §80a–35(b)(1), to
show that the fee is outside the range that arm’s-length
bargaining would produce.
The Gartenberg approach fully incorporates this under
standing of the fiduciary duty as set out in Pepper and
reflects §36(b)(1)’s imposition of the burden on the plain
tiff. As noted, Gartenberg insists that all relevant circum
stances be taken into account, see 694 F. 2d, at 929, as
does §36(b)(2), 84 Stat. 1429 (“[A]pproval by the board of
directors . . . shall be given such consideration by the court
as is deemed appropriate under all the circumstances ”
(emphasis added)). And Gartenberg uses the range of fees
that might result from arm’s-length bargaining as the
benchmark for reviewing challenged fees.
2
Gartenberg’s approach also reflects §36(b)’s place in the
statutory scheme and, in particular, its relationship to the
other protections that the Act affords investors.
Under the Act, scrutiny of investment adviser compen
sation by a fully informed mutual fund board is the “cor
nerstone of the . . . effort to control conflicts of interest
within mutual funds.” Burks, 441 U. S., at 482. The Act
interposes disinterested directors as “independent watch
dogs” of the relationship between a mutual fund and its
12 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
adviser. Id., at 484 (internal quotation marks omitted).
To provide these directors with the information needed to
judge whether an adviser’s compensation is excessive, the
Act requires advisers to furnish all information “reasona
bly . . . necessary to evaluate the terms” of the adviser’s
contract, 15 U. S. C. §80a–15(c), and gives the SEC the
authority to enforce that requirement. See §80a–41.
Board scrutiny of adviser compensation and shareholder
suits under §36(b), 84 Stat. 1429, are mutually reinforcing
but independent mechanisms for controlling conflicts. See
Daily Income Fund, 464 U. S., at 541 (Congress intended
for §36(b) suits and directorial approval of adviser con
tracts to act as “independent checks on excessive fees”);
Kamen, 500 U. S., at 108 (“Congress added §36(b) to the
[Act] in 1970 because it concluded that the shareholders
should not have to rely solely on the fund’s directors to
assure reasonable adviser fees, notwithstanding the in
creased disinterestedness of the board” (internal quotation
marks omitted)).
In recognition of the role of the disinterested directors,
the Act instructs courts to give board approval of an ad
viser’s compensation “such consideration . . . as is deemed
appropriate under all the circumstances.” §80a–35(b)(2).
Cf. Burks, 441 U. S., at 485 (“[I]t would have been para
doxical for Congress to have been willing to rely largely
upon [boards of directors as] ‘watchdogs’ to protect share
holder interests and yet, where the ‘watchdogs’ have done
precisely that, require that they be totally muzzled”).
From this formulation, two inferences may be drawn.
First, a measure of deference to a board’s judgment may
be appropriate in some instances. Second, the appro
priate measure of deference varies depending on the
circumstances.
Gartenberg heeds these precepts. Gartenberg advises
that “the expertise of the independent trustees of a fund,
whether they are fully informed about all facts bearing on
Cite as: 559 U. S. ____ (2010) 13
Opinion of the Court
the [investment adviser’s] service and fee, and the extent
of care and conscientiousness with which they perform
their duties are important factors to be considered in
deciding whether they and the [investment adviser] are
guilty of a breach of fiduciary duty in violation of §36(b).”
694 F. 2d, at 930.
III
While both parties in this case endorse the basic Gar
tenberg approach, they disagree on several important
questions that warrant discussion.
The first concerns comparisons between the fees that an
adviser charges a captive mutual fund and the fees that it
charges its independent clients. As noted, the Gartenberg
court rejected a comparison between the fees that the
adviser in that case charged a money market fund and the
fees that it charged a pension fund. 694 F. 2d, at 930, n. 3(noting the “[t]he nature and extent of the services re
quired by each type of fund differ sharply”). Petitioners
contend that such a comparison is appropriate, Brief for
Petitioners 30–31, but respondent disagrees. Brief for
Respondent 38–44. Since the Act requires consideration of
all relevant factors, 15 U. S. C. §80a–35(b)(2); see also
§80a–15(c), we do not think that there can be any cate
gorical rule regarding the comparisons of the fees charged
different types of clients. See Daily Income Fund, supra,
at 537 (discussing concern with investment advisers’
practice of charging higher fees to mutual funds than to
their other clients). Instead, courts may give such com
parisons the weight that they merit in light of the simi
larities and differences between the services that the
clients in question require, but courts must be wary of
inapt comparisons. As the panel below noted, there may
be significant differences between the services provided by
an investment adviser to a mutual fund and those it pro
vides to a pension fund which are attributable to the
14 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
greater frequency of shareholder redemptions in a mutual
fund, the higher turnover of mutual fund assets, the more
burdensome regulatory and legal obligations, and higher
marketing costs. 527 F. 3d, at 634 (“Different clients call
for different commitments of time”). If the services ren
dered are sufficiently different that a comparison is not
probative, then courts must reject such a comparison.
