The U.S. Supreme Court handed a victory to the $11 trillion mutual fund industry by endorsing a 1982 legal standard to decide the fairness of fund fees, a ruling that gives companies considerable freedom to set investment adviser charges.
The justices unanimously adopted the standard in a 1982 U.S. appeals court ruling that fees are excessive only when they are so high they could not be the result of arm's-length bargaining and bear no reasonable relationship to the services provided.
Industry executives and attorneys described the high court's ruling as a big win because it limits the potential that Congress or lower courts could force fund firms to reduce the roughly $90 billion they collect in fees every year.
Justice Samuel Alito wrote in the 17-page ruling that a consensus has developed regarding the workable standard in place for nearly three decades that has been used by courts and the U.S. Securities and Exchange Commission.
The highly-anticipated decision came in a case where three shareholders in Oakmark Funds sued the funds' adviser, Harris Associates, which decided which stocks to buy and sell. Harris is an indirect subsidiary of Natixis SA
Investor rights advocates, meanwhile, said the ruling will prompt funds' directors to negotiate more actively on fees for shareholders.
Americans save trillions of dollars for college education and retirement by investing it with funds managed by industry and giants like the Vanguard Group and Fidelity Investments.
The decision is very stabilizing for the entire industry. It is good for mutual funds, it is good for the investors, it is good for everybody, said Eric Brunstad, a partner at law firm Dechert LLP who filed a brief on behalf of Harris.
Alito said a U.S. appeals court in Chicago erred in rejecting the 1982 standard and requiring shareholders show an adviser had misled the fund's directors who approved a high fee. The top court sent the case back for further proceedings.
We are extremely happy with this, said John Donovan, a Ropes & Gray attorney in Boston who argued the case for Harris.
This is a significant victory for the industry and for Harris, since it means the 1982 standard in a case known as Gartenberg will remain the standard. That's what the Supreme Court has now made the law of the land.
The language of the Supreme Court, if it does anything, it closes the door for plaintiffs' lawyers, who now will have a harder time arguing that the 1982 standard sets the wrong rules, Donovan said.
Paul Schott Stevens, president of the Investment Company Institute, the mutual fund industry trade group, praised the ruling.
STABILITY AND CERTAINTY FOR 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 long-standing framework under which courts consider claims of excessive fund advisory fees, he said.
The court's decision recognizes that this framework has worked for funds, advisers, boards, courts, and -- most importantly -- fund shareholders, who have seen their cost of investing fall by half in the last 20 years, Stevens said.
Mercer Bullard, a law professor at the University of Mississippi who also served as an expert for the shareholder plaintiffs, said of the ruling, It is right up the middle. What surprised me is that it shows a remarkable degree of judicial humility by the court, in view of recent decisions.
Alito said courts must compare the fees an investment adviser charged a mutual fund with those charged for its independent clients, like pension funds.
But Alito said courts should be aware of the significant differences between those services, and the fees do not have to necessarily be the same for the two types of clients.
He said the decision of disinterested directors to approve a particular fee agreement is entitled to considerable weight.
Should a board's process be deficient or should the adviser withhold important information, then a court should take a more rigorous look at the fees charged, Alito said.
David Smith, general counsel for the Mutual Fund Directors Forum, a trade group for these individuals, said it was pleased with the ruling.
It's a generally positive decision for fund shareholders and the directors' community, in that Congress intended for independent directors to play the central role in shareholder protection, rather than other scenarios the courts could have created, Smith said.
The Supreme Court case is Jones v. Harris Associates, No. 08-586.
(Additional reporting by Ross Kerber and Svea Herbst-Bayliss in Boston, Jon Stempel in New York)
(Reporting by James Vicini, Editing by Gerald E. McCormick and John Wallace, Bernard Orr)