Have investment advisers chosen a strategic withdrawal to the relative safety of trial courts, where they have never lost a case? Perhaps the most surprising development at today’s oral argument was not the decision of the respondent to abandon Chief Judge Easterbrook’s opinion in the Seventh Circuit, which it had already done on the briefs, but instead to acknowledge the propriety of comparisons between institutional and retail fees. Heretofore, Harris Associates – and the industry generally – had consistently maintained that such comparisons are inapt, unworkable, and unwise.
In the face of this morning’s pointed questioning from Justices Ginsburg, Sotomayor, and especially Breyer, however, oral advocate John Donovan of Ropes & Gray conceded that comparing the fees that advisers charge to different clients “is a factor . . . likely to be relevant.” For years, defendants in these lawsuits have consistently resisted efforts by plaintiffs to petition courts to include and indeed to privilege such a comparison among the Gartenberg series of factors. Unlike comparisons to other mutual fund fees, comparisons between clients reveal that some investors pay twice as much as others for similar investments. So why then would the defendant accede to such a new standard today?
Perhaps Harris Associates calculated that appearing conciliatory before the Court by agreeing to the inclusion of this factor in the overall test would ward off harsher and more dramatic responses either from the Supreme Court in an adverse decision in this case or subsequently from Congress in a revised statute. The adviser might be gambling that the addition of one more factor – even one that most directly highlights large disparities in fees – to an already fact-intensive legal standard can effectively be combated and neutralized on remand with the same force of experts, data, and attorneys that have won advisers every previous excessive fees case at trial for the past forty years.
If, as some of today’s questions seem to indicate, the eventual decision from the Court in Jones v. Harris will read like Gartenberg with just one additional factor included in an already long and nebulous evaluation, we might have to wait for the next wave of litigation in trial courts to see whether the new Jones standard makes any practical difference on fees. If, on the other hand, the justices highlight and strongly emphasize the institutional/individual fee comparison in an opinion that reads like Posner’s dissent or Ameriprise v. Gallus, the pressure upon the industry to lower fees could be more acute and immediate.
Given the skepticism of Chief Justice Roberts and Justice Scalia for judicial involvement in this issue, combined with the lack of engagement in the particulars of this case by Justices Stevens and Kennedy (who asked only general and theoretical questions about the concept of fiduciary duties), and even the relatively modest concern by Justices Ginsburg, Breyer, and Sotomayor (who seemed supportive of the petitioners but not terribly impressed that the institutional fee comparison would be definitive), it’s hard to foresee a passionate opinion arising out of this case. Joining Justice Thomas in silence today was Justice Alito, which was a great shame given his personal involvement on the SEC's brief in the last major mutual fund case before the Supreme Court (Daily Income Fund v. Fox) and significant expertise on this topic.
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