Supreme Court to take mutual fund-fee case

March 10, 2009|By Walter Hamilton | Walter Hamilton,Los Angeles Times

New York -Critics have long complained that mutual-fund fees are too high, wrongfully enriching Wall Street at the expense of ordinary Americans.

Yesterday, the U.S. Supreme Court said it would take a crack at the explosive issue.

The court agreed to hear a case in which individual investors have accused their fund company of charging excessive fees.

At issue is the legal standard that small investors must meet to bring lawsuits against fund companies. The court will determine whether a ruling last year sets too high a bar for investors to challenge the annual levies.

Fees have become a highly charged subject in recent years as Americans have come to rely on 401(k)s to finance their retirements, and they have taken on greater relevence as the stock market has tumbled during the financial crisis.

"It's very significant because mutual funds are now the investment vehicle of choice for most American investors; they're the vehicle for planning for our retirements," said James Cox, a Duke University law professor.

Critics say the fund industry reaps big profits by not passing along economies of scale that they have achieved through decades of growth.

As proof, they say, investment firms charge much higher fees to mutual-fund investors than to pension funds and other institutional investors for essentially the same services.

The court agreed to review a case in which three investors sued Harris Associates, which manages the Oakmark funds.

The investors alleged that Oakmark's average fees rose from 1993 to 2003 even though the company's assets under management jumped 40-fold to more than $11.7 billion.

Critics say that - unlike industries such as manufacturing, which must hire new workers and buy extra raw materials to service new customers - fund companies incur few additional costs when adding investors.

Thus, the levies charged to newcomers "represent almost pure profit" to fund managers, the investors said in their suit.

Average fund fees have declined slowly over the years, falling to 1.24 percent of assets last year from 1.34 percent in 1998, according to Morningstar Inc.

An Oakmark spokesman did not return a phone call seeking comment.

"This is an important case for the mutual fund industry and fund boards," said Rachel McTague, a spokeswoman for the Investment Company Institute, the fund industry's main trade group. "We will certainly continue to follow it closely." The Supreme Court agreed to consider whether a ruling last year by the U.S. Court of Appeals for the Seventh Circuit makes it too difficult for small investors to challenge fund fees.

For years, courts have relied on a legal standard set in a 1982 decision known as Gartenberg, which itself sets high hurdles for plaintiffs to succeed in fee-related cases, experts said.

Last year's ruling laid down even tougher standards, making it virtually impossible for investors to bring fee cases, experts said.

The ability of investors to sue, and the willingness of fund companies to lower fees, will depend largely on the Supreme Court ruling, experts said.

Even if the Supreme Court nullifies the more stringent standards, investors won't gain much unless the justices also dispense with Gartenberg in favor of more lenient standards, experts said.

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