SNAP ANALYSIS – US court fund adviser ruling leaves firms with leeway on fees

By Reuters Staff
March 30, 2010

BOSTON, March 30 (Reuters) – The U.S. Supreme Court’s unanimous decision  in a closely watched mutual fund case gives investors leeway to challenge fees they consider excessive, but falls short of being a total loss for the $11.5 trillion industry.

The court rejected a lower-court ruling that made it harder for individual shareholders to sue an investment advisory firm for excessive fees.

While the decision still gives fund firms considerable freedom to assess fees — and set fees higher than rivals might charge — it might prove problematic if an adviser charges dramatically higher fees for retail customers than for larger, institutional investors.

Justice Samuel Alito wrote that to face liability, “an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”

The case of Jones vs. Harris Associates LP was eagerly anticipated within the fund industry.

Some analysts had feared the court’s decision could impose tight restrictions on fee-setting, and by doing so dramatically alter the way big fund companies earn money.

Those fees generate much of the profits at fund companies such as Legg Mason Inc, T Rowe Price Group Inc and AllianceBernstein Holding LP, as well as the larger, privately held Fidelity Investments LLC and Vanguard Group.

The case was brought by three shareholders of Oakmark Funds against Harris, a Chicago firm that is an affiliate of France’s Natixis SA.

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(Reporting by Svea Herbst, Ross Kerber and Jonathan Stempel; editing by Ros Krasny and John Wallace) ((Ross.Kerber@ThomsonReuters.com; +1-617-856-4341; Ross.Kerber.Reuters.com@Reuters.net))

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