Financial advisers said they agreed with several Supreme Court justices
who appeared to suggest during oral arguments yesterday that the Securities and Exchange Commission — and not the courts — should ultimately decide when mutual fund fees are excessive.
The case heard yesterday, Jones v. Harris, involves a lawsuit filed by a group of investors against Harris Associates LP, which advises the Oakmark Funds. The plaintiffs alleged that Harris breached its fiduciary duty by charging excessive management fees.
“It makes a lot more sense to have the SEC regulate rates than to have courts do it, doesn't it?,” Chief Justice John Roberts said during court arguments. A ruling is not expected until next year.
And Mr. Roberts’ thinking jives with some financial advisers too.
“That’s what the SEC is there for,” said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., a financial advisory firm with $170 million in assets. Plus, getting the courts involved in setting fees seems like an unnecessary extra step, Mr. Schroeder added.
Others noted the SEC is already regulating mutual funds, so additional discretion over fees appears like a natural extension of the agency’s duties. “It seems logical that the government agency watching over the industry has authority over fees,” said Mark Balasa, a financial adviser and co-president of Balasa Dinverno & Foltz LLC of Itasca, Ill., which manages $1.5 billion in assets.
The SEC, however, has rarely used its authority to weigh in on fees, said Mercer Bullard, president and founder of Fund Democracy Inc., a mutual fund shareholder advocacy group.
“The SEC should bring cases or provide guidance that establish the standard that would apply,” he said. “That would be something that would be beneficial, but the SEC has long abdicated any responsibility for setting standards.”
SEC spokesman John Heine declined to comment.
Advisers agreed that the SEC has done little to reign in excessive fees.
“If that’s what they [SEC staffers] are supposed to be doing they aren’t doing enough of it,” said Stephen Gorman, president of Gorman Financial Management of Hingham, Mass., which has $100 million in assets.
Despite a line of questioning that seemed to suggest the Supreme Court justices were leery of getting into the business of setting standards, however, it’s hard to tell what the court will ultimately determine.
The 7th U.S. Circuit Court of Appeals in Illinois ruled against the plaintiffs last fall. Chief Judge Frank Easterbrook upheld the fees set by Harris, and noted that as long as there is transparency and no fraud, a fund provider has not breached its fiduciary responsibility to investors.
That ruling essentially created new law.
Since a 1982 ruling by the 2nd U.S. Circuit Court of Appeals in New York, courts have applied the Gartenberg standard — named for a plaintiff in that case — to excessive-fee claims.
That standard holds that for a fee to be excessive, the mutual fund manager "must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining."
