The Flawed Mechanics of Mutual Fund Fee Litigation
University of Virginia School of Law
Yale Law School
March 1, 2014
Yale Journal on Regulation, Forthcoming
Virginia Law and Economics Research Paper No. 2014-09
Yale Law & Economics Research Paper No. 495
We identify a number of serious mechanical flaws in the statutes and judicial doctrines that organize fee liability for mutual fund managers. Originating in section 36(b) of the Investment Company Act, this form of liability allows investors to sue managers for charging fees above a judicially created standard. Commentators have extensively debated whether this form of liability should exist, but in this paper we focus instead on improving the mechanics of how it actually works. We identify a number of problems. Among other things, statutes and case law give recoveries to investors who did not actually pay the relevant fees. Statutes and case law also impose no penalties to provide deterrence; they treat similar categories of fees differently; they create an unusual settlement process that prevents litigants from settling their full claims; they expose low-cost advisers to serious litigation risk; they exhibit deep confusion about what makes fees excessive; and they provide unduly small incentives for plaintiffs’ lawyers that are only adequate in cases of low merit. Most of these problems appear to be the unintended results of accidents and confusion, rather than deliberate policy choices. We conclude by offering specific ideas for reform.
Number of Pages in PDF File: 46
Keywords: Mutual Funds, Fee Litigation, 36(b), Securities Litigation
Date posted: March 7, 2014 ; Last revised: April 24, 2014
© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.547 seconds