August 18, 2009
On Ribstein regarding the Ramifications of Jones v. Harris
Posted by William Birdthistle

Although Larry Ribstein portends broad ramifications from Jones v. Harris, he supports Easterbrook's lower court opinion and is unenthusiastic about the Supreme Court's involvement.  He cites with approval a good deal of Easterbrook's opinion, much of which Posner addressed in his dissent from denial of rehearing en banc.  Ribstein also focuses upon a few additional points with which I quibble here:

First, Ribstein emphasizes that different clients call for different commitments of an adviser's time (with the unstated assumption that therefore fees for individual clients are reasonably twice those of fees for individual shareholders).  Certainly, different clients call for different commitments of time, but if this is indeed the reason for the difference in fees, investment advisers should readily be able to prove this point in their favor.  Instead, they have vigorously avoided the question altogether in years of litigation.

Second, Ribstein emphasizes that pension funds have lower turnover (with the unstated assumption that therefore institutional clients call for a lower commitment of time).  In fact, internal emails between employees of advisers in the recent Eighth Circuit case Gallus v. Ameriprise and in Jones v. Harrissuggest that the advisers cannot prove any such differences in support of their pricing disparities.  Anecdata can certainly tell tales about the costs of maintaining web sites and toll-free numbers for individual clients, but large dedicated teams, individual client dinners, and sophisticated data requests for institutional clients could easily be just as expensive.  If advisers had proof that their higher fees were justified, surely they would not be shy about sharing it.

Third, Ribstein emphasizes that mutual funds are just like other products (with the unstated assumption that mutual funds should not receive heightened judicial scrutiny or, alternatively, that if they do, then this case might unhappily trigger judicial scrutiny of those products too).  In a similar argument, Easterbrook asserted that courts have no business reviewing the purchases of automobiles and thus shouldn't being doing so for mutual funds.  But unlike automobiles or any other products, Congress specifically (a) designated mutual fund purchasers as shareholders with the rights, privileges, &c. appertaining thereto and (b) imposed a particular fiduciary duty upon advisers with respect to the receipt of compensation.

The distaste that Easterbrook, Bainbridge, and Ribstein appear to share for judicial review of this issue appears to involve a bleeding of positive analyses of this litigation into normative ones.  One cannot eliminate judicial review in cases such as these without ignoring the express language of Section 36(b) of the Investment Company Act.  Congress wrote that provision presumably because it believed that mutual funds, which unlike automobiles and other widgets (even expensive ones) lie at the heart of retirement funds, require heightened protections.  Certainly, one can argue that Section 36(b) is a bad idea and that Congress ought to repeal it, but so long as it remains in effect, courts that allow for the possibility that the fiduciary duty may have been breached are hardly being paternalistic or activist.

Perhaps the most interesting thing about the posts of Oesterle, Bainbridge, and Ribstein is their agreement that the case is primarily about executive compensation.  I certainly believe that it is as well, but it's also a case about reevaluations of behavioral and classical economic theory, the Court's ability to evaluate competing econometric analyses, and of course mutual funds.

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