Directors of mutual-fund boards are watching warily as an important case on fund fees comes before the U.S. Supreme Court.
They fear that Jones v. Harris Associates, which the Court is set to hear on Monday, could create a new standard for setting fees and possibly open the gates to a flood of litigation, or remove directors from the fee-negotiation process altogether. If the court in some way opens the door to more fee challenges, it could also become more difficult to hire directors.
None of that would be good for shareholders or directors, says Jamie Baxter, vice chair of Putnam Funds. "If all someone has to do is file a case, saying, 'these fees are too high,' then you have to defend it."
In August 2004, three investors in Oakmark Funds sued Harris Associates, the funds' creator and adviser, alleging it breached its fiduciary duties by charging excessive fees to individual investors compared with those charged institutional shareholders. A district court and an appeals court have sided with the funds.
"I've been on the other end of those cases, where shareholders have said Putnam's fees are too high," said Baxter. The shareholders haven't won, but preparing and going through depositions requires an enormous amount of time and effort and costs shareholders' money, she said.
The role of boards is central to the Jones v. Harris Associates case, as the plaintiffs have alleged there were conflicting relationships among the trustees and Harris personnel. Many expect that the Court will give boards guidance on negotiating fees.
Under the Investment Company Act of 1940, boards, including independent directors, are charged with the primary responsibility for protecting investors' interests. In 1970, boards' roles in evaluating and approving advisory fees were expanded. Those amendments also imposed a fiduciary duty on a fund's adviser regarding compensation for services from the fund, and gave fund shareholders the right to sue for a breach of that duty.
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