The U.S. Supreme Court is looking at whether an investment advisor breaches its fiduciary duty when it sets different fees for captive mutual fund investors and independent fund investors.
If the fund shareholders who brought the suit, Jones vs. Harris Associates, win, any holding that changes the current interpretation of the breach-of-fiduciary standard could affect executives’ pay packages.
The plaintiffs are suing based on Section 36(b) of the Investment Company Act of 1940.
The ICA creates a “fiduciary duty with respect to the receipt of compensation for services” for investment advisors, and it gives shareholders the right to sue in connection with allegations of violations of that duty.
A 1970 amendment limits the fees that an advisor can charge for advising mutual funds.
The Harris Associates shareholders say the fund company set fees that are too high.
The 7th U.S. Circuit Court of Appeals rejected that argument, holding that the limit on fees applies only if an advisor misled fund directors in securing approval for the fees.
The 7th Circuit ruled that mutual fund fees are a product of market forces and that courts should not be engaged in “[j]udicial price-setting.”
The shareholders appealed to the Supreme Court. The Obama administration has filed a “friend of the court” brief that urges the Supreme Court to put limits on investment advisor fees.
“If the court creates a higher fiduciary standard, that’s going to have a significant impact on investment advisors,” says Jim Gregory, a partner in the employee benefits and executive compensation group at Proskauer Rose L.L.P., New York. “And if the court were to take a broader view of the fiduciary duty, then it might take it upon itself to say what is or isn’t an appropriate level of executive compensation.”