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September 4, 2009
Legal Briefs

Jones v. Harris Associates

by Timothy Sandefur and Ilya Shapiro

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The Investment Company Act of 1940 places on investment advisers a fiduciary duty with respect to the compensation they receive for the services they provide their clients. In this case, shareholders in various mutual funds contend that their adviser's fees were excessive and violated the ICA. The Seventh Circuit affirmed the judgment of the district court that the fees were not excessive but also expressly disapproved of the Second Circuit's methodology for evaluating such claims. Judge Frank Easterbrook's opinion explains that the ICA creates a fiduciary duty but does not act as a rate regulator, and that judicial price-setting does not accompany fiduciary duties. Judge Richard Posner, writing for five judges, dissented from the denial of an en banc rehearing. The Supreme Court agreed to review case to settle the circuit split. Cato filed an amicus brief in support of the investment adviser. Our brief makes three arguments: 1) All persons have a fundamental human right to whatever compensation their contracting partners freely and honestly choose to pay them; 2) courts have no power to second-guess the reasonableness of any salary or compensation agreement honestly and freely signed by both contracting parties; and 3) the ICA's fiduciary duty requires only fair dealing, not any particular outcome.

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