Good news for mutual fund investors: The Supreme Court on Tuesday overruled a lower-court ruling that would have made it much harder for shareholders to challenge fund fees.
The unanimous decision, issued in the case Jones v. Harris, reaffirms a quarter-century-old standard for assessing the fairness of fees charged by mutual fund managers and other investment advisers: Namely, whether those fees are in the range of what would be negotiated in an arms-length transaction and not so large that they bear “no reasonable relationship to the services rendered.”
The ruling clearly rejects an alternate standard proposed by a lower court in 2008: That the competition that has developed among mutual funds in recent years is sufficient protection for mutual fund investors, and that an adviser’s compensation would raise red flags only if it were so unusual that one would assume that the adviser had been deceitful.
In their opinion, the judges also rejected the idea that simply charging fees in the ballpark charged by other mutual-fund advisers was a litmus test for the fairness of a fund’s mutual fees.
“It would have been impossible to win an excessive-fee case under [the lower court's] standard,” said Mercer Bullard on Tuesday. Bullard, a securities law professor at Ole Miss and the head of the mutual fund advocacy group Fund Democracy, was an expert witness for the plaintiffs in the case.
“A mutual fund shareholder should be happy that this has very little effect on their situation,” Bullard said. “This will not make it more or less likely that they will win an excessive-fee suit or be subject to much higher fees.”
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