BOSTON (Reuters) - The U.S. Supreme Court handed a victory to the $11 trillion mutual fund industry on Tuesday by endorsing the legal standard in place since the early 1980s in deciding the fairness of fund fees.
ERIC BRUNSTAD, A PARTNER AT LAW FIRM DECHERT LLP AND A
LECTURER AT YALE LAW SCHOOL WHO FILED AN AMICUS BRIEF ON BEHALF
OF HARRIS, HARTFORD, CT:
“The decision is very stabilizing for the whole, entire industry. It is good for mutual funds, it is good for the investors, it is good for everybody. While there are always going to be people who are going to become unhappy and might be tempted to file lawsuits, the bottom line is that in this industry you have lots and lots of options because there is so much competition. There are mutual fund outlets on most city blocks and they are more ubiquitous than Starbucks coffee shops.”
MERCER BULLARD, PROFESSOR OF LAW AT UNIVERSITY OF
MISSISSIPPI WHO ALSO SERVED AS AN EXPERT FOR THE PLAINTIFFS,
OXFORD, MISSISSIPPI :
“It is right up the middle. What surprised me is that it shows a remarkable degree of judicial humility by the court, in view of recent decisions. The costs of an adverse decision could have been very high. This is a humiliating embarrassment for the Seventh Circuit, as a judicial matter, to be slammed unanimously by such an ideologically diverse court. It was an opinion at 60,000 feet, and the case will now be litigated at 20,000 feet.”
RUSS WERMERS, ASSOCIATE PROFESSOR OF FINANCE AT UNIVERSITY
OF MARYLAND’S ROBERT H. SMITH SCHOOL OF BUSINESS, COLLEGE PARK,
“It is a little bit of a trap to start second-guessing how funds set expenses. The ruling gives courts some leeway to look into cases where there wasn’t proper disclosure or where expenses were set way outside the appropriate bounds for investors.
“You might think it sets a green light for the industry to charge what it wants. It is actually a warning to advisers not to charge outrageous or unjustified expenses, because disgruntled investors can press court cases.
“This could bring force to bear on comparisons, such that fund services become more commoditized where two fund companies offer the same kind of products. I hope it doesn’t result in low-fee companies increasing their fees because the technicalities of the law allow them.
“Moving money out of a fund is still a default option for investors unhappy with expenses. There is some argument that if you paid a load or a financial adviser a fee to find a fund, there may be some resistance to moving money out. But that financial adviser hopefully put you in a fund with appropriate fees in the first place.
“Index funds are going to be under severe competitive pressures, because the services provided are very clear and transparent. This ruling will put even greater pressure on index funds to lower fees, to the point where fees within that category are more consistent among advisers.”
TAMAR FRANKEL, PROFESSOR OF LAW, BOSTON UNIVERSITY,
“The decision, in effect, strengthens in an indirect way the duty of directors to evaluate the fees on behalf of investors. There is now a duty on the advisers to give the fund directors a lot more information, and that is good.
“The directors will have to negotiate more strongly and look around for how much is being charged.
“The idea that the relationship (between investors and advisers) is a contract and that investors should take better care of themselves is rejected. What remains is that the duty is on the service giver, in this case the fiduciary who charges a reasonable fee.”
JOHN DONOVAN, PARTNER AT ROPES & GRAY IN BOSTON WHO
REPRESENTED HARRIS ASSOCIATES:
“This is a significant victory for the industry and for Harris ... That’s what the Supreme Court has now made the law of the land ... The language of the Supreme Court, if it does anything, it closes the door for plaintiffs’ lawyers.”
RYAN LEGGIO, ANALYST AT MORNINGSTAR INC IN CHICAGO:
“The industry had feared that if the lower court were upheld then Congress would rewrite the law and ... would go too far.”
Reporting by Jon Stempel, Svea Herbst-Bayliss and Ross Kerber
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