A case involving how mutual fund management advisory fees are charged will be heard by the U.S. Supreme Court this fall and could result in lower fees for shareholders.
A case involving how mutual fund management advisory fees are charged will be heard by the U.S. Supreme Court this fall and could result in lower fees for shareholders.
The case, Jones v. Harris, involves a lawsuit filed by a group of investors against Chicago-based Harris Associates LP, which advises the Oakmark Funds of Kansas City, Mo. The plaintiffs alleged that Harris breached its fiduciary duty by charging excessive management fees.
The 7th U.S. Circuit Court of Appeals in Illinois ruled against the plaintiffs last fall. Chief Judge Frank Easterbrook upheld the fees set by Harris, saying that as long as there is transparency and no fraud, there is no breach in fiduciary responsibility, said Ryan Leggio, attorney and fund analyst at Morningstar Inc. of Chicago.
The fees charged were higher than those charged to institutional clients, he said.
“I think the Court of Appeals decision will be overturned,” Mr. Leggio said “If the [Supreme] Court creates a more stringent standard, it could reduce fees for mutual fund shareholders industrywide.”
Prior to the 7th Circuit decision, courts have widely used the so-called Gartenberg standard, which determines a fee’s fairness based on whether two independent parties would have determined the same amount, Mr. Leggio said.
No shareholder has ever won an excessive-fee case in court under the Gartenberg standard, he said. “I think the court has to create a standard where the shareholder has a chance to win a case.”
The 7th Circuit decision eliminated a lot of the responsibilities from a fund’s board of directors, said Burt Greenwald, a Philadelphia-based mutual fund consultant.
“This decision seems to imply lesser regulation,” he said.
But the current climate may have an impact on the Supreme Court’s decision, he added.
“The decision comes at a time when the environment suggests that everybody is concerned about lack of regulation in the financial services industry,” Mr. Greenwald said. “The question is whether this is the kind of environment that is likely to influence the court over and beyond the legal aspects of the case?”
Attorney John Donovan of Ropes & Gray LLC of Boston, the firm representing Harris Associates, was not immediately available for comment.