Even if the services provided and fees charged to an inde
pendent fund are relevant, courts should be mindful that
the Act does not necessarily ensure fee parity between
mutual funds and institutional clients contrary to peti
tioners’ contentions. See id., at 631. (“Plaintiffs maintain
that a fiduciary may charge its controlled clients no more
than its independent clients”).8
By the same token, courts should not rely too heavily on
comparisons with fees charged to mutual funds by other
advisers. These comparisons are problematic because
these fees, like those challenged, may not be the product of
negotiations conducted at arm’s length. See 537 F. 3d, at731–732 (opinion dissenting from denial of rehearing en
banc); Gartenberg, supra, at 929 (“Competition between
money market funds for shareholder business does not
——————
8 Comparisons with fees charged to institutional clients, therefore,
will not “doo[m] [a]ny [f]und to [t]rial.” Brief for Respondent 49; see
also Strougo v. BEA Assocs., 188 F. Supp. 2d 373, 384 (SDNY 2002)
(suggesting that fee comparisons, where permitted, might produce a
triable issue). First, plaintiffs bear the burden in showing that fees are
beyond the range of arm’s-length bargaining. §80a–35(b)(1). Second, a
showing of relevance requires courts to assess any disparity in fees in
light of the different markets for advisory services. Only where plain
tiffs have shown a large disparity in fees that cannot be explained by
the different services in addition to other evidence that the fee is
outside the arm’s-length range will trial be appropriate. Cf. App. to
Pet. for Cert. 30a; see also In re AllianceBernstein Mut. Fund Excessive
Fee Litigation, No. 04 Civ. 4885 (SWK), 2006 WL 1520222, *2 (SDNY,
May 31, 2006) (citing report finding that fee differential resulted from
different services and different liabilities assumed).
Cite as: 559 U. S. ____ (2010) 15
Opinion of the Court
support an inference that competition must therefore also
exist between [investment advisers] for fund business.
The former may be vigorous even though the latter is
virtually non-existent”).
Finally, a court’s evaluation of an investment adviser’s
fiduciary duty must take into account both procedure and
substance. See 15 U. S. C. §80a–35(b)(2) (requiring defer
ence to board’s consideration “as is deemed appropriate
under all the circumstances”); cf. Daily Income Fund, 464
U. S., at 541 (“Congress intended security holder and SEC
actions under §36(b), on the one hand, and directorial
approval of adviser contracts, on the other, to act as inde
pendent checks on excessive fees”). Where a board’s proc
ess for negotiating and reviewing investment-adviser
compensation is robust, a reviewing court should afford
commensurate deference to the outcome of the bargaining
process. See Burks, 441 U. S., at 484 (unaffiliated direc
tors serve as “independent watchdogs”). Thus, if the
disinterested directors considered the relevant factors,
their decision to approve a particular fee agreement is
entitled to considerable weight, even if a court might
weigh the factors differently. Cf. id., at 485. This is not to
deny that a fee may be excessive even if it was negotiated
by a board in possession of all relevant information, but
such a determination must be based on evidence that the
fee “is so disproportionately large that it bears no reason
able relationship to the services rendered and could not
have been the product of arm’s-length bargaining.” Gar
tenberg, supra, at 928.
In contrast, where the board’s process was deficient or
the adviser withheld important information, the court
must take a more rigorous look at the outcome. When an
investment adviser fails to disclose material information
to the board, greater scrutiny is justified because the
withheld information might have hampered the board’s
ability to function as “an independent check upon the
16 JONES v. HARRIS ASSOCIATES L. P.
Opinion of the Court
management.” Burks, supra, at 484 (internal quotation
marks omitted). “Section 36(b) is sharply focused on the
question of whether the fees themselves were excessive.”
Migdal v. Rowe Price-Fleming Int’l, Inc., 248 F. 3d 321,
328 (CA4 2001); see also 15 U. S. C. §80a–35(b) (imposing
a “fiduciary duty with respect to the receipt of compensa
tion for services, or of payments of a material nature”
(emphasis added)). But an adviser’s compliance or non
compliance with its disclosure obligations is a factor that
must be considered in calibrating the degree of deference
that is due a board’s decision to approve an adviser’s fees.
It is also important to note that the standard for fiduci
ary breach under §36(b) does not call for judicial second
guessing of informed board decisions. See Daily Income
Fund, supra, at 538; see also Burks, 441 U. S., at 483(“Congress consciously chose to address the conflict-of
interest problem through the Act’s independent-directors
section, rather than through more drastic remedies”).
