Today, the House Financial Services Committee will continue its consideration of the Investor Protection Act. Several amendments were considered by the Committee last week that have been viewed as weakening investor protections including the fiduciary standard, prompting several advisor industry and investor advocacy groups to express their disappointment to the Committee. The legislation is expected to be voted out of committe this week and referred to the full House. However, even if financial reform continues its smooth progression through the House, there are indications that it may face an uphill battle in the Senate, potentially slowing down Congress' agressive timetable for executing change.
Meanwhile, fiduciary issues took center stage in another type of hearing room on Capitol Hill as the Supreme Court heard oral arguments related to compensation for mutual fund advisors. The issues came before the court in the case of Jones v. Harris Associates, in which three shareholders sued Harris Associates, LP, the advisor to the Oakmark Funds. The shareholders claim that Harris Associates charged excessive fees and violated its fiduciary duty under Section 36(b) of the Investment Company Act of 1940, as amended in 1970.
During oral arguments, the parties and justices mostly focused on the appropriate legal standard and analysis that should be used by courts to determine if fees are fair. However, it's also notable that Justice Kennedy started off questioning by exploring the meaning of "fiduciary" and the scope of the fiduciary duty under the federal securities law. Other justices joined in this line of questioning, which focused on how the fiduciary duty of Harris compares to that of corporate officers and directors, guardians, and trustees. The shareholders' counsel answered that fiduciary duty in these circumstances meant "fair result through full information and good-faith negotiations."
Ultimately, a few justices questioned the role of courts in regulating rates, suggesting that the SEC and market competition should be the key drivers in ensuring rates are fair. Market competition was a key factor in the 7th Circuit's decision to let a ruling against the Oakmark Fund shareholders stand, but many, including mutual fund icon, John Bogle, have thrown their support behind the shareholders and argued that funds are not competitive with one another.
With oral arguments concluded, the mutual fund industry and shareholders can only sit by and wait for the Supreme Court to issue a decision in June. For those looking for more immediate action on the fiduciary front, Congress appears ready to deliver in the coming months.
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