In affirming a lower court decision granting summary judgment to Harris Associates, adviser to the Oakmark funds, the court said: “Federal securities laws, of which the Investment Company Act is one component, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices.”
Writing for the appellate panel, Chief Judge Frank Easterbrook pointed out that the law requires a fiduciary to make full disclosure and not be deceitful, but does not subject the fiduciary to a cap on compensation. “The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth,” Easterbrook wrote.
The court said competitive processes are not perfect, but are superior to a “just price” system administered by the judiciary, noting that the judicial process is worse than competition for weeding out errors, since “judges cannot be turned out of office or have their salaries cut if they display poor business judgment.”
The court also rejected plaintiffs’ argument that Harris Associates committed a wrongdoing by charging a lower percentage of assets to pension clients than to mutual fund clients. Easterbrook pointed out that different clients call for different commitments of time, and pension funds have low (and predictable) turnover of assets while mutual funds may grow or shrink quickly and must hold some assets in high-liquidity instruments to facilitate redemptions, complicating an adviser’s task.
In addition, Easterbrook noted that joint costs, such as for research, valuation, and portfolio design that benefit several clients, “are apportioned among paying customers according to their elasticity of demand, not according to any rule of equal treatment.”
The plaintiffs were investors in the Oakmark funds and claimed their fees were too high and that Harris Associates did not disclose some information about their pricing process.
The decision in Jones v. Harris Associates is here .