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Supreme Court looks into business

Steve Henn Oct 30, 2009

Supreme Court looks into business

Steve Henn Oct 30, 2009


KAI RYSSDAL: The Supreme Court has packed its docket with cases about American business this term. The justices have agreed to take a look at Jeffery Skilling’s conviction. He’s the former CEO of Enron. The court could throw out landmark accounting reforms that were set up after Enron collapsed. Next week, it’s set to hear a case about investor protections in the mutual fund industry.

Marketplace’s Steve Henn reports.

Steve Henn: On Monday, the U.S. Supreme Court will hear arguments in Jones v. Harris. The case could undermine laws that were meant to protect mutual fund investors from unreasonably high fees.

More than 93 million Americans have mutual funds. And even after this financial crisis, it’s a $10 trillion industry.

William Birdthistle: And every year investment advisors bring home $100 billion in fees from those funds.

William Birdthistle is a professor at Chicago-Kent College of Law. And he’s convinced many mutual fund advisors are overcharging their clients.

Birdthistle: There’s something unusual about the mutual fund industry. As fees go up, performance goes down.

That’s not how free markets are supposed to work. But Birdthistle says many investors are stuck in mutual funds that charge high fees, because they have limited choices at work for their retirement accounts.

Nonetheless, last year, a federal appeals court in Chicago weakened investor protections meant to put a lid on high fees.

Paul Stevens: We were surprised frankly.

Paul Stevens is president of the Investment Company Institute and represents the mutual fund industry. He says the industry was happy with the status quo.

Stevens: We were not surprised that the judge, Judge Easterbrook, would conclude that this is a highly competitive industry. In fact, it is.

Judge Easterbrook is a conservative icon. He is one of the most widely cited judges on the bench and a pioneer in law and economics. During his career he’s helped make the courts much more responsive to business concerns.

But what surprised many observers like Stevens was how far Judge Easterbrook went in this case. He set aside longstanding court precedents that were already pretty easy on the mutual fund industry.

William Birdthistle says there’ve been more than 500 investor law suits accusing mutual funds advisors of price gouging.

Birdthistle: And no plaintiff has ever won — in 25 years, no plaintiff has ever won.

But writing for the court, Judge Easterbrook raised the bar — making it harder for investors to prevail.

Birdthistle: You are going from a standard in which no plaintiff has won to a standard in which no plaintiff could theoretically ever win.

Easterbrook wrote that courts should get involved setting fees only if mutual fund advisors actually lie about their charges. After all, if investors think fees are too high, they can invest somewhere else.

But this decision only applies to mutual funds in the Midwest. So it created different rules for funds in different parts of the country.

The industry’s Paul Stevens also worries that if Easterbrook’s opinion becomes the law of the land, it could create a backlash and Congress could intervene.

Stevens: Many industries like to have some clarity about what the rules of the road are.

So in the industry’s brief, Stevens is asking the Supreme Court to return to the old status quo. And many legal observers believe that’s the likely outcome.

Henn: Do you lose sleep over this case?

Stevens: No, not over that or much else actually.

Maybe that’s the best illustration of just how pro-business the federal courts have become. And with dozens of business cases on its docket this year, the U.S. Supreme Court is likely to signal just how far it will let Congress and the Administration go regulating business affairs. And the rulings could be harbinger of the kind of scrutiny future regulatory reforms could face.

In Washington, I’m Steve Henn for Marketplace.

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