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December 2009

Supreme Court Weighs Reasonableness of Mutual Fund Fees

The United States Supreme Court heard an argument in early November on a case that could impact more than 90 million Americans by deciding whether some mutual funds charge excessive fees to consumers. The case is based on a complaint by investors who accuse the fund managers of taking excessive fees.

As I have written in prior “Consumer Checkpoint” columns, mutual fund fees can make a significant difference in the amount Americans have saved for retirement. According to The Wall Street Journal, last year’s fees approached $300 billion on an estimated $10 trillion in mutual fund investments.

Congress, to protect investors, imposed a “fiduciary duty” on mutual fund advisors “with respect to compensation for services” back in 1970. However, Congress did not define what “fiduciary duty” meant. In 2007, a federal district court in Chicago ruled against a shareholder lawsuit alleging that a mutual fund manager violated the law by charging individual shareholders nearly twice as much in fees as he charged institutional clients (such as pension funds).

The shareholders appealed the decision to the Seventh Circuit Court of Appeals in Chicago and that court also ruled in favor of the fund managers and decided that the fees were acceptable as long as the managers “make full disclosure and play no tricks.” The shareholders then appealed to the U.S. Supreme Court and the case was heard on November 2. Because the Supreme Court typically accepts less than 1 percent of appealed cases for review, this case is receiving significant attention from the mutual fund industry.

According to press reports, several conservative justices, including Chief Justice John Roberts, appeared to favor the disclosure approach decided by the Court of Appeals whatever fees were being charged. More liberal justices including Ruth Bader Ginsburg and Stephen Breyer appeared to favor sending the case back to the federal district court for more review of the facts about the fee arrangements. A final decision by the Supreme Court is expected by next spring. 

Congress Looks at Financial Reforms

Congress is debating what new financial regulations should be put into place as a response to last year’s Wall Street meltdown. Substantial and in some cases far-reaching reform legislation is now being considered in the U.S. Senate and House of Representatives. The Senate bill sponsored by Senator Chris Dodd (D–Connecticut) would create a new federal financial regulator that would have the power to break up companies if their failure would place the U.S. economy in jeopardy.

The House bill would also create a new regulator but with far less far-reaching powers. Opponents are arguing new regulations will make the recovery take even longer.

Overall, this is a complicated debate that will likely be hard for you and me to follow. However, last year’s huge corporate bailouts demonstrate the real importance of this issue to us as taxpayers.         

    

End-of-the-Year Consumer Reminders

The end of December is a great time to ensure that you have reviewed your credit report and maintained or added your name to the Wisconsin Do Not Call list. Review your credit report with each of the three major credit-reporting agencies for free each year by going to www.annualcreditreport.com. You can add your land line telephone or your cell phone to the state’s Do Not Call list by calling toll free 1-866-9NO-CALL (1-866-966-2255) or by going to https://nocall.wisconsin.gov/web/home.asp.

            Have a safe and enjoyable Christmas and New Year.

 


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