Did the Jones Decision Expand the Gartenberg Standards?

The recent Supreme Court decision in Jones v. Harris confirmed that a court evaluating mutual fund fees should utilize the standards established by the 1982 decision by the U.S. Court of Appeals for the Second Circuit in Gartenberg v. Merrill Lynch Asset Management. The Supreme Court cited another case in its opinion, Pepper v. Litton, in describing the fiduciary duty owed to investors by an investment adviser as a test of "whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain."

 

An issue in the Jones case (and in several other cases) is the fact that the advisory fee being charged for certain mutual funds is significantly higher for retail investors than it is for institutional clients of the same investment adviser. Since the institutional client is much more sophisticated than the average investor and it operates in a more competitive marketplace, the question is whether the level of advisory fees for institutional clients are more reflective of an "arm's length" transaction than the advisory fees established for retail investors. If this premise is correct, then advisory fees for retail investors that are almost twice the level set in the more competitive institutional market, should be considered excessive and violative of the standards in  Gartenberg and Pepper, as described in the Jones decision.

 

The fund industry argues that any comparison between retail and institutional investors is like comparing apples to oranges, as each type of investor requires different services. However, several of these cases have raised the issue that the provision of advisory services for institutional and retail investors is actually quite similar. Any distinctions in services provided to retail vs. non-retail investors by the typical mutual fund should be addressed instead through the level of shareholder servicing and distribution-related fees.

 

As the Jones opinion is interpreted by the lower courts, did the Supreme Court use its Pepper opinion to expand upon the Gartenberg standards that courts have applied in the past, or did the Court merely ratify the existing Gartenberg test?