Court says judges can settle mutual fund fee fight

Posted March 30, 2010 at 9:59 a.m.

Associated Press | The Supreme Court on Tuesday ordered a lower court to reconsider a lawsuit that asks the courts to rein in what some investors are calling “excessive” fees on mutual funds, a popular investment vehicle for millions of Americans.

The high court said the 7th U.S. Circuit Court of Appeals in Chicago used the wrong standard when it threw out a lawsuit brought by investors against a mutual fund company for charging excessive fees.

Justice Samuel Alito, writing for the court, said the appeals court should have made its decision using the standard set by the courts in 1982 in the case Gartenberg v. Merrill Lynch Asset Management.

To face liability under Gartenberg, “an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s length bargaining,” Alito said.

The court sent the case back down for the courts to apply Gartenberg.

However, that does not bode well for the plaintiffs, because the original federal judge who heard the case threw it out using the Gartenberg standard.

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 decided by 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.

The federal judge who originally heard the case threw it out, saying the plaintiff had not shown that the fee were so disapproportionately high they bear “no reasonable relationship to the services rendered.” The appeals court agreed, but rejected the Gartenberg standard.

Instead, the 7th Circuit said such lawsuits cannot be brought unless shareholders can prove that the adviser misled the fund directors who approved the fee.

The case is Jones v. Harris Associates, 08-586.

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