Gartenberg, Jones, and the Meaning of Fiduciary: a Legislative Investigation of Section 36(B)

Amy Y. Yeung and Kristen J. Freeman

Section 36(b) of the Investment Company Act of 1940 creates a ‘fiduciary duty” on the part of an investment adviser with respect to the receipt of compensation for services or of payments of a material nature. The term ‘fiduciary, “however, conveys a range of obligations, the breadth of which comes before the Supreme Court in Jones v. Harris, as two circuits diverge on the meaning of fiduciary duty under section 36(b), doing so, this controversy calls into question whether a fund’s investment adviser breached its fiduciary duty by charging an excessive fee.

Notably absent from the language of section 36(b) is any description of substantive or procedural application of the term ‘fiduciary.” Justice Kennedy pressed for such analysis in the Jones oral arguments: “Is Harris a fiduciary in the same sense as a corporate officer and a corporate director? Or does his fiduciary duty differ?” This article provides a comprehensive review of the legislative history creating the ‘fiduciary” obligation under section 36(b) of the Investment Company Act. It identifies key congressional and industry themes, and draws conclusions on the legislative intent of section 36(b), in an attempt to clarify the use of ‘fiduciary.