Even though the Supreme Court has already agreed to decide in Jones v. Harris whether the market for mutual fund advisory fees is competitive (most likely early next Term), other mutual fund cases continue to percolate up through the federal courts of appeals.  This morning, the Eighth Circuit handed down the latest major ruling on this subject with its decision in Gallus v. Ameriprise, in which it reversed a trial court's grant of summary judgment in favor of an investment adviser on the question whether the adviser had violated its Section 36(b) fiduciary duty by charging excessive fees.  This ruling -- in tone and analysis -- could hardly be more different from the Seventh Circuit's decision in Jones and suggests growing judicial skepticism of the competitiveness of advisory fees.

Unlike Easterbrook's panel opinion in Jones -- but very much like Posner's dissent from denial of rehearing en banc in Jones -- the Eighth Circuit focused on the discrepancy between the rates advisers charge institutional investors and the rates they charge ordinary investors.  The traditional Gartenberg analysis does not require much consideration of such discrepancies, and advisers have long objected to any comparisons either on the grounds that the investments are not apposite or because discrepancies are justified by the higher costs of advising retail investors.  Here, the court dismissed both of those objections by pointing out that the retail and institutional funds at issue here "had identical investment objectives" and "very similar stock holdings" and that the adviser admitted in internal emails that it didn't have good reasons for justifying the disparity: "we should have a reply," wrote an Ameriprise employee, "though it may or may not be convincing."  Ameriprise ultimately produced its reply in the form of a report, but the court questioned the document's "veracity and completeness."  (If that report becomes publicly available, it should make for very interesting reading.)

The only remaining defense by the adviser, observed the court, was the contention that "an adviser cannot be liable for a breach of fiduciary duty as long as its fees are roughly in line with industry norms."  Such a standard is endorsed by Easterbrook in Jones and up for review by the Supreme Court.  But the Eighth Circuit rejected it, noting that "[t]o apply Gartenberg in this fashion across the entire mutual fund market would be  to eviscerate Section 36(b)."

So, is this decision a harbinger of future rulings or perhaps even a template for the Supreme Court?  Possibly.  Certainly the Eighth Circuit's evaluation of the competing claims of competitiveness in the industry is notable, being the first judicial ruling on the issue since the public dispute between Easterbrook and Posner in Jones -- this court comes down firmly in line with Posner's skepticism.  Interestingly, the court chose not to stay its decision pending the Supreme Court's resolution of Jones.  Perhaps it hoped to influence the Court with another opinion similar to Posner's dissent.  Or perhaps it believed that this is how the Supreme Court is going to rule.  If accurate, that's not very good news for investment advisers.

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