Supreme Court Grants Certiorari in Mutual Fund Fee Suit Against Harris Associates

Holding:

In a summary order, the U.S. Supreme Court has granted a writ of certiorari to a petition alleging that mutual fund adviser Harris Associates LP (“Harris”) charged excessive fees to its clients. In so doing, the Supreme Court agreed to hear and review a Court of Appeals for the Seventh Circuit’s ruling that mutual fund fees should not be capped, and not be subject to judicial determination. In its review, the Supreme Court will resolve the issue whether a shareholder’s claim that an investment adviser breaches their fiduciary duty under § 36(b) of the Investment Company Act (“ICA”) by charging excessive fees is valid if the shareholder can show the adviser misled the fund directors who approved the fee. To recall, the Seventh Circuit declared that Section 36(b) of the ICA does not say that fees must be “reasonable” in relation to a judicially created standard. According to the Seventh Circuit, federal securities laws, such as the ICA, 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.

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 ICA.

The U.S. District Court for the Northern District of Illinois, Eastern Division, found that…

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