Several Supreme Court justices seem unwilling to get involved in fight over mutual fund fees

Justices seem unwilling to get involved in fees

WASHINGTON — Several Supreme Court justices seemed unsympathetic Monday to calls for the courts to get involved in reining in what investors are calling “excessive” fees on mutual funds, a popular investment vehicle for millions of Americans.

Some of the justices suggested that a regulatory agency might be in a better position to determine if the fees are appropriate. They also said consumers always have recourse to switch to another fund if they aren’t happy with the fee amounts.

“It makes a lot more sense to have the SEC (Securities and Exchange Commission) regulate rates than to have courts do it, doesn’t it?” Chief Justice John Roberts said during court arguments.

Mutual funds have become a popular way for Americans to invest, with more than $10 trillion in assets placed in mutual fund investment vehicles such as 529 college education plans or 401(k) retirements plans. The more money the adviser charges in fees, the less money goes into the mutual fund for investors.

In the case before the high court, Jerry N. Jones, Mary F. Jones and Arline Winerman sued Harris Associates L.P., which advises on the Oakmark complex of mutual funds. The plaintiffs, who own shares in several Oakmark funds, say that Harris’ fees are so high they violate the federal Investment Company Act, which is supposed to combat excessive investment adviser fees.

Harris appoints Oakmark’s board of trustees, which in turn hires Harris as the mutual fund adviser and sets the fees.

Courts previously have used a standard that investment advisers violate federal law when their fees are so disproportionately high they bear “no reasonable relationship to the services rendered.” But lower courts dismissed this case, saying such lawsuits cannot be brought unless shareholders can prove that the adviser misled the fund directors who approved the fee.

“Plaintiffs do not contend that Harris Associates pulled the wool over the eyes of the disinterested trustees or otherwise hindered their ability to negotiate a favorable price for advisory services,” the 7th U.S. Circuit Court of Appeals in Chicago said in their decision.

Jones’ lawyer, David C. Frederick, argued that the courts should have looked at what Harris was charging independent funds, which they say was half of what the adviser was charging Oakmark.

“There is no reason why the mutual fund should be charged twice as much,” Frederick said.

But Roberts and Justice Antonin Scalia suggested that people can move their money somewhere else if they don’t like what they are being charged. That in turn will affect the fees charged by mutual funds, they said.

“When investors leave the company that is charging excessive fees to go to other companies, the company that they are leaving sees that something’s wrong and has to lower its compensation to its adviser,” Scalia said.

The SEC can also bring lawsuits against mutual fund advisers, even though the agency has not done so since 1980, said Curtis E. Gannon, assistant solicitor general.

Justice Stephen Breyer, speaking in a raspy voice because of what he said was laryngitis, suggested that justices send the case back to the lower courts to determine what kind of information a mutual fund must give to its investors. Currently, mutual funds advisers do not have to disclose to mutual fund investors what they charge independent funds for similar services.

“We would like, if it’s a lot different, to ask him why,” Breyer said.

During arguments, the court had a little problem with the clocks in the courtroom due to the change from daylight saving time on Sunday. As lawyers began arguing the case, the clock above the justices was about four hours off. Roberts said that lawyers are often told not to look at the clock above the justices’ heads while making their arguments.

“That is particularly important today,” Roberts said to laughter.

The case is Jones v. Harris Associates, 08-586. A ruling in the case is expected sometime next year.