The case arrived at the court in the midst of a national debate about whether the marketplace can be trusted to set the pay of corporate executives.
Though the case on Monday was related to mutual funds, the justices’ questions touched on the roles that courts and regulators should take in setting other kinds of compensation, including that of executives, directors and lawyers.
The plaintiffs in the case are individual investors in the Oakmark family of mutual funds. They sued the funds’ investment adviser, Harris Associates, under a 1970 federal law that imposed a fiduciary duty on advisers concerning their compensation.
Mutual funds are typically formed by their investment advisers, which select the fund’s board. That board then negotiates the advisers’ fees. The plaintiffs claimed that Harris Associates charged them much more for similar services than it did independent institutional investors like pension funds.
“It surely cannot be the case,” said David C. Frederick, a lawyer for the investors, “that where you are dealing with a fiduciary duty — which is a higher standard recognized in the law — that you can charge twice as much as what you are obtaining at arm’s length for services that you are providing.”
The question of whether and to what extent that comparison is relevant was at the heart of the argument, said William A. Birdthistle, a law professor at Chicago-Kent College of Law who filed a brief for more than 20 law professors supporting the investors.
“There was a broad consensus that making the comparison between institutional and individual investors is acceptable to a broad array of justices and acceptable to the defendants,” Professor Birdthistle said.
The appeals court’s decision in the case, which gave great deference to compensation decisions made by directors, appeared unlikely to survive. In that decision, Chief Judge Frank H. Easterbrook of the United States Court of Appeals for the Seventh Circuit, in Chicago, wrote that advisers need only make full disclosure of the facts and “play no tricks.”
The marketplace, Chief Judge Easterbrook went on, may be trusted to curb excessive fees. Mutual fund investors unhappy with the fees they are charged could withdraw their money and invest it elsewhere, he said.
Neither the parties nor the federal government defended that standard. John D. Donovan Jr., a lawyer for the defendants, expressly disavowed it and said courts might consider disproportionate payments in some limited circumstances. But he said the evidence in the case at hand, Jones v. Harris Associates, No. 08-586, required a ruling in favor of his clients.
Given the failure of all concerned to defend Chief Judge Easterbrook’s ruling, the Supreme Court is likely to announce a new standard for evaluating claims of excessive compensation under the 1970 law. It was not clear, however, whether the court would return the case to the lower courts to apply such a new standard or do the job itself. Nor was it clear how large a role the justices might assign to the comparison with institutional investors.
Chief Justice John G. Roberts Jr. suggested that technology had made it easier for investors to evaluate for themselves whether advisers’ fees were too high.
“These days all you have to do is push a button and you find out exactly what the management fees are,” the chief justice said. “You just look it up on Morningstar and it’s right there, and as an investor you can make whatever determination you’d like, including to take your money out.”