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From Securities Regulation Daily, August 6, 2015

Mutual fund investors fail to show that adviser fees were excessive

By Amanda Maine, J.D.

The Seventh Circuit let stand a decision by the Northern District of Illinois, which found that investors in a mutual fund failed to establish that they had been charged excessive adviser fees. The Seventh Circuit rejected the plaintiffs’ argument that the fees they were charged should be compared to the fees the firm charged pension funds, noting that there may be significant differences between the services provided to the different investment vehicles (Jones v. Harris Associates L.P., August 6, 2015, Easterbrook, F.).

Background. Investors Jerry N. Jones, Mary F. Jones, and Arline Winerman (plaintiffs) sued Harris Associates L.P. alleging that Harris charged excessive fees for advising certain mutual funds. The case eventually reached the Supreme Court, which determined that under Section 36(b) of the Investment Company Act, to face liability for charging excessive fees, 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” (Jones v. Harris Associates L.P., 559 U.S. 335 (2010)) and was remanded to the lower court.

The plaintiffs then contended that Harris’s fees should be deemed excessive because they were not subject to “proper procedures,” but the Seventh Circuit disagreed, stating that a process-based failure alone is not enough to constitute a violation of Section 36(b), and that the question should instead be whether the fees themselves were excessive.

District court summary judgment. The district court granted summary judgment to Harris after examining four factors for determining whether fees are excessive. The court found that Harris’s fees were similar to those charged by other advisers to comparable funds. The court also determined that Harris provided accurate information about the funds’ board members who had approved the fees. In addition, the court noted that the fee schedules reduced the applicable percentage charge as the funds’ assets rose. Finally, the court stated that the fees were not disproportionate in relation to the value of the work performed by Harris, noting that the funds’ returns exceeded the norm for comparable investments. These factors required a decision for Harris, the court found.

Appellate decision. On appeal, the plaintiffs argued that the fees could not be a product of arm’s length bargaining, and urged the appellate panel to compare the fees that Harris charged them with the fees charged to some of Harris’s other clients, which included pension funds. The court refused to do so, observing that the Supreme Court’s original opinion in this case had noted that there may be “significant differences” between the services provided by an investment adviser to a mutual fund compared to the services it provides to a pension fund.

In the absence of any evidence showing that Harris provided its pension fund clients with the same kinds of services it provided to the plaintiffs’ mutual funds or that it incurred the same costs in doing so, there was no reason to open the matter on remand, the panel concluded, and affirmed the district court’s order of summary judgment.

The appellate decision does not carry precedential effect.

The case is No. 07-1624.

Attorneys: James C. Bradley (Richardson, Patrick, Westbrook & Brickman) for Jerry N. Jones. John D. Donovan, Jr. (Ropes & Gray LLP) and Gordon B. Nash, Jr. (Drinker Biddle & Reath LLP) for Harris Associates.

Companies: Harris Associates

MainStory: TopStory InvestmentAdvisers IllinoisNews IndianaNews WisconsinNews

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