Harris Associates, the Investment Company Institute, the Mutual Fund Directors Forum and the U.S. Chamber of Commerce fired their first salvos in the Supreme Court fee case through separate briefs, claiming that market forces and diligent fund trustees keep fees low and negotiated at “arm’s length” bargaining between the investment advisor and the board. They also argue that due to the greater service afforded to retail investors, institutional fees are understandably lower.
The case that the Supreme Court is scheduled to hear in November, Jerry N. Jones et al. v. Harris Associates LP, claims that the Oakmark Funds charge individual investor excessive fees. District and federal courts ruled in favor of Harris, but a judge for the Appeals Court for the Seventh Circuit kicked the case over to the Supreme Court, saying that only in cases of fraud have investors ever won.
Harris Associates wrote, “The growth of the mutual fund industry has created a powerful check on fees: Investors are free to transfer their dollars elsewhere.”
The Directors Forum said that any court should defer to a fund board on fees and an advisor contract, and that the fund advisor has a fiduciary duty with respect to charging fair fees. It also noted that over the past 15 years, the Securities and Exchange Commission has focused on strengthening fund boards, including requiring in 2004 that 75% be independent.
“The statutory regime relies upon on independent, engaged and able board,” the Forum said. “Boards effectively use an [arm’s length] Gartenberg-like approach to determine whether a contract is appropriate from the shareholder’s perspective, and courts should ordinarily give deference to the conclusions reached by an informed, engaged board. Failing to give deference to a responsible board determination would, in effect, undermine the existing regulatory regime.”
The U.S. Chamber said the plaintiffs are seeking a huge settlement and it fears the high court could set a precedent that would be detrimental to the mutual fund industry.
“The [existing] standards have worked very well to benefit investors, and we see that in steadily declining fees,” Paul Schott Stevens, president and CEO of the ICI, told The Wall Street Journal. “All of that is at risk if the trial bar is successful in overturning the standards courts have used.” He stressed that comparing the fees charged on retail funds to those imposed on institutional funds is so wrong that it’s “not even apples to oranges; they’re apples to melons.”
But industry critics, including Ryan Leggio, a fund analyst with Morningstar, say that the fund companies purposely hide all of the fees they charge retail investors to make such comparisons difficult in the first place.