July 2009

The Securities and Exchange Commission filed an amicus brief on behalf of the United States in the Jones vs Harris case last month, arguing the court of appeals committed two fundamental errors and chat the case should be remanded for further consideration. The brief states that the court erred in judging that under Section 36(b) full disclosure and only a comparison of similar mutual fund fees is necessary to evaluate fees properly. The SEC believes that the long-used Gartenberg factors are the correct way to evaluate fund fees, although those factors have been misconstrued by later court cases.

John Baker, partner at Stradley Ronon in Washington D.C., stated in his FundLaw blog that the SEC's brief "is likely to receive special consideration from the Supreme Court" as well as "it may be seen as embodying the SEC's interpretation of Section 36(b)."

The brief argues that when Congress imposed Section 36(b), it would have added very little if it only required full disclosure and the absence of "tricks" - since a handful of other provisions already required that. An advisor's duty under Section 36(b) "extends beyond the obligation to disclose all relevant facts to the board and includes the jury to refrain from charging an excessive fee," the brief states. The SEC argues that for a full comparison of fees, the advisor must look beyond just similar funds and consider fees charged to unaffiliated clients, such as institutional funds.

The brief also points out that certain SEC regulations have recognized and formalized the Gartenberg factors - such as the 2004 decision to require a specific discussion in shareholder documents of the factors boards used to determine fees. "The Gartenberg standard - along with its non-exclusive list of potentially relevant factors - has provided useful guidance to fund boards," the brief says. "It also provides guidance for advisors in proposing fees." The brief goes on to say that the board's receipt of necessary information from the advisor covering the Gartenberg factors can be strong evidence that the advisor has complied with its fiduciary duty.

Eight amicus briefs have been filed, all in support of petitioners Jerry Jones, Mary Jones and Arline Winerman. A decision is expected by the Supreme Court in early 2010.