The U.S. Supreme Court today signaled it might require money managers to justify charging retail mutual fund customers dramatically more than institutional investors in similar separate-account strategies.
In oral arguments today in Jones vs. Harris Associates, Justices Sonia Sotomayor and Stephen Breyer expressed skepticism about whether longtime precedent on the subject, from the 1982 decision in Gartenberg vs. Merrill Lynch Asset Management Inc., provides sufficient clarity.
Harris is accused of violating its fiduciary duty under the Investment Company Act by charging retail investors in the firm's Oakmark mutual funds more than double what it charges pension funds and other institutional investors for managing similar strategies in separate accounts.
The 1982 decision in Gartenberg vs. Merrill Lynch held that a fee charged to manage a mutual fund was appropriate as long as it wasn't “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length negotiation.”
Mr. Breyer suggested a new standard that would require a money manager to explain large discrepancies between what a manager is charging retail and institutional customers.
“We would like if it's (the fees charged) a lot different to ask him why,” Mr. Breyer said.
Attorneys for Harris urged the high court to leave the Gartenberg precedent in place.
“We hope the court's decision will affirm the existing legal standard (Gartenberg),” added Paul Schott Stevens, president and CEO of the mutual fund industry's Investment Company Institute, in a news release today.
But in an interview, William Birdthistle, an assistant professor of law at Chicago-Kent College of Law and expert on mutual fund issues, said he thought the court might enhance the Gartenberg standard to consider comparisons of how much managers charge retail vs. institutional investors.
“It was such a part of the discussion that I would be surprised if it didn't become a much larger part of the test,” Mr. Birdthistle said.
A final decision in the case is expected by June 2010.