Circuit Court Turns Down Appeal against Harris Associates, Refusing to Put a Cap on Mutual Fund Advisory Fees

Holding:

The U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s ruling that mutual fund adviser fees should not be determined by the judiciary. In refusing to put a limit on adviser’s fees, the Seventh Circuit declared that Section 36(b) of the Investment Company Act does not say that fees must be “reasonable” in relation to a judicially created standard. Federal securities laws, such as the Investment Company Act, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. In this case, the fees were not hidden from investors—and the mutual fund's net return has attracted new investments rather than drive investors away. Section 36(b) does not make the federal judiciary a rate regulator, similar to that performed by the Federal Energy Regulatory Commission. Regulating advisory fees through litigation is unlikely to do more good than harm.

Detailed Summary:

Defendant Harris Associates, L.P. advised the Oakmark complex of mutual funds. These open-end funds (an open-end fund is one that buys back its shares at current asset value) have grown in recent years as a result of their net returns exceeding the market average, and the compensation for investment adviser’s has grown apace. Plaintiffs Jerry N. Jones, Mary P. Jones, and Arline Winderman, who owned shares in several of the Oakmark funds, argued that the adviser’s fees were too high and thus violated §36(b) of the Investment Company Act of 1940.

The U.S. District Court for the Northern District of Illinois,…

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