559 U.S. 133


certiorari to the united states court of appeals for the seventh circuit

No. 08586.Argued November 2, 2009Decided March 30, 2010

Petitioners, shareholders in mutual funds managed by respondent investment adviser, filed this suit alleging that respondent violated 36(b)(1) of the Investment Company Act of 1940, which imposes a fiduciary duty [on investment advisers] with respect to the receipt of compensation for services, 15 U.S.C. 80a35(b). Granting respondent summary judgment, the District Court concluded that petitioners had not raised a triable issue of fact under the applicable standard set forth in Gartenberg v. Merrill Lynch Asset Management, Inc. , 694 F.2d 923, 928 (CA2): [T]he test is essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arms-length in light of all of the surrounding circumstances. To be guilty of a violation of 36(b), the adviser must charge a fee that is so disproportionately large it bears no reasonable relationship to the services rendered and could not have been the product of arms length bargaining. Rejecting the Gartenberg standard, the Seventh Circuit panel affirmed based on different reasoning.

Held: Based on 36(b)s terms and the role that a shareholder action for breach of the investment advisers fiduciary duty plays in the Acts overall structure, Gartenberg applied the correct standard. Pp.717.

(a)A consensus has developed regarding the standard Gartenberg set forth over 25 years ago: The standard has been adopted by other federal courts, and the Securities and Exchange Commissions regulations have recognized, and formalized, Gartenberg -like factors. Both petitioners and respondents generally endorse the Gartenberg approach but disagree in some respects about its meaning. Pp.79.

(b)Section 36(b)s fiduciary duty phrase finds its meaning in Pepper v. Linton , 308 U.S. 295, where the Court discussed the concept in the analogous bankruptcy context: The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arms length bargain. If it does not, equity will set it aside. Gartenberg s approach fully incorporates this understanding, insisting that all relevant circumstances be taken into account and using the range of fees that might result from arms-length bargaining as the benchmark for reviewing challenged fees. Pp.911.

(c) Gartenberg s approach also reflects 36(b)s place in the statutory scheme and, in particular, its relationship to the other protections the Act affords investors. Under the Act, scrutiny of investment adviser compensation by a fully informed mutual fund board, see Burks v. Lasker , 441 U.S. 471, and shareholder suits under 36(b) are mutually reinforcing but independent mechanisms for controlling adviser conflicts of interest, see Daily Income Fund, Inc. v. Fox , 464 U.S. 523. In recognition of the disinterested directors role, the Act instructs courts to give board approval of an advisers compensation such consideration as is deemed appropriate under all the circumstances. 80a35(b)(1). It may be inferred from this formulation that (1) a measure of deference to a boards judgment may be appropriate in some instances, and (2) the appropriate measure of deference varies depending on the circumstances. Gartenberg heeds these precepts. See 694 F.2d, at 930. Pp.1112.

(d)The Court resolves the parties disagreements on several important questions. First, since the Act requires consideration of all relevant factors, 80a35(b)(2), courts must give comparisons between the fees an investment adviser charges a captive mutual fund and the fees it charges its independent clients the weight they merit in light of the similarities and differences between the services the clients in question require. In doing so, the Court must be wary of inapt comparisons based on significant differences between those services and must be mindful that the Act does not necessarily ensure fee parity between the two types of clients. However, courts should not rely too heavily on comparisons with fees charged mutual funds by other advisers, which may not result from arms-length negotiations. Finally, a courts evaluation of an investment advisers fiduciary duty must take into account both procedure and substance. Where disinterested directors consider all of the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if the court might weigh the factors differently. Cf . Lasker, 441 U.S., at 486. In contrast, where the boards process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome. Id., at 484. Gartenberg s so disproportionately large standard, 694 F.2d, at 928, reflects Congress choice to rely largely upon [independent] watchdogs to protect shareholders interests, Lasker, supra , at 482. Pp.1216.

(e)The Seventh Circuit erred in focusing on disclosure by investment advisers rather than the Gartenberg standard, which the panel rejected. That standard may lack sharp analytical clarity, but it accurately reflects the compromise embodied in 36(b) as to the appropriate method of testing investment adviser compensation, and it has provided a workable standard for nearly three decades. Pp.1617.

527 F.3d 627, vacated and remanded.

Alito, J., delivered the opinion for a unanimous Court. Thomas, J., filed a concurring opinion.


on writ of certiorari to the united states court of appeals for the seventh circuit

[March 30, 2010]

Justice Thomas , concurring.

The Court rightly affirms the careful approach to 36(b) cases, see 15 U.S.C. 80a35(b), that courts have applied since (and in certain respects in spite of) Gartenberg v. Merrill Lynch Asset Management, Inc. , 694 F.2d 923, 928930 (CA2 1982). I write separately because I would not shortchange the Courts effort by describing it as affirmation of the Gartenberg standard. Ante , at 7, 17.

The District Court and Court of Appeals in Gartenberg created that standard, which emphasizes fee fairness and proportionality, 694 F.2d, at 929, in a manner that could be read to permit the equivalent of the judicial rate regulation the Gartenberg opinions disclaim, based on the Investment Company Act of 1940s tortuous legislative history and a handful of extrastatutory policy and market considerations, id. , at 928; see also id ., at 926927, 929931; Gartenberg v. Merrill Lynch Asset Management, Inc ., 528 F.Supp. 1038, 10461050, 10551057 (SDNY 1981). Although virtually all subsequent 36(b) cases cite Gartenberg , most courts have correctly declined its invitation to stray beyond statutory bounds. Instead, they have followed an approach (principally in deciding which cases may proceed past summary judgment) that defers to the informed conclusions of disinterested boards and holds plaintiffs to their heavy burden of proof in the manner the Act, and now the Courts opinion, requires. See, e.g. , ante , at 11 (underscoring that the Act modifies the governing fiduciary duty standard in a significant way: It shifts the burden of proof from the fiduciary to the party claiming breach, 15 U. S. C. 80a35(b)(1), to show that the fee is outside the range that arms-length bargaining would produce); ante , at 16 (citing the degree of deference that is due a boards decision to approve an advisers fees and admonishing that the standard for fiduciary breach under 36(b) does not call for judicial second-guessing of informed board decisions).

I concur in the Courts decision to affirm this approach based upon the Investment Company Acts text and our longstanding fiduciary duty precedents. But I would not say that in doing so we endorse the Gartenberg standard. Whatever else might be said about todays decision, it does not countenance the free-ranging judicial fairness review of fees that Gartenberg could be read to authorize, see 694 F.2d, at 929930, and that virtually all courts deciding 36(b) cases since Gartenberg (including the Court of Appeals in this case) have wisely eschewed in the post Gartenberg precedents we approve.