High Court Takes on Investment Adviser Fee Dispute

The U.S. Supreme Court agreed to consider whether the level of fees paid to investment advisers to mutual fund companies can violate the Investment Company Act.

That question is at the heart of Jones v. Harris Associates, an appeal from a May ruling of the 7th U.S. Circuit Court of Appeals. The court had thrown out the lawsuit by investors in the Oakmark funds who claimed the fees of adviser Harris Associates were too high and that Harris did not disclose certain information about its pricing process. Plaintiffs in the case are Jerry N. Jones, Mary F. Jones , and Arline Winerman.

The high court announced Monday that it would hear the case.

In upholding a lower court decision in favor of Harris, the 7th Circuit asserted that while the fees of fund family advisers should be properly disclosed, their level should be regulated by a free market in which dissatisfied investors can take their business elsewhere (see “Mutual Fund Adviser Fees: Not for Courts to Decide).

“The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth,” wrote Chief Circuit Judge Frank Easterbrook, in the 7th Circuit decision.

The plaintiffs argued in their appeal that other U.S. Appeals Courts use a standard that says investment advisers violate federal law when their fees are so disproportionately high they bear “no reasonable relationship to the services rendered.”

The pending U.S. Supreme Court case is Jones v. Harris Associates, 08-586. The 7th Circuit opinion is available here.