## Facts

- Mutual fund shareholders sued the funds’ investment adviser, alleging the adviser’s advisory fees were excessive.
- The adviser had a central role in creating and operating the funds, including selecting directors and providing investment management and related services.
- Shareholders alleged the adviser’s compensation breached § 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty regarding receipt of compensation for services.
- The district court granted summary judgment for the adviser, applying the Gartenberg standard and finding no triable issue that the fees were excessively high under that test.
- The court of appeals affirmed but rejected Gartenberg, reasoning that competition and market forces, not courts, should control mutual fund advisory fees.
- The Supreme Court granted review to resolve the conflict over the proper § 36(b) standard.

## Issues

1. What standard governs a shareholder claim that a mutual fund investment adviser breached § 36(b) by charging an excessive advisory fee?
2. Whether courts may treat market forces as effectively precluding judicial scrutiny of advisory fees under § 36(b).
3. What role a mutual fund board’s fee-approval process plays in evaluating a § 36(b) claim.

## Decision

- The Supreme Court reversed the judgment of the court of appeals and remanded.
- The Court held that § 36(b) incorporates the standard articulated in Gartenberg.
- The Court rejected the court of appeals’ approach that largely displaced judicial review in favor of market regulation.
- The Court stated that board approval deserves deference when the board’s process is robust and fully informed, and warrants closer review when the process is deficient.
- The Court emphasized that § 36(b) does not authorize courts to engage in open-ended fee “fairness” or price-setting review.

## Legal Principles

- Under ICA § 36(b), an adviser breaches its fiduciary duty as to compensation only if the fee 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.
- The benchmark is the range of fees that could result from arm’s-length bargaining, assessed in light of all relevant surrounding circumstances.
- A court should give deference to the fee approved through an effective, informed, independent board process, while applying more searching review when the process is weak or uninformed.
- Structural features of mutual funds can weaken typical arm’s-length constraints, supporting Congress’s decision to permit shareholder enforcement under § 36(b).
- § 36(b) claims are not a vehicle for general judicial regulation of advisory fees; liability requires meeting a demanding, conflict-focused standard.

## Conclusion

The Court held that § 36(b) excessive-fee claims are governed by the Gartenberg test and require proof that an advisory fee is so outsized, relative to services and circumstances, that it could not have resulted from arm’s-length bargaining; market competition alone does not eliminate judicial review, and the quality of the fund board’s approval process affects the level of deference given.


Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010)