High Court to Decide Fund-Fee Suit

August 28, 2009
Michael Sheehan

The Supreme Court will rule on a high-mutual-fund-fee case that consumer advocates hope will clarify issues such as mutual fund board conflicts of interest.

Stubbornly high mutual fund fees have faced down competition from no-load and skinflint funds, oversight by the Securities and Exchange Commission, and a flood of advice from many mutual fund gurus who suggest that the most important thing for an investor to look at is a fund’s expenses. According to a recent Wall Street Journal report, however, there’s a chance the US Supreme Court may ring in some changes.

The Supreme Court will hear a fund-fee lawsuit that has been kicking around the lower courts for more than five years before ending up on its docket. The suit involves allegations that the fees for the fund involved were too high and that the fund’s trustees, who were charged with negotiating and approving the fees, were not independent enough to play hardball with the money managers. According to the WSJ report, fund trustees may be averse to endangering compensation packages, often in the six-figure range, that they get for attending a few meetings a year. And since the compensation packages are set by the fund managers who are on the other side of the table when the trustees negotiate the managers’ fees, there’s a fairly obvious conflict of interest, according to the suit’s plaintiffs.

What decision the court may come to and what actions it may recommend are obviously unknowns, but consumer advocates are hoping that it will clarify issues like the potential for conflicts of interest on mutual fund boards. In the meantime, the advice from the investment mavens is still valid — to get better returns over the long run, look for funds with low expenses.