The first major business case of the Supreme Court session will be heard today, and it could greatly reduce fees paid to mutual fund advisers.
Jones v. Harris Associates asks whether a shareholder can claim that a fund’s investment adviser charged excessive fees without showing that the fund adviser misled the fund’s directors who approved the fee.
WSJ: A ruling for shareholders could push down fees that last year approached $100 billion by some estimates in the $10 trillion industry. That could reduce the multimillion-dollar paydays of some fund advisers. The industry warns that its defeat could invite a wave of lawsuits challenging advisory fees, rewarding plaintiff lawyers more than investors and driving talented managers from the mutual-fund business…
Typically, the investment-advisory company that manages a mutual fund takes a percentage of the assets, say 1%. That fee is negotiated with the mutual-fund board, which is set up to represent investors…
The case was filed in 2004 by three shareholders in the Oakmark Funds, which were developed and run by Harris Associates LP, a Chicago firm that said it oversees about $48 billion in assets. The plaintiffs said Harris charged Oakmark an effective rate of 0.88% on $6.3 billion in assets, nearly twice the 0.45% rate for an unrelated institutional client like a pension fund.
plaintiffs are arguing that the funds are often too close to the advisors to reasonably set fees, and the Obama administration has suggested some limits should be put on the fees; Solicitor General Elena Kagan said the fees should not exceed those that would be made based on “arms-length bargaining,” Scotusblog reported in its coverage of the case.
Defendant/respondent Harris Associates has argued in its briefing that an adverse ruling would greatly increase litigation and that their liability for relevant fiduciary duty can only be triggered by a disproportionately large fee structure, which they do not believe to be the case here.
The Court’s decision will settle the differing opinions of two of the most well-known Circuit Judges, Judges Frank Easterbrook and Richard Posner.
Easterbrook sided with the fund in the affirming 7th Circuit opinion, stressing the importance of reliance on the market and noting that the wool was not pulled over the investors’ eyes. In his dissent, Posner said that type of economic analysis was “ripe for examination” and that abuses have run rampant in the mutual fund system.
It will not be just Easterbrook and Posner that are watching these oral arguments with interest — today, the eyes of the mutual fund industry will definitely be focused on the Court.
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