Nov. 2 (Bloomberg) -- U.S. Supreme Court justices signaled they are split over the role judges should play in reviewing the compensation of mutual fund advisers in a case that might force reductions in the $90 billion in annual fees advisers collect.

Hearing arguments today in Washington, Chief Justice John Roberts and Justice Antonin Scalia emerged as the industry’s strongest defenders, questioning whether courts should second- guess the fund boards that approve the fees. The justices are considering the impact of the federal law that governs the mutual fund industry and its $10 trillion in assets.

An investor who objects to a fee “can go look at another fund,” Roberts said. “It takes 30 seconds.”

Other justices, including Stephen Breyer, suggested that judges should compare the fees paid by mutual fund shareholders to those the same investment advisers charge institutional clients that have similar investment objectives. Breyer said that, for fund directors, that would be a “normal question to ask.”

The court is considering the ability of investors to sue portfolio managers in a case involving Harris Associates LP’s Oakmark mutual funds. The fund industry is pitted against consumer-rights groups, the Obama administration and John Bogle, founder of Vanguard Group Inc.

Bogle, who filed a brief supporting the Oakmark investors, says mutual fund shareholders are being overcharged through fees that seem low when expressