NEW YORK -- The Supreme Court may soon issue a ruling that puts more pressure on mutual-funds to justify their fees.

That's the feeling of some observers after the Court heard arguments this week in a case brought by disgruntled investors against their fund management company.

Questions asked by the justices during the hearing of Jerry N. Jones et al. v. Harris Associates L.P. suggest that while the ruling may not bring radical change, the Court could call for special attention on how much a fund manager charges its larger institutional clients, which typically pay much less than mutual-fund investors.

That in turn might lead to fund boards taking action to in the coming year to reduce fees -- or at least to work harder to justify the fees their funds currently charge -- for fear of being sued.

"I think we could see [in the ruling] an added emphasis on the comparison between the two [fees]," said Ryan Leggio, fund analyst at Morningstar Inc.

Observers said it's likely the Court will also restate the so-called Gartenberg standard for judging fund fees, which was effectively thrown out by district court Judge Frank Easterbrook when he ruled in favor of Harris in May 2008. Easterbrook said that free-market forces should be left to set fees and investors could only successfully sue if fraud was involved.

Established by a 1982 court ruling in the case of Gartenberg v Merrill Lynch Asset Management Inc., the Gartenberg standard states that for a fee to be considered excessive it needs to be so "disproportionately large" that there's no way the fee negotiations could have been conducted at arm's length.

If the Court restates Gartenberg but also specifically mentions comparing different fees, it would lead to what some have called a Gartenberg-plus standard.

Such a ruling "is more likely now than before the oral arguments," said Leggio.

Quizzing counsel

The investors' lawyer, David Frederick, argued before the court that fund firms charge investors in their mutual funds twice what they charge institutions even though they use "the same manager to provide the same research analytics from the same research group, from the same meetings, buying the same stocks, and simply allocating them to different accounts."

John Donovan, representing Chicago-based fund firm Harris Associates, argued that fund investors cost more to service -- due to, among other things, greater regulatory requirements and customer service needs. But the justices quizzed him repeatedly about comparing fund fees with institutional fees.

"The justices kept coming back to the issue of fund fees versus institutional fees, and [I think] they could come out and say 'you should pay attention to that,'" said Marguerite Bateman, partner at the law firm Sutherland Asbill & Brennan LLP.

But the impact that such a ruling would have on fund fees will depend on the wording of the decision, said Leggio. For example, a ruling that says comparisons "are crucial" to determining fair fees would be far stronger than one that says the comparison should be made "when appropriate."

If the ruling is strong enough, "there may be some slight downward pressure," on fees under a Gartenberg-plus standard, said Leggio. Fund boards would be keen to work by the new standards set by the Court, and in some cases the comparisons could lead to lower fees.

Even if fees don't come down, boards will likely work harder to justify their decisions, said Bateman.

"They'd want stronger support in board meeting minutes for their [fee-setting] decisions," she said.

A strong Gartenberg-plus standard could also boost investors unhappy about their fund fees in their efforts to see their fees cut.

"[Gartenberg-plus] will give plaintiffs weapons they can use to complain about fees," said Bateman. "It could quite possibly bring about more lawsuits."

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