BNA INSIGHTS: Jones v. Harris Associates L.P.—Mutual Fund Fees and the Supreme Court: What Next?

U.S. mutual funds represent 90 million investors who have entrusted the funds with $10 trillion in assets. That scale makes mutual funds one of the dominant vehicles for long-term savings in the United States. Yet the funds operate under an organizational model that is foreign to the rest of corporate America. Instead of housing the fund’s management within the fund, i.e., with its officers and key employees, a mutual fund’s executive functions are outsourced to a third-party management company, typically known as the fund’s investment adviser. It is as if the fund is a third-party client to its own management team.

That unusual corporate relationship – and its attendant vulnerabilities for a mutual fund, which, without traditional officers, necessarily “speaks” through its board of directors when dealing opposite the fund’s investment adviser—serves as the backdrop to Jones v. Harris Associates L.P., a case decided by the Supreme Court in the last days of March.

At stake was the standard courts apply when deciding a so-called “excessive fee” case in which an aggrieved fund investor alleges unfairness of the fee arrangements entered into between the fund and its investment adviser. In a solid win for the fund industry, the Supreme Court upheld a standard long applied by the lower courts that is widely perceived as protective of funds, their investment advisers and boards and unfriendly to private litigants.

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