November 05, 2009
Judicial, Legislative, and Executive Responses to Jones v. Harris
Posted by William Birdthistle

With Jones v. Harris now submitted to the justices for their consideration, academics can fill the next few months of silence speculating about the eventual decision and the responses it may evoke.  Some commentators have already considered how trial courts might deal with a pro-plaintiff Gartenberg-plus standard and whether Congress would revisit a pro-defendant status quo ruling.  But not much time has been spent thinking about how the executive branch will respond.

In fact, of all the considerable ink spilled reporting Monday’s oral arguments, comparatively little was spent on what may have been the most impressive ten minutes of the session: the appearance of Curtis Gannon, Assistant to the Solicitor General, on behalf of the United States.  Gannon was, in my opinion, the most polished, poised, and dynamic oral advocate on the day.  But some of the hardest questions he faced raised the issue of the executive branch’s role in this area.

Justice Scalia: Well, [the SEC] must be aware of the divergence between the fees that investment advisers charge to these [mutual funds] and what they charge to other clients.  Isn’t the SEC aware of that?

Mr. Gannon: It is aware of that.

Justice Scalia: And yet has brought no suits against this industry?

Mr. Gannon: Since 1980 it hasn’t used section 36(b).  It has used less formal mechanisms in the context of examinations and investigations –

Justice Scalia: For disclosure, just for disclosure.  But that suggests to me that the SEC may think that this is indeed a self-contained industry and that the comparison with investment advice given to other entities is – is not a fair one.

This exchange demonstrates the occasional awkwardness of one executive office (the Solicitor General) representing the interests of another (the SEC).  In the SG’s brief, the SG in fact placed a great deal of emphasis on this fee comparison, and yet the SEC’s action, or rather inaction, of the past three decades suggests a different attitude toward the industry.

One is left to wonder whether a single SEC investigation of whichever adviser charges the very highest advisory fee might produce a greater deterrent impact at far lower cost than the huge sums spent annually in private litigation.  With an SEC stoking its enforcement division to change the topic from how it overlooked Madoff, is that an action we can expect to see?

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