Sunday, June 5, 2011
An Empirical Study of Mutual Fund Excessive Fee Litigation: Do the Merits Matter?, by Quinn Curtis, University of Virginia School of Law, and John Morley, University of Virginia School of Law, was recently posted on SSRN. Here is the abstract:
This paper presents the first comprehensive empirical study of mutual fund excessive fee liability under § 36(b) of the Investment Company Act. This unique form of liability, which was upheld by the Supreme Court last year in Jones v. Harris Associates, allows shareholders to sue a fund’s advisers on the theory that the fund’s fees are simply too high, even if the fees have been fully and accurately disclosed. Relying on a hand-collected dataset of all excessive fee complaints filed between 2000 and 2009, we find that the size of a fund’s family is the strongest predictor of whether the fund will be targeted for an excessive fee suit; fees are a much weaker predictor. During our study period funds in the smallest one-third of management complexes were almost never targeted, even though these funds were the most likely to charge fees at the high end of the fee distribution. We find no evidence that funds affected by excessive fee suits reduced their fees after the filing of the suits relative to unaffected funds, and we find some evidence that affected funds actually increased their fees relative to unaffected funds. We find no evidence that fees were related to case outcomes or that advisers experienced reputational penalties as a result of lawsuits. We find no evidence that greater board independence reduced the likelihood that a fund would be targeted. This paper is relevant to the general debate about whether the merits matter in class and derivative litigation, because the merits of excessive fee suits are uniquely easy to observe and analyze.