Source: Investment News
Suing to
prove that a mutual fund charges small investors excessive fees is often an
exercise in futility.
For 30
years, the courts have set the bar so high for plaintiffs in such cases that
most suits are dismissed before they get to trial.
According to
a 1982 legal precedent known as the Gartenberg Standard, the courts will deem a
fund's management fee excessive only if it is “so disproportionately large that
it bears no reasonable relationship to the services rendered and could not have
been the product of arm's-length bargaining.”
Proving that
has been impossible, partly because it is difficult to isolate management fees
that cover the crucial work of picking stocks and bonds from costs associated
with mundane administration.
Until now.
In December,
U.S. District Court Judge Renee Marie Bumb in Newark, N.J., allowed a case
known as Kasilag et al. v. Hartford Investment Financial Services LLC to
proceed, denying Hartford's motion to dismiss. Jennifer Kasilag is one of six plaintiffs
who invested in Hartford funds.
The reason
for the decision has everything to do with the type of mutual funds the
plaintiffs chose to attack.
LEVEL OF TRANSPARENCY
Rather than
go after, say, Fidelity Investments, which manages funds in-house and bundles
most of its costs in its management fees, Ms. Kasilag's lawyers targeted
Hartford's subadvised funds, run primarily by external manager Wellington
Management Co. LLC. Because the fees Hartford pays Wellington to pick stocks
are specified in public documents and separate from fees for other services,
they provide a level of transparency that can better indicate whether the total
management fee is too high.
Part of the
trouble with previous shareholder suits was that plaintiffs would compare a mutual
fund's management fees with those of pension plans, arguing that the latter pay
a fraction of the cost. Defendants would respond that it was an
apples-to-oranges comparison, as mutual funds have additional administrative,
advisory and legal costs from handling multiple shareholder accounts baked into
their management fees.
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