Justices tackle case on investment fees

Several Supreme Court justices on Monday seemed reluctant to make the courts arbiters of whether mutual fund investment advisers are charging excessive fees for their work on what has become an essential investment tool for Americans.

Chief Justice John G. Roberts Jr. and Justice Antonin Scalia were most outspoken in saying that government regulators or even consumers were better equipped at monitoring the fees.

Technology has made it easy for investors to check the amounts charged by investment advisers, and consumers can move their money from those they think excessive, Roberts said.

"All you have to do is push a button and you find out exactly what the management fees are," Roberts said, adding, "As an investor you can make whatever determination you'd like, including to take your money out."

But lawyer David C. Frederick, representing a group of consumers suing their mutual fund managers, said that was not the intent of the law Congress passed decades ago. It was not just to make sure fees were disclosed, Frederick said, but that they had been negotiated in a fair way that made the funds as profitable as possible.

In the case, three investors in the Oakmark family of mutual funds alleged that the funds' manager, Harris Associates, violated its fiduciary duty by charging investors "excessive" fees -- more than twice the amounts Harris charged for advising other clients.

In one year alone, the mutual funds paid between $37 million and $58 million more in fees than they would have if they had been charged the same as other clients of Harris Associates, the investors group said. But because of the cozy relationships among the boards of the mutual funds -- whose members were all appointed by Harris Associates -- the fees were not challenged, the investors said.

"There is no reason why the mutual fund should be charged twice as much," Frederick said.

John D. Donovan Jr., who represented Harris Associates, said the work done for the mutual fund was not the same as the work performed for other investors, so the fees charged should not be the same.

He warned that if the court decides that judges should determine whether a fee is reasonable, "I suggest you consign 8,000 mutual funds to a trial."

Still, Justice Stephen G. Breyer worried about a system in which the fund's owners have such a close relationship with the board of directors that sets fees. He compared it to hiring someone to set your salary, with the ability to fire the person if you didn't like the result.

The case was set up for the high court by two of the judiciary's leading thinkers on the economy and law, judges Frank H. Easterbrook and Richard A. Posner of the U.S. Court of Appeals for the 7th Circuit. Easterbrook wrote the majority opinion upholding a district judge's decision to grant Harris summary judgment. Easterbrook said there was no reason to engage in "judicial price-setting" because the law requires only that Harris not mislead about the fees it charges.

But Posner said that in the mutual fund setting, the market couldn't be relied on because of the "feeble incentives of boards of directors to police compensation."

But from their questioning, the justices seem inclined to decide the case narrowly. None seemed to defend Easterbrook's hands-off standards -- even Donovan -- and some wondered whether the district court had too quickly granted relief to Harris without hearing more about disputed facts in the case.

One possibility would be to remand the case back to the trial judge with more instructions about how to judge whether the fund managers had lived up to their fiduciary duty.

The case is Jones v. Harris Associates.