(Dow Jones) Both the mutual fund industry and advocates for fund shareholders found something to like in the U.S. Supreme Court's decision Tuesday regarding fund fees.
In its ruling, the court did not uphold an appeals court's new, tougher standard for shareholders who want to challenge what they consider to be excessive fees. They instead effectively restored a standard that had been in place since the early 1980s.
"This is really restoring the status quo," said Mercer Bullard, president of Fund Democracy, an advocacy group for mutual-fund shareholders.
Niels Holch, executive director of the Coalition of Mutual Fund Investors, a Washington-based advocacy group, called the decision "a step in the right direction," which "certainly upholds and clarifies the Gartenberg standard." But he noted it's still up to the lower court to interpret the higher court's language.
Under the Gartenberg decision, a fund advisor breaches its fiduciary duty to shareholders if it charges a fee "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."
Paul Schott Stevens, president and chief executive of the Investment Company Institute, the mutual-fund industry group, said the decision reinforces the Gartenberg standard and "confirms the line of judicial decisions that have grown up over time" around the Investment Company Act of 1940. It "provides certainty and clarity that will be helpful to boards and advisers, and ought to be reassuring to shareholders as well."
The high court ordered a federal appeals court in Chicago to reconsider the case, in which three investors in Oakmark Funds sued Harris Associates, the funds' creator and adviser, alleging it breached its fiduciary duties by charging excessive fees to individual investors compared with those charged institutional shareholders. The appeals court had set a tougher standard, saying shareholders must show that an adviser misled a fund's director.
Bullard called Tuesday's ruling "a unanimous body slam" to the new standard set by the appeals court, which opined that competition in the marketplace would assure the fairness of mutual fund fees. "That was explicitly rejected by the Supreme Court."
The case was closely watched by the mutual fund industry, which feared the court could create a new standard for setting fees and possibly open the gates to a flood of litigation.
The high court's decision doesn't open the floodgates to such challenges, and settles the important issue of how fee comparisons should be handled, Stevens said.