Posted in: Capitol Hill | Securities Law | SEC | Greedy Brokers | Breach of Fiduciary Duty | Risky Investments | Mutual Funds |
Last month’s U.S. Supreme Court decision gives investors more power to sue mutual fund managers for charging unreasonably high fees. This also signals the government’s intent to regulate fund fees itself, rather than leaving such powers to Wall Street.
Since 1970, federal securities laws required mutual funds to be managed by an independent board of directors, who were bound by a fiduciary duty. For years the common belief within the securities industry was that a free market, along with these independent advisors, would keep mutual fund fees in check.
As investors learned after the Wall Street collapse that began in 2007, this simply was not the case. So-called “independent advisors” used their connections in the industry to earn huge fees even while their funds collapsed.
While investors have been able to sue mutual fund managers, this recent unanimous Supreme Court decision in the case Jones v. Harris Associates specifically addresses high fees. In future claims, investors would need to prove that a high fee did not match up to services rendered from a fund manager.
William Birdthistle, a professor at the Chicago-Kent College of Law, said in his brief filed with the Supreme Court that the Jones. v. Harris decision, specifically the language in Justice Samuel Alito’s court statement, can potentially be “enormously friendly” to investors.”
“Every ruling on mutual fund excessive fees going forward will be based on Jones v. Harris,” Birdthistle said in his brief.
Mercer Bullard, a University of Mississippi securities law professor, told the New York Times that excessive fee claims would now be more likely to succeed, adding that advisors and boards of mutual funds will also be under greater scrutiny.
The Washington Post provides more information on the Jones v. Harris case, which originated as a lawsuit against fund managers Harris Associates before progressing through the U.S. Court of Appeals in Chicago. The plaintiffs were shareholders in Oakmark funds, said they were charged 0.88 percent management fees while other Harris customers were charged .45 percent.
In the case before the court, three investors in the Oakmark family of mutual funds alleged that the funds’ manager, Harris Associates, violated its fiduciary duty by charging investors excessive fees—more than twice the amounts Harris charged for advising other clients.
In one year alone, the mutual funds paid between $37 million and $58 million more in fees than they would have if they had been charged the same as other clients of Harris Associates, the investors group said. But because of the cozy relationships among the boards of the mutual funds—whose members were all appointed by Harris Associates—the fees were not challenged, the investors said.
Harris Associates argued that the fees charged for mutual fund work are not easily compared to fees charged other clients, and noted the funds’ profitability. Investors were advised of the fees charged.
Consumer groups supported the investors, as did one of the giants of the mutual fund industry, John C. Bogle, founder of the Vanguard Group. He said in a brief that the explosive growth of the mutual fund industry has made it harder to monitor the “conflicting loyalties” of investment advisers and the failure of fund managers to share economies of scale with investors.
To some, this case may appear to be an insignificant return to the status-quo. After all, the Supreme Court is just clarifying a decades-old law regarding mutual funds and the enforcement of fiduciary duty. But now that the highest court in the land has said the government would be responsible for directly enforcing this fiduciary duty - and a closer look would be paid to fees - future investor claims are sure to be impacted.
In 2008 alone, mutual funds generated more than $90 billion in fees. Americans currently have $11 trillion invested in stocks and bonds controlled by mutual funds.
If you saw your mutual fund portfolio collapse while the fund managers somehow made millions, now is the time to act.
