Explaining Jones

Why did counsel for the defendant in Jones v. Harris, the mutual fund fees case, abandon on oral argument the reasoning of the judge who had supported its position? Todd Henderson has a plausible explanation:

Easterbrook believes that litigation against advisors claiming excessive compensation is socially wasteful, and his opinion tries to do away with these cases in all but the most extreme cases. This Essay * * * exposes the reasons why none of the parties nor the mutual fund industry agree with Judge Easterbrook. Obviously the lawyers on both sides benefit from litigation, which he is trying to end, but more interestingly the mutual fund industry rationally prefers the small tax on its profits that the current regime generates over the risk that the Supreme Court or, worse, the Congress might make matters much worse. This case is therefore a classic example where the narrow interests of the parties are not informative of the right result. This Essay shows why the Supreme Court should consider the interests of investors over the lawyers and the funds before reinstating a legal regime under which the plaintiffs have never won and that serves no deterrent function.

But if the Court considers investors' interests, would it get reversed by Congress? Is there a scenario here in which the investors win? Doesn't seem that way.

Comments

[michael webster]

If you listen to Easterbrook's questions in the oral hearing, you will find out that he puts the statutory issue very clearly.

Do the fiduciary duties A owes B entail that A gives B the same financial deal as A gives C, an more experienced client?

Easterbrook says no, noting that attorneys engage in this type of differential fee arrangement all the time.

Congress may decide to change the statute, but my guess is that the Supreme Court will simply reaffirm that current test Gartenberg test for advisor fees - "the
adviser-manager must [not] 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."

To otherwise would dramatically expand the scope of all fiduciary duties and not just the investment advisors duties as described in section 36(b) of the Investment Company Act of 1940