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Mutual fund case hinges on fee comparison

November 2, 2009 |  2:49 pm

Must mutual fund investors pay significantly higher fees than institutional investors such as pension funds?

That was the issue today at the U.S. Supreme Court as the justices heard oral arguments in a case accusing a mutual fund manager of charging excessive fees.

Several investors have accused Harris Associates, which manages money for the Oakmark mutual fund group, of charging high fees in violation of the federal Investment Company Act.

A ruling for the plaintiffs could force fund companies to lower fees paid by millions of American investors.

Two justices seemed to side with the mutual fund industry, while three others seemed receptive to the plaintiffs.

But even if the justices ultimately were to side with the defendants, their ruling still could result in lower fund fees, said William Birdthistle, an assistant professor at the Chicago-Kent College of Law, who attended the hearing.

That’s because a central issue in the case is whether mutual fund boards should be required to compare the generally lower rates that managers charge pensions, endowments and other institutional investors with the higher rates they charge for mutual funds.

The plaintiffs say the lower fees on institutional accounts prove that mutual fund fees are too high. The industry disputes that logic, saying investors have lots of low-fee options and that, in any case, mutual fund fees have come down steadily over the years.

Three justices -- Ruth Bader Ginsburg, Stephen G. Breyer and Sonia Sotomayor -- seemed to support the idea that mutual fund boards should use institutional fees as a benchmark when setting mutual fund fees, Birdthistle said.

Existing law, which was set by a 1982 ruling, did not require a comparison with institutional fees.

Such a requirement would boost pressure on managers to justify mutual fund charges and could ultimately push fees down.

"The message would be heard loud and clear by boards and by future trial courts," Birdthistle said.

-- Walter Hamilton

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