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Tuesday, March 30, 2010

UPDATED: Supremes Revive the Oakmark Fee Suit

Reported by Neil Anderson, Managing Editor

The Oakmark Funds fee suit is back from the dead, and the mutual fund industry has missed an opportunity to preempt most fee-related lawsuits. Today the U.S. Supreme Court just unanimously overruled the Seventh Circuit's dismissal of Jones v. Harris Associates, in which investors attacked Harris for allegedly charging excessive fees to Oakmark Funds shareholders. Associate justice Samuel Alito penned the court's decision, while associate justice Clarence Thomas penned a concurring opinion.

Samuel Anthony Alito, Jr.
United States Supreme Court
Associate Justice
The MFWire could not immediately reach a Harris spokesperson for comment. (Harris is an indirect subsidiary of Natixis.)

Both sides of the suit appear to be declaring the decision a victory. The Wall Street Journal's Brent Kendall reports that Harris' attorney, John Donovan, called the ruling an affirmation "that courts have a very limited role to play in scrutinizing mutual fund fees," while plaintiffs' attorney David Frederick said it was "a great win for investors" because it will help "to hold investment advisers accountable for the excessive fees they charge mutual funds."

In their ruling, the justices have thrown their weight behind the 1982 precedent of Gartenberg v. Merrill Lynch Asset Management, whereby fees count as excessive if it is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining." The Seventh Circuit's dismissal of the case would have put the judgment of fees' reasonableness solely in the hands of fund trustees, which would have made excessive fee suits that much more difficult.

"The Gartenberg standard ... may lack sharp analytical clarity, but ... it has provided a workable standard for nearly three decades," Alito ruled. "The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual fund market is a matter for Congress, not the courts."

Alito cautions the plaintiffs that the court's decision is not an open invitation to attack funds' fees.

"Courts should be mindful that the [40] Act does not necessarily ensure fee parity between mutual funds and institutional clients contrary to petitioners' contentions," Alito wrote. "By the same token, courts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers. These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm's length."

Paul Schott Stevens, president and CEO of the ICI (Investment Company Institute), praised the ruling for bringing "stability and certainty for mutual funds, their directors and almost 90 million investors."

"The Courtís decision recognizes that this framework has worked for funds, advisers, boards, courts, and -- most importantly -- fund shareholders, who have seen their cost of investing fall by half in the last 20 years, making it easier for them to meet retirement, education, and other vital financial goals," Stevens stated.

From a different side of the industry, Mutual Fund Directors' Forum counsel Carolyn McPhillip expressed relief that the decision means that "decisions won't be second-guessed in the court room."

"Our amicus brief was pretty consisten with the court's ultimate decision," McPhillip told The MFWire. "We are pleased because the court confirmed that independent directors have a central role."

And SEC (Securities and Exchange Commission) spokesman Kevin Callahan called the ruling "welcome news for mutual fund investors, who can continue challenging fund fees they believe to be excessive."

Click here to read the decision.

The Associated Press and Reuters' James Vicini broke the news this morning. Bloomberg, CNN, the Los Angeles Times, MarketWatch, the New York Times and Pensions & Investments all covered the story, too. 

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