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Supreme Court Unanimously Reinforces Gartenberg Approach in Investment Company Adviser Fee Cases

April 01, 2010

Grace A. Carter and Joshua G. Hamilton

On March 30, 2010, the United States Supreme Court, in a unanimous decision, standardized the law for determining whether investment adviser fees are excessive for purposes of the advisers fiduciary duty under Section 36(b) of the Investment Company Act of 1940 (the Act), 15 U.S.C. §80a-35(b). In a case closely watched by shareholders, investment advisers, and investment company boards alike, the Court in Jones v. Harris Associates L.P., 559 U.S. __, --- S. Ct. --- (2010), vacated the Seventh Circuits novel approach to excessive fee cases and adopted the standard which has been relied upon across the investment management industry for over a quarter of a century, Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982). In an opinion authored by Justice Alito, Jones resoundingly affirms the vitality of the Gartenberg approach. The opinion also clearly confirms the factors that an investment company board must consider in determining whether the directors have satisfied their duties under Section 15(c) in evaluating an advisers compensation.

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