Jason Stipp: I'm Jason Stipp with Morningstar. The Supreme Court made a decision Wednesday in the Jones v. Harris case. This is a fund fee case involving the advisor to the Oakmark funds, in which some fundholders were very upset that they were being charged about twice as much as the Harris Associate institutional clients.
Morningstar's Ryan Leggio has been following this case for a while. He's here to tell us a little bit about what the decision means. Thanks for joining me, Ryan.
Ryan Leggio: Sure, Jason.
Stipp: So, give us just a quick rundown on exactly what the Supreme Court did decide yesterday, when they came out with their ruling.
Leggio: Sure. The Supreme Court officially decided in favor of the shareholders, so this case will go back down to district court where the shareholders will be able to try and prove that Harris charged them too much on fees. They affirmed what's known as the "Gartenberg Standard," which is a standard that's been in place for 25 years, which basically says that as long as the negotiations between the funds' advisor and the mutual fund boards are done in an arm's-length type of transaction, that the fund fees will stand.Read Full Transcript
Stipp: So it's my understanding that there's a range of possibilities of what the Supreme Court could have decided. Let us know where this actual decision comes in that continuum, from this to this. Where did we actually fall and what could have happened?
Leggio: We fell a little bit to the right of Gartenberg. Something I would describe as a "Gartenberg-plus" type of ruling. To the far left and the most lenient to fund companies would be the Appellate Court decision, which the Supreme Court overruled, which was Judge Frank Easterbrook's decision in which he said basically that the free market's going to decide fees. That would have been the worst case for shareholders, and that didn't happen.
On the other far right side would have been the Supreme Court saying that fund fees had to have parity with institutional fund fees. That would have been a best-case scenario for shareholders, and of course that didn't happen. In the middle is Gartenberg, which looks at a totality of the circumstances, again makes sure that there's this arms-length transaction. While that looks to be friendly for shareholders, no shareholder has ever won under the Gartenberg case. Harris didn't win. Another notable case in the courts right now, in the American Funds family, they didn't win. So that could have been an option.
The Supreme Court didn't do exactly that, because they raised the third footnote in Gartenberg, which talks about comparing institutional fees to retail fees and put that into the full-body meat of the decisions.
So now instead of kind of just an afterthought for courts looking at what institutional clients are charged, now that's really at the forefront. So it's definitely more shareholder-friendly than Gartenberg, we just don't know how much more shareholder-friendly yet.
Stipp: So that is the "plus" part that some folks are saying about this decision. The Gartenberg-plus is that particular point that the court elevated.
Stipp: So they've kicked this down then back to the district court, so they're going to take another look at that. If you had some takeaways here for investors on what this could possibly mean: what are the range of outcomes here and how might this trickle down to their actual fund holdings?
Leggio: I think there's three big takeaways for investors in this case.
One is that over the next few years maybe the courts will help them out, because this new decision is more favorable to plaintiffs. But again, it's going to be a few years until we know and so keep an eye on litigation, because we won't know whether or not this "plus" really has some bite to it or not, until the cases come out.
The second general point I would make is: don't rely on the plaintiffs' attorneys and the SEC to get your fees down. The SEC has never brought a case under this provision of federal law. Attorneys haven't brought that many cases, have not been successful, and they haven't brought cases in some of the most kind of notorious fee disparity cases, which would be index funds where you see an S&P 500 Index fund charging 60 basis points and yet another charging 10. In these kind of blatant examples where you would think attorneys would be filing lawsuits, they haven't. So don't rely on attorneys and the SEC to solve the problem for you.
The last is that really shareholders are the best watchdogs. The Supreme Court makes the point that independent directors are supposed to be the watchdogs of the industry. We haven't seen a lot of really independent director behavior which would lead us to believe that they can really do the job on their own.
Shareholders have to be doing the job, too. That means if you see a fund with really high fees, look for another fund that has a comparable strategy. You'll find on our website a link to fee data for all different categories (see last page), so you can look at the same data that directors are looking at. Shareholders should use that data to really make the fund companies change their behavior.
Stipp: So fees obviously are a very, very important part of your fund decision. Dig in a little bit behind those funds and vote with your feet if you need to.
Stipp: Thanks so much for joining me, Ryan.
Leggio: Thank you.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.