Congress imposed a fiduciary duty regarding compensation on investment advisors by adding Section 36(b) to the Investment Company Act of 1940. Legislators intended this fiduciary duty to protect mutual fund investors from excessive management fees. It has failed. Mutual fund investors continue to pay significantly higher fees than institutional investors for the same money management services. In Jones v. Harris Associates, decided in 2008, the Seventh Circuit broke with the widely followed, thirty-year-old precedent of Gartenberg v. Merrill Lynch Asset Management. Chief Judge Easterbrook authored the majority opinion and Judge Posner wrote vigorously in dissent. This disagreement between two titans of the law and economics community highlighted the uncertainty surrounding the appropriate fiduciary duty standard for mutual fund excessive fee cases. To address that uncertainty, the Supreme Court will hear Harris Associates in November 2009. This Note argues that neither the traditional Gartenberg standard nor the market-based Harris Associates standard adequately protects investors. To further Congress's goal, the Court should modify, but maintain, the Gartenberg standard. This Note's proposed modification-allowing comparisons to institutional investors' fees and eliminating profitability penalties-incorporates market forces into the fiduciary duty standard by introducing a proxy for fairness and encouraging efficiency, but rejects Harris Associates' total reliance on the market.

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