Eighth Circuit Says Boards Should Compare Fund Fees with Institutional Accounts
The Eighth Circuit Court of Appeals recently opined that a fund Board should compare mutual fund fees against fees charged to similarly-managed institutional accounts. The Court said that the Board’s primary responsibility is “to represent…the shareholders during the fee negotiation.” Expanding its analysis beyond the Gartenberg factors, the Eighth Circuit said that the “purpose of an inquiry into fees paid by institutional, non-fiduciary clients is to determine what the investment advice is worth.” The Court expressly disagreed with the Seventh Circuit in Jones v. Harris Associates, where the Seventh Circuit ruled that a fund Board need only look at the fees charged by other fund managers. The Supreme Court has agreed to hear the Jones case in order to resolve the standard to be applied.
OUR TAKE: We believe that comparing fees charged by mutual funds to those charged to institutional clients will create significant unintended consequences. The Eighth Circuit assumes that such a regime would lead to lower mutual fund fees. The opposite may also happen: higher fees for institutional customers.