Hit High-Fee Funds Where It Hurts
Supreme Court ruling means aggrieved investors' best option is voting with their feet.
When it comes to mutual fund fees, the Supreme Court has essentially chosen to maintain the status quo. That means a fund's board of directors will continue to have wide latitude on setting fees charged to investors. It also means that investors who are unhappy with the fees should switch funds rather than sue in hopes of forcing a fund company to lower them.
The high court made the ruling recently in a case involving management fees charged by Harris Associates, which runs the Oakmark funds. In the case, some shareholders argued that the fees Oakmark mutual funds charged individual investors should be in line with the lower fees Harris charged institutional clients. An appellate court had earlier ruled that shareholders who sue over excessive fees must show that the fund's board had been misled. But the Supreme Court unanimously disagreed and sent the case back to the lower court for another look.
Suing to lower fund fees is already difficult, and the lower-court decision would have made it even harder. Instead, the high court largely upheld the Gartenberg case, which has governed lawsuits related to fund fees since 1982. Gartenberg held that suits can succeed only if the fee is so high that it is outside the range of what parties might reasonably negotiate in an arm's-length transaction (a fair transaction in which buyers and sellers have no relationship with one another). In nearly three decades under this standard, no fund company has ever lost a suit over fees.