Roberts: Should Courts Review Mutual Fund Fees When Morningstar Has Info?
Chief Justice John G. Roberts Jr. and Justice Antonin Scalia questioned yesterday whether courts should be evaluating mutual fund fees when investors can make their own assessments.
At issue in the case is whether investors in the Oakmark family of mutual funds can challenge high fees set by fund manager Harris Associates under a 1970 federal law establishing “a fiduciary duty” on advisers concerning their compensation. The Washington Post and the Los Angeles Times highlighted comments by Roberts, who noted that technology makes comparisons easy.
“These days all you have to do is push a button and you find out exactly what the management fees are,” Roberts said, according to an account in the New York Times. “You just look it up on Morningstar and it’s right there, and as an investor you can make whatever determination you’d like, including to take your money out.”
The Chicago-based 7th U.S. Circuit Court of Appeals had upheld the fee in the case, Jones v. Harris Associates. The opinion by Judge Frank Easterbrook said decisions on mutual fund fees pass muster under federal law as long as the managers “make full disclosure and play no tricks,” the Wall Street Journal reports.
But even the defendant’s lawyer, John Donovan Jr., did not defend the 7th Circuit standard, the New York Times reports. He argued that in some cases shareholders could win when fees were outside the range of what could have been negotiated at arm’s length with funds “of a similar stripe,” the National Law Journal reports. But this was not such a case, he said.
The Supreme Court appeared more likely to embrace a different standard announced in a federal appeals court ruling in 1982, Gartenberg v. Merrill Lynch Asset Management Inc., according to the NLJ and the Wall Street Journal. The ruling by the New York City-based 2nd U.S. Circuit Court of Appeals says fees should remain undisturbed unless they are “so disproportionately large” that they could not have been the product of “arm’s length bargaining,” according to the NLJ account.
“Given the failure of all concerned to defend Chief Judge Easterbrook’s ruling, the Supreme Court is likely to announce a new standard for evaluating claims of excessive compensation under the 1970 law,” the Times wrote. “It was not clear, however, whether the court would return the case to the lower courts to apply such a new standard or do the job itself.”
