Mutual Fund Fee Dispute Divides U.S. Supreme Court

Nov. 2 (Bloomberg) -- U.S. Supreme Court justices signaled they are split over the role judges should play in reviewing the compensation of mutual fund advisers in a case that might force reductions in the $90 billion in annual fees advisers collect.

Hearing arguments today in Washington, Chief Justice John Roberts and Justice Antonin Scalia emerged as the industry’s strongest defenders, questioning whether courts should second- guess the fund boards that approve the fees. U.S. mutual funds have more than $10 trillion in assets.

An investor who objects to a fee “can go look at another fund,” Roberts said. “It takes 30 seconds.”

Other justices, including Stephen Breyer, suggested that judges should compare the fees paid by mutual fund shareholders to those the same investment advisers charge institutional clients that have similar investment objectives. Breyer called that a “normal question to ask.”

The court is considering the ability of investors to sue portfolio managers in a case involving Harris Associates LP’s Oakmark mutual funds. The fund industry is pitted against consumer-rights groups, the Obama administration and John Bogle, founder of Vanguard Group Inc.

Bogle, who filed a brief supporting the Oakmark investors, says mutual fund shareholders are being overcharged through fees that seem low when expressed as percentages yet add up to a multibillion-dollar windfall for advisers.

Important Ruling

The fund industry’s trade association, the Washington-based Investment Company Institute, says the case may produce the most important Supreme Court ruling in the history of the business, changing the legal standard governing fees and inviting new investor suits. The industry has grown 200-fold since 1969, when it had $50 billion in assets.

Growth has brought steady reductions in the management fees paid by investors, says Paul Schott Stevens, the trade group’s president. Average fees for stock funds have fallen to 0.99 percent in 2008 from 2.32 percent in 1980, the group says.

A federal appeals court threw out an investor lawsuit against Harris Associates.

The shareholders suing Harris say fees on the three funds - - -- Oakmark, Oakmark Equity and Income and Oakmark Global -- are in percentage terms more than twice what Harris charges pension funds and other independent clients. For the Oakmark Fund, Harris charged 0.88 percent during the 12 months before the suit was filed in August 2004, court documents show.

$55 Million in Fees

Investors in the Oakmark Fund paid $55 million in fees during that period, compared with $720,000 paid by an unspecified institutional client.

The case turns on the Investment Company Act, which protects investors from close relationships between fund managers, also known as investment advisers, and their fund directors. An adviser, such as Harris, typically sets up the fund and often selects some of the directors, who are responsible for approving the adviser’s fees.

Since it was amended in 1970, the Investment Company Act has addressed that conflict of interest by imposing on advisers “a fiduciary duty with respect to the receipt of compensation for services.â€

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

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net .