The Supreme Court probably will not endorse a totally free market approach, though the mutual fund industry can likely stop worrying about fee-slashing and rampant litigation.
The Court heard arguments yesterday in Jones v. Harris Associates, with the plaintiff investors arguing that managers of mutual funds had been paid excessive fees. Specifically, investors were charged higher fees than were non-mutual fund clients for what the plaintiffs asserted were similar services.
As Jess Bravin notes in The Wall Street Journal, the Court appeared to be “willing to accept a standard defined by a New York federal appellate court in 1982. That court said fees must be ‘within the range of what would have been negotiated at arm’s length in the light of all of the surrounding circumstances.'”
The case also involved the fund advisers fiduciary duty and whether that was served as long as there was full disclosure to the fund’s board, regardless of the size of the fee.
Though Justice Kennedy appeared to be interested in parsing the specific meaning of fiduciary in these instances, Chief Justice Roberts was more focused on the negotiation of the fee and whether fund investors really needed to be protected from high fees.
“These days, all you have to do is push a button and you find out exactly what the management fees are,” Justice Roberts said. “You just look it up on Morningstar and it’s right there and you can make…whatever determination you’d like, including to take your money out.”
The investors’ attorney argued that a third of mutual funds are bought through company-controlled 401(k)s.
Interestingly, Sotomayor, who was President Barrack Obama’s nominee and considered, therefore, a more liberal justice, pushed the attorney arguing for the investors on why the agreement at issue was not arm’s length and reasonable, pointing out that Congress seemed to be saying that an arms-length transaction is required, rather than a fiduciary duty to ensure a “reasonable” fee.
However, she did confirm with the fund’s attorney that the law should not go as far as to say, “as long as the process was fair, any fee is OK,” which is what Chief Judge Frank Easterbrook’s majority opinion for 7th Circuit said.
Even the attorney for the fund did endorse Judge Easterbrook’s very free-market interpretation. Easterbrook did not think the 1982 decision needed to be invoked.
SCOTUSblog offered several options of how the Court may decide, though it noted that, no matter what, there do not seem to be the five votes for Easterbrook’s fully market-based approach. This means the Court could adopt the 1982 appeals court standard and send the case back for determination on the facts or choose to better define that standard themselves.
Full background and coverage of Jones v. Harris Associates can be found at the SCOTUSblog.
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