Jones v. Harris Associates

The Supreme Court has agreed to decide whether the federal Investment Company Act limits the ability of investment advisers to charge higher management fees for in-house mutual funds.

A group of individual investors sued Harris Associates, which advises on Oakmark funds. The investors, who own shares in several Oakmark funds, allege that Harris’ fees are so high they violate the federal Investment Company Act of 1940, which was created to limit excessive investment adviser fees.

A district court dismissed the claims against Harris Associates, holding that the market, not the judiciary, should determine manager fees. Last May, a three-judge panel on the 7th U.S. Circuit Court of Appeals affirmed the lower court order.

“Plaintiffs do not contend that Harris Associates pulled the wool over the eyes of the disinterested trustees or otherwise hindered their ability to negotiate a favorable price for advisory services,” Judge Frank H. Easterbrook wrote for the court.

Attorneys for the shareholders asked the Supreme Court to review the case, pointing to a split among the circuits on the issue.

“This case presents a recurring question of exceptional importance warranting the court's immediate resolution,” they said, adding that the standard for claims of breach of fiduciary duty under the law affects “millions of shareholders who have trillions of dollars invested in mutual funds.”

On March 9, 2009, the Supreme Court granted review in the case. The justices will hear oral arguments in the fall.

Question presented:

Whether the Seventh Circuit contravened the Investment Company Act in holding that a shareholder’s claim that the fund’s investment adviser charged an excessive fee is not cognizable under Section 36(b), unless the shareholder can show that the adviser misled the fund’s directors who approved the fee.