“[P]otential conflicts [of interests] may justify some re
straints upon the unfettered discretion of even disinter
ested mutual fund directors, particularly in their transac
tions with the investment adviser,” but they do not
suggest that a court may supplant the judgment of disin
terested directors apprised of all relevant information,
without additional evidence that the fee exceeds the arm’s
length range. Id., at 481. In reviewing compensation
under §36(b), the Act does not require courts to engage in
a precise calculation of fees representative of arm’s-length
bargaining. See 527 F. 3d, at 633 (“Judicial price-setting
does not accompany fiduciary duties”). As recounted
above, Congress rejected a “reasonableness” requirement
that was criticized as charging the courts with rate-setting
responsibilities. See Daily Income Fund, supra, at 538–
540. Congress’ approach recognizes that courts are not
well suited to make such precise calculations. Cf. General
Motors Corp. v. Tracy, 519 U. S. 278, 308 (1997) (“[T]he
Cite as: 559 U. S. ____ (2010) 17
Opinion of the Court
Court is institutionally unsuited to gather the facts upon
which economic predictions can be made, and profession
ally untrained to make them”); Verizon Communications
Inc. v. FCC, 535 U. S. 467, 539 (2002); see also Concord v.
Boston Edison Co., 915 F. 2d 17, 25 (CA1 1990) (opinion
for the court by Breyer, C. J.) (“[H]ow is a judge or jury to
determine a ‘fair price’?”). Gartenberg’s “so disproportion
ately large” standard, 694 F. 2d, at 928, reflects this con
gressional choice to “rely largely upon [independent direc
tor] ‘watchdogs’ to protect shareholders interests.” Burks,
supra, at 485.
By focusing almost entirely on the element of disclosure,
the Seventh Circuit panel erred. See 527 F. 3d, at 632 (An
investment adviser “must make full disclosure and play no
tricks but is not subject to a cap on compensation”). The
Gartenberg standard, which the panel rejected, may lack
sharp analytical clarity, but we believe that it accurately
reflects the compromise that is embodied in §36(b), and it
has provided a workable standard for nearly three dec
ades. The debate between the Seventh Circuit panel and
the dissent from the denial of rehearing regarding today’s
mutual fund market is a matter for Congress, not the
courts.
IV
For the foregoing reasons, the judgment of the Court of
Appeals is vacated, and the case remanded for further
proceedings consistent with this opinion.
It is so ordered.
Cite as: 559 U. S. ____ (2010) 1
THOMAS, J., concurring
SUPREME COURT OF THE UNITED STATES
_________________
No. 08–586
_________________
JERRY N. JONES, ET AL., PETITIONERS v. HARRIS
ASSOCIATES L. P.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE SEVENTH CIRCUIT
[March 30, 2010]
JUSTICE THOMAS, concurring.
The Court rightly affirms the careful approach to §36(b)
cases, see 15 U. S. C. §80a–35(b), that courts have applied
since (and in certain respects in spite of) Gartenberg v.
Merrill Lynch Asset Management, Inc., 694 F. 2d 923, 928–
930 (CA2 1982). I write separately because I would not
shortchange the Court’s effort by describing it as affirma
tion of the “Gartenberg standard.” Ante, at 7, 17.
The District Court and Court of Appeals in Gartenberg
created that standard, which emphasizes fee “fairness”
and proportionality, 694 F. 2d, at 929, in a manner that
could be read to permit the equivalent of the judicial rate
regulation the Gartenberg opinions disclaim, based on the
Investment Company Act of 1940’s “tortuous” legislative
history and a handful of extrastatutory policy and market
considerations, id., at 928; see also id., at 926–927, 929–
931; Gartenberg v. Merrill Lynch Asset Management, Inc.,
528 F. Supp. 1038, 1046–1050, 1055–1057 (SDNY 1981).
Although virtually all subsequent §36(b) cases cite Gar
tenberg, most courts have correctly declined its invitation
to stray beyond statutory bounds. Instead, they have
followed an approach (principally in deciding which cases
may proceed past summary judgment) that defers to the
informed conclusions of disinterested boards and holds
plaintiffs to their heavy burden of proof in the manner the
2 JONES v. HARRIS ASSOCIATES L. P.
THOMAS, J., concurring
Act, and now the Court’s opinion, requires. See, e.g., ante,
at 11 (underscoring that the Act “modifies” the governing
fiduciary duty standard “in a significant way: It shifts the
burden of proof from the fiduciary to the party claiming
breach, 15 U. S. C. §80a–35(b)(1), to show that the fee is
outside the range that arm’s-length bargaining would
produce”); ante, at 16 (citing the “degree of deference that
is due a board’s decision to approve an adviser’s fees” and
admonishing that “the standard for fiduciary breach under
§36(b) does not call for judicial second-guessing of in
formed board decisions”).
I concur in the Court’s decision to affirm this approach
based upon the Investment Company Act’s text and our
longstanding fiduciary duty precedents. But I would not
say that in doing so we endorse the “Gartenberg standard.”
Whatever else might be said about today’s decision, it does
not countenance the free-ranging judicial “fairness” review
of fees that Gartenberg could be read to authorize, see 694
F. 2d, at 929–930, and that virtually all courts deciding
§36(b) cases since Gartenberg (including the Court of
Appeals in this case) have wisely eschewed in the post
Gartenberg precedents we approve.