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Jones v. Harris Associates Defers to Investment Advisers in Mutual Fund Case

Online Exclusive: Anatomy of a Circuit Split

"An adviser can't make money from its captive fund if high fees drive investors away ... A fiduciary duty differs from rate regulation," Easterbrook wrote in that decision. "Publicly traded corporations use the same basic procedures as mutual funds: a committee of independent directors sets the top managers' compensation. No court has held that this procedure implies judicial review for 'reasonableness.'"

He concluded that fee challenges should only succeed in cases of insufficient disclosure or outright deception, making it far more difficult for excessive fee claims to survive summary judgment.

The board must show that it considered factors including the profitability of the fund to the adviser and the fees charged for other funds that provide similar services. A percentage of the board of directors must also be disinterested in the investment adviser and the directors must have full disclosure for their deliberations.

"They're not new factors, necessarily," says Grace Carter, a partner at Paul Hastings. "[The justices] specifically say Gartenberg has stood the test of time for 25 years, and it's worked pretty well overall."

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Christopher Danzig

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