Mauro: Justices Seem Reluctant to Wade into Mutual Fund Fee Regulation
By Andrew Longstreth
November 02, 2009
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Populist outrage about Wall Street compensation may play well in certain theaters, but not so much at the Supreme Court. When the justices heard arguments Monday in Jones v. Harris Associates, they appeared skeptical about the idea of courts reigning in fees mutual funds pay to the investment advisers who run them. Here's the story from National Law Journal Supreme Court correspondent Tony Mauro.The question before the court is when and if mutual fund shareholders can challenge fees as excessive under the Investment Act of 1970. While business groups are hoping the Court sticks with an old precedent that gives mutual funds broad discretion, investor-rights group are urging the Justices to give shareholders leeway in challenging fees, which they say are inflated due to the tangled relationship between advisers and mutual fund boards.
The business community seemed to make more headway with the high court, according to Mauro. At one point during the argument, Chief Justice John Roberts said that it makes "a lot more sense to have the SEC regulate rates than to have courts do it." Justice Antonin Scalia, meanwhile, said that the investors' proposed standard for determining what's "excessive" would be "utterly meaningless," and would allow judges to consider any factors they wanted.
The case was brought by shareholders of the Oakmark family of mutual funds, who claim that the fees Oakmark was charged by Harris Associates were twice what Harris charges nonfund clients for similar services. Arguing for the shareholders was Supreme Court veteran (and former Litigator of the Week) David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel. He told the Justices that mutual fund advisers have leverage over the directors, whom they often pick. "Directors can't fire and walk away from the adviser," said Frederick. "In any arm's-length transaction, if I sell you a car and you don't like the price, you can walk away."
But the chief justice said information on fees is readily available to investors, who are free to take their business elsewhere. "I mean, you can just look it up on Morningstar and it's right there," he said. "And as an investor you can make whatever determination you'd like, including to take your money out."
John Donovan, Jr., of Ropes & Gray represented Harris Associates.
Last month in our Video Sidebar, Lauren Goldman of Mayer Brown called Jones v. Harris a "potential sleeper" case that could impact not just the compensation of mutual fund advisers but also CEOs. "It'll be interesting to see whether [the Supreme Court] wants judges wading into these determinations about the value of the services provided by mutual fund advisers or a CEO," Goldman told us.
