High Court says investors can challenge mutual fund fees, but upholds industry standard on fairness
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The mutual fund industry is declaring victory after the Supreme Court ruled Tuesday in a closely watched case involving the fairness of fund management fees.
From the Times’ David Savage in Washington:
The Supreme Court opened the door Tuesday for investors in the $11-trillion mutual fund industry to sue if they learn their fund’s advisors have charged them exorbitant fees. But the justices also made it hard for plaintiffs to win such claims and warned judges against ‘second-guessing’ the pay decisions made by an independent board of directors.
The court ruled in a case individual investors brought against Chicago-based Harris Associates, which manages the Oakmark funds. The investors alleged that the company’s fund fees were excessive compared with what it charged institutional clients.
A federal appeals court had sided with Harris, and said investors needed to show that fund directors had been misled by the company.
The Supreme Court threw out the appeals court decision, saying the lower court had used the wrong standard in deciding the case. It ordered the appeals court to reconsider the case using another standard -- one that lawyers say is a major hurdle for fund investors trying to prove that they’re being overcharged.
From Bloomberg News:
Justice Samuel Alito said the Supreme Court was endorsing a standard laid out by the federal appeals court in New York in 1982. That ruling, known as Gartenberg v. Merrill Lynch, set a high bar for lawsuits, saying the issue is whether fees were “so disproportionately large that they could not have been the result of arm’s length bargaining.”
Alito, writing for the court in the ruling, said Congress didn’t want courts to have “rate-setting responsibilities” over the fund industry. “Congress’s approach recognizes that courts are not well-suited to make such precise calculations,” he wrote. Read the entire ruling here.
The court’s decision was hailed by the Investment Company Institute, the trade group for the fund industry.
“The Supreme Court’s unanimous decision brings stability and certainty for mutual funds, their directors, and almost 90 million investors, by endorsing the Gartenberg standard under which courts have long considered claims of excessive fund advisory fees,” the ICI said in a statement.
But the plaintiffs’ lawyers also insisted they were satisfied with the court’s ruling. “Under today’s ruling, investors will have a fair opportunity to demonstrate that investment advisors charging excessive fees to retail mutual funds will be held to account,” David Frederick, an attorney for the investors, told Bloomberg.
-- Tom Petruno