US Videos

Fund Fees on Trial: Our Report from the Courtroom

Ryan Leggio

Jason Stipp: I'm Jason Stipp with Morningstar.

The Supreme Court today heard oral arguments in the Jones v Harris case. This is a case that has the potential to change the landscape of fund fees in the U.S. and how much individual investors pay for your mutual funds.

Here with me today is Ryan Leggio. He was in the courtroom today, and he has some news to report about what the justices said, how the questioning went, and where we think the justices may come down in their decision.

Thanks for joining me, Ryan.

Ryan Leggio: No problem.

Stipp: So, if you could, just quickly give me a 20-second recap of who are the plaintiffs in this case, who are the defendants, and what's at issue here.

Leggio: Sure. The plaintiffs in the case are Jones. They are shareholders of three Oakmark mutual funds. The defendants in the case are Harris. Harris is the investment advisor to the Oakmark fund family.

The case reached the Supreme Court because the shareholders, Jones, lost in district court and the appellate court and appealed their case all the way to the Supreme Court.

Read Full Transcript

Stipp: OK. And so, today the Supreme Court was hearing oral arguments. They're not going to decide today, but they were gathering some information from both sides.

So, let's just start with the plaintiffs and the questioning of the plaintiffs. How did that go? Were there any surprises that you heard in what the justices were asking the plaintiffs' side?

Leggio: Sure. The plaintiffs' attorney was up first, and, as is usual, the Supreme Court justices asked very tough questions to the plaintiffs' attorney, specifically as to the issue they're deciding, what are fair fees and what is a breach of fiduciary duty.

Chief Justice Roberts noted near the beginning of oral arguments specifically that shareholders can look at fees through Morningstar every day and that shareholders can move with their feet to new mutual funds.

The other justice who was very skeptical of the plaintiffs' position was Justice Scalia. He felt, or asked questions anyway, that it was probably improper for courts and judges to regulate fees, that possibly the SEC would be better at that job.

So, the plaintiffs' side definitely faced fierce questioning from a number of the judges.

Stipp: Were there any questions that seemed to imply that there were some sympathetic ears to the plaintiffs' case? Were there questions from any of the justices that maybe seemed to say that this marketplace isn't as competitive as maybe Scalia was implying that it might be?

Leggio: The only kind of glimmer of hope initially for plaintiffs was really Justice Sotomayor's questioning. She really wanted to know what an unfair fee would look like, and she was troubled that not only could there be an unfair fee based upon the fees alone, but she also was looking at what if the process of deciding the fees is broken? Is that enough for fees to be unfair and a breach of fiduciary duty? So, she was really the one looking for more options on the plaintiffs' side.

Stipp: OK. How about the questioning of the Harris side, of the defendants? What kind of information came out in that process?

Leggio: Sure, well, right before the Harris side got up, the United States government, the Solicitor General, had about 10 minutes, and the big question that came out of there was: Look the Securities and Exchange Commission have the power to also file these lawsuits. So, shareholders can file these lawsuits, but also the SEC can, and how many lawsuits has the SEC filed?

The government said that there has been no lawsuit filed since 1980 that the SEC has brought, but quickly pointed out to the justices that wasn't because they think that the industry is perfect, but because they're deploying their resources on the regulatory side through more disclosures.

Then, Harris was up, and there were definitely equally tough questions for the Harris side. Justice Ginsburg and Justice Breyer were asking a lot of questions, as well as Justice Kennedy.

Really, what it boiled down to was, what do unfair fees look like? And the defendants' side didn't really have an answer to that question.

Stipp: So, based on the questions that they were asking the plaintiffs, the questions that they were asking the defendants, did you get a sense of where this decision might come down, where the justices were leaning? And were there any surprises in what you were hearing and what they were focusing on?

Leggio: Well, there were, I think.

First, I would note that Justice Alito and Justice Thomas did not ask one question during the one hour oral arguments, so we don't really have an idea of where they're leaning.

I would say, Justice Scalia and Chief Justice Roberts are probably leaning towards upholding some type of Gartenberg standard, as it is known, which is really that the fees are going to be permissible if it's possible that they could have been arrived through an arm's-length transaction.

I would say that the one surprise was the questions by Justice Kennedy. He really was asking generally what was meant by fiduciary duty. He wasn't going into the specifics of the law, even though I think a lot of people were expecting him to, and also expecting that he may be the swing vote in this case, as he often is. So, I think that was a surprise. We really don't have a sense of where he's leaning.

I think the other big surprise was that towards the end of the arguments, Justice Breyer hinted that the Supreme Court may come up with their own standard, that they may reword Gartenberg and make it a lot more easy for other courts to apply. I think that was really the big surprise for me at the end.

As far as where the votes lie, again, without two of the justices asking questions, with Kennedy really asking some vague questions, I think it's really anybody's guess at this point.

Stipp: And that decision you're expecting next spring. When would be the latest that this would come out?

Leggio: The latest we would expect a decision is June, and from the arguments today, I expect the case will probably be reversed, that Easterbrook's decision will be reversed, and that the case will probably go back down to trial. So, this is probably not the last that we've heard of Jones v. Harris.

Stipp: Ryan, thanks so much for joining us today, and thanks for calling in with your insights.

Leggio: My pleasure.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching