Mutual Fund Adviser Fees: Not for Courts to Decide

A federal court ruled that mutual fund adviser fees are best set by market competition and not judicial process.

The decision in Jones v. Harris Associates by the 7th U.S. Circuit Court of Appeals affirmed a lower court decision granting summary judgment to Harris Associates, adviser to Oakmark funds. The decision could have an affect on a variety of mutual fund fee lawsuits, and may have reversed the precedent, according to reports.

The plaintiffs, investors in the Oakmark funds, claimed their fees were too high and that Harris Associates did not disclose some information about its pricing process.

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In affirming a lower court decision granting summary judgment to Harris Associates, the court said competition adequately sets pricing already. The law stipulates that fiduciaries honestly and fully disclose fees—but does not subject them to a cap on compensation.

Writing for the appellate panel, Chief Judge Frank Easterbrook said: “The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth.’

The court also rejected plaintiffs’ argument that Harris Associates committed a wrongdoing by charging a lower percentage of assets to pension clients than to mutual fund clients. Easterbrook wrote that different clients call for different commitments of time, and mutual funds can complicate an adviser’s task.

Lawyers on both the plaintiff and defendant side told The American Lawyer the case might have reversed a precedent, set in the 1980s, of allowing judges to regulate fees.

The decision in Jones v. Harris Associates can be viewed here.

SEC Proposes Making Mutual Fund Comparisons Easier

The SEC proposed a rule requiring mutual funds to label their public files in order to enable investor comparison shopping.

The Securities and Exchange Commission (SEC) proposed a rule that mutual fund investors get access to key information about fees, performance, and strategies through interactive data, according to an SEC press release. The proposal would permit comparison shopping among more than 8,000 funds via online searching.

“This exciting new technology will enable investors to instantly analyze and compare not just two or three mutual funds, but hundreds or even thousands, and to quickly focus on the particular funds that are right for them,” said SEC Chairman Christopher Cox, in the news release. “Investors will no longer need to wade through lengthy documents to find the relevant details needed to compare funds one at a time.”

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Mutual funds have already been voluntarily submitting information to the SEC in interactive data format, the SEC said. The new rule proposal, voted unanimously by the SEC, would require all mutual funds to provide data-tagged information beginning with registration statement filings that become effective after Dec. 31, 2009. The mutual fund also would be required to post the data on its Web site, if it has one.

The interactive mutual fund data can be test driven at the Mutual Fund Reader on the SEC Web site.

Last week, the SEC proposed a similar rule to require public companies to provide financial information using interactive data beginning next year for the largest companies and within three years for all public companies, the SEC said.

The SEC is accepting public comment on the proposal until August 1.

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