The mutual fund industry made a rare appearance before the US Supreme Court in a case alleging "excessive fees" brought against a Chicago fund firm, with claimant Jerry Jones suing Harris Associates LP (Jones v Harris). The US Investment Company Act contemplates such cases by aggrieved individual investors and, in doing so, establishes that a mutual fund's investment adviser owes a fund a fiduciary duty in respect of the fee arrangement charged to the fund. That said, courts traditionally have not favoured claimants in these so-called "fee suits," taking the view that the corporate governance structure under which a US mutual fund is organised requires substantial deference to the fund board of directors or trustees that will have approved the fee.

In effect, if a fund board has acted on the fee, the court usually stands aside. In a victory for the fund industry, the Supreme Court in Jones v Harris reaffirmed a long-standing lower court precedent known as the Gartenberg case that had provided the intellectual basis for that approach. Reciting the Gartenberg standard almost verbatim, Justice Alito wrote for the Court that to violate the relevant fiduciary principles "an investment adviser must charge a fee that 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 decision has, however, been described occasionally in the press and by some industry and academic observers as a partial victory for shareholder claimants, primarily because a lower court in Jones v Harris had set an even higher bar for claimants than did Gartenberg (though interestingly neither Jones nor Harris argued in favour of the lower court's position before the Supreme Court).

Another ground for the claimants to claim victory is that the Supreme Court disagreed with the position taken by some lower courts that, because of the differences between the two business lines, an investment adviser's institutional fee rates are of itself not relevant when reviewing the same adviser's retail mutual fund fee rates.

The Supreme Court ruling was simply that no factor in a board's (or court's) review of mutual fund fees is of itself relevant or irrelevant. On that slim reed, observers envision at least a trickle of test suits to follow, each pushing at the question of whether retail/institutional fee differences justify a finding of "excessive fees" for a mutual fund under the facts of the particular case. But the reality is that those suits will still run directly into the standard, now enshrined by the Supreme Court, that a fee approval by an informed and diligent board of directors will be granted a significant measure of deference – and even a fee approval by a misled board or one following a deficient process can be found to be excessive only if, again, 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."

For more information, see Jones v. Harris – Mutual Fund Fees in the Balance.