NASAA Supports Judicial Scrutiny of Fund Advisory Fees

The North American Securities Administrators Association (NASAA) has filed an amicus brief with the United States Supreme Court in Jones v. Harris Associates, L.P., urging the high court to reverse a decision of the Seventh Circuit and permit the petitioners to pursue claims against a fund's investment adviser for charging excessive fees in breach of the fiduciary duty under Section 36(b) of the Investment Company Act of 1940. NASAA argued that the federal courts have consistently failed to interpret the fiduciary duty imposed by Section 36(b) with the breadth and rigor that it deserves, thereby denying mutual fund investors an important remedy to protect themselves from investment advisers who extract exorbitant fees from the captive funds they manage. Accordingly, NASAA called on the Court to reverse the decision below and allow the petitioners the opportunity to prove their claims at a trial on the merits.

NASAA argued that the decision of the Seventh Circuit was erroneous on three grounds. First, NASAA believes that the lower court erred in holding that the fiduciary duty set forth in Section 36(b) only requires disclosure by the investment adviser during fee negotiations and imposes no substantive limitations on the amount of the fees that the adviser may charge its mutual funds. Rather, NASAA contended, the language of Section 36(b) and the cases applying the fiduciary duty make clear that advisers not only must be scrupulously honest in their dealings with respect to their compensation, but the amount of that compensation must also be fair and reasonable in light of all the facts and circumstances.

Second, NASAA argued that the lower court erred by holding that some of the most compelling evidence in the case of an excessive fee arrangement was irrelevant to the application of Section 36(b). Specifically, NASAA pointed to the lower court's discounting of the fact that the respondent had charged significantly lower fees to its independent institutional clients. The lower court had asserted that market forces would inhibit any abuses that these price differentials might reflect and that such fee disparities might be justified by the differences in the amount of work that the adviser performed for different clients. NASAA contended, however, that the lower court's grant of summary judgment was improper because these are precisely the genuine issues of material fact that require resolution at trial.

Third, NASAA asserted that the Seventh Circuit's decision conflicts with the Congressional objectives that underly Section 36(b). NASAA stated that the powerful legislative remedy adopted by Congress was intended to prevent investment advisers from exploiting their captive mutual funds, a problem that has been made abundantly clear over several decades in court decisions, the legislative history of Section 36(b), and expert commentary. Despite this history, however, the lower court's ruling continues the trend of weak interpretation and application of Section 36(b) in the federal courts, thereby affording little or no relief to millions of aggrieved mutual fund investors.

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