The high court said the appellate court improperly applied a “marketplace” standard—under which the court would play little, if any role, in assessing whether advisory fees are reasonable, according to BNA. In light of The Supreme Court’s recent decision in Jones v. Harris, the high court sent the case back to the 8th Circuit for further consideration.
In Jones v. Harris, The U.S. Supreme Court ordered a federal appellate court to take another look at its ruling that mutual fund managers can only be held liable for charging allegedly excessive fees if fraud is involved (see “High Court Sides with Investors in Fee Case”). In sending the case back to the 7th Circuit, the justices asserted that the correct legal standard in excessive fund fee cases was actually that used in Gartenberg v. Merrill Lynch Asset Management, where the 2nd Circuit held that “to be guilty of a violation of Section 36(b),” a fund adviser “must charge a fee that 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.” (see “ICI Urges Court to Stick with Traditional Critique of Fund Fees”)
In Gallus v. Ameriprise Financial, the 8th Circuit determined that a lower court mistakenly rejected a comparison between fees charged to its mutual fund shareholders—to whom Ameriprise owed a fiduciary duty—and nonfiduciary institutional clients (see “Ameriprise Fund Fee Challenge Sent Back to Lower Court”). The appellate judges said the lower court merely applied the standard set out in the 1982 Gartenberg case without also conducting a broader fee inquiry.
“We believe that the proper approach to 36(b) is one that looks to both the adviser’s conduct during negotiation and the end result,” Circuit Judge Roger L. Wollman wrote for the court.
The Supreme Court’s ruling vacating the 8th Circuit decision is Ameriprise Financial Inc. v. Gallus, U.S., No. 09-163, judgment vacated and remanded 4/5/10.