The U.S. Supreme Court 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 Nov. 2 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),” said Paul Schott Stevens, president and CEO of the mutual fund industry's Investment Company Institute, in a news release.
A final decision in the case is expected by June 2010.