Supreme Court Sends Mutual Fund Fees Case Back to Lower Court

The Jones v. Harris Associates case, which was in the news when a district court supported the Chicago-based Harris Associates by finding the mutual fund fees charged reasonable, has come into the spotlight once again as the Supreme Court has sent the case back to the lower court.

The facts of the case were laid out before the district court earlier and included allegations that the company charged excessive and disproportionate fees from shareholders of Oakmark funds. The fund is managed by Harris Associates. The plaintiffs alleged that the fees charged by Harris from Oakmark clients was nearly three times as much as that charged for similar services from others including well established institutional investors like pension funds. Harris Associates denied the charges and assured that its fees were in line with prevailing standards.

The case has already been heard and adjudged by a lower court, which came to the conclusion that the fund fee was reasonable. However, the plaintiffs were unhappy with the judgment passed and brought the case to the higher court for redressal. The Supreme Court maintained that while market forces could be used to set a fund’s fee, there has to be adequate transparency in the process. The lawsuit has been reassigned to the lower court with instructions for accurate application of the Gartenberg criteria.

The Gartenberg criterion arose from the Gartenberg v. Merrill Lynch Asset Management lawsuit and has been used in disputes involving fees since 1982. The criterion involves an objective assessment of the fees charged based on what would be reasonable and in proportion to the actual services offered. A test of whether the same fees would be feasible if negotiated with another fund is also considered during the assessment.

Fees are a very significant factor to consider in mutual funds because they can eat into much of the income from the investment. The larger the fees, the lower the earnings for the investors.

The Supreme Court ruling has been welcomed by both parties in the lawsuit. Mutual fund industry sources say that the ruling has brought more clarity in the application of the criterion, which will aid them in fixing fund fees accurately in future. Investors are understandably happy that the court has asked fund boards to keep the fees charged from institutional investors in mind when fixing the fee for individual investors.

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