More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The U.S. Supreme Court announced its unanimous ruling in Jones v. Harris Associates LP a few weeks ago.
The 2004 case involved a lawsuit by investors against Harris Associates LP, adviser to the Oakmark Funds. The suit alleged that Harris was charging retail investors double what the firm charged institutional investors for the same services; that, the plaintiffs claimed, was a violation of the adviser's fiduciary duty.
The court's decision is seen as favorable for fund companies, although some observers believe it could lead to more lawsuits over fees and possibly lower fees.
The Investment Company Institute (ICI) has compiled an extensive resource page on the case, its outcome, and possible implications.
ICI President and CEO Paul Schott Stevens issued the following statement:
"The Supreme Court's unanimous decision brings stability and certainty for mutual funds, their directors, and almost 90 million investors, by endorsing the Gartenberg standard under which courts have long considered claims of excessive fund advisory fees. This standard has well served the interests of funds and fund shareholders, who have seen their cost of investing fall by half in the last 20 years."
Key excerpts from the Court's opinion, according to the ICI, include the following:
"Where a board's process for negotiating and reviewing investment-adviser compensation is robust, a reviewing court should afford commensurate deference to the outcome of the bargaining process.... Thus, if the disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently." (p. 15)
"[T]he Court must be wary of inapt comparisons based on significant differences between those services and must be mindful that the Act does not necessarily ensure fee parity between the two types of clients." (p. 2)
"Where disinterested directors consider all of the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if the court might weigh the factors differently." (p. 2)
"Since the Act requires consideration of all relevant factors..., we do not think that there can be any categorical rule regarding the comparisons of the fees charged different types of clients." (p. 13)
"[T]here may be significant differences between the services provided by an investment adviser to a mutual fund and those it provides to a pension fund which are attributable to the greater frequency of shareholder redemptions in a mutual fund, the higher turnover of mutual fund assets, the more burdensome regulatory and legal obligations, and higher marketing costs.... If the services rendered are sufficiently different that a comparison is not probative, then courts must reject such a comparison. Even if the services provided and fees charged to an independent fund are relevant, courts should be mindful that the Act does not necessarily ensure fee parity between mutual funds and institutional clients contrary to petitioners' contentions." (pp. 13-14)
"[C]ourts should not rely too heavily on comparisons with fees charged to mutual funds by other advisers. These comparisons are problematic because these fees, like those challenged, may not be the product of negotiations conducted at arm's length." (p. 14)