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Jones v. Harris Associates LP

U.S. Supreme Court Allows People to Protect Their Retirement Investments

Upon denial by the Seventh Circuit of the investors' request that the full court review the issue (as opposed to the three-judge panel that made the initial ruling), a strongly worded dissent argued that the court had relied too heavily on market forces, such as competition, to set fair compensation levels, in disregard of the fact that those forces do not operate effectively in the mutual fund industry. That dissent also criticized the part of the ruling that said an adviser's compensation should be compared to that of advisers to other mutual funds, noting that because the "governance structure that enables mutual fund advisers to charge exorbitant fees is industry-wide," making comparisons to practices by other industry participants is an invalid way to determine the reasonableness of compensation. The dissent relied on a study published in March 2007, and noted that abuses in the industry had only become more pronounced since the study was published, particularly in the wake of recent market collapses.

The investors, supported by AARP, successfully petitioned the Supreme Court to grant review to resolve the "split in the circuits" and establish a fiduciary duty standard that will apply nationwide and recognize the structural issues raised by the relationship between mutual funds and their advisers.

AARP's Brief

Attorneys with AARP Foundation Litigation filed a "friend of the court" brief in Jones v. Harris Associates LP on behalf of AARP and Consumer Federation of America, urging the Court to overturn the Seventh Circuit decision.

The brief detailed the reasons underlying Congress's passage of The Investment Company Amendments Act of 1970 to address the potential for abuse inherent in the structure of mutual fund companies and how, despite the Act, little has changed to improve the situation. The brief argued that the standard created by the Seventh Circuit contradicts the realities of the mutual fund marketplace, particularly in the light of how the relationship between funds and their advisers overrides traditional market forces that otherwise might ensure that advisers' compensation remains consistent with their fiduciary duty.

AARP's brief cited numerous studies by the Securities and Exchange Commission, Government Accountability Office, scholars, and industry analysts that have documented the factors that drive inflated compensation levels and how even slight fee increases harm the millions of people relying on mutual fund investment income for their retirement security.

The brief also noted that while beneficiaries of pension funds benefit from having plan managers negotiate with investment advisors to reduce investment fees, individual investors in mutual funds lack collective bargaining power to lower such fees. Fund holders are also captive investors because they cannot freely exit and move their money to alternative funds, because of costs imposed by the funds or by law (for example, investors in 529 funds who benefit from the tax treatment of the funds are tied by the tax law's associated requirements). The brief notes that financial incentives coupled with the fee-generating opportunity for mutual fund advisors created by the captive-like status of the investors pose a threat that calls out for more — not less — regulation of the mutual fund investment vehicle.


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