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U.S. Supreme Court debates whether mutual funds' fees are too high

Investors may be allowed to sue funds' board members if the fees are considered excessive.

November 03, 2009|David G. Savage and Walter Hamilton

WASHINGTON AND NEW YORK — The U.S. Supreme Court debated Monday whether the fees charged by mutual funds were too high, and if so, whether investors should be allowed to sue the boards that approved them.

The case put a spotlight on the often cozy relationship between mutual funds and their advisors. It is the advisors who sponsor the fund and choose members of its board, which in turn decides on fees that go to the advisors.

Lawyers for the Obama administration described these arrangements as "fraught with potential conflicts of interests," and they urged the justices to open the door to suits against mutual funds if their fees are not in line with those charged to other, similar investors.

But the lawyers ran into sharply skeptical questions from Chief Justice John G. Roberts Jr. and Justice Antonin Scalia, who said investors could easily check the fees charged by a mutual fund and take their money elsewhere if the fees were too high.

"You can look it up on Morningstar," Roberts said, referring to the investment research provider. "It's right there. . . . It takes 30 seconds."

Roberts and Scalia also questioned whether judges or juries should be given the duty of deciding which fees were too high. Say, for instance, a fund consistently performs above average. "What's a fair fee in that situation?" Roberts asked.

But several others on the court, including Justices Sonia Sotomayor and Stephen G. Breyer, questioned whether the free market could be counted on to police the fees.

The court is reviewing a ruling last year by the U.S. 7th Circuit Court of Appeals that tossed out a suit against Harris Associates of Chicago, which serves as the advisor for the Oakmark Funds.

Several investors alleged Harris had charged Oakmark funds investors fees that were twice as high as the fees that Harris charged large pension funds.

In dismissing the suit, Judge Frank Easterbrook said the fees were fully disclosed. Investors can vote "with their feet and their dollars" if they think the fees are too high, he said.

Judge Richard Posner dissented from that decision, arguing that the "markets cannot be counted on to solve the problem" because investors cannot police these dealings with mutual funds boards and their advisors.

A ruling for the investors could force fund companies to lower fees paid by millions of Americans.

Three justices -- Breyer, Sotomayor and Ruth Bader Ginsburg -- seemed to support the idea that mutual fund boards should use the fees that asset managers charge institutional investors as a benchmark when reaching agreements on how much a mutual fund should pay its advisor, said William Birdthistle, an assistant professor at the Chicago-Kent College of Law, who attended the hearing.

Such a requirement would boost pressure on managers to justify fund charges and could ultimately push fees down.

"The message would be heard loud and clear by boards and by future trial courts," Birdthistle said.

A ruling on the issue is not likely until spring.


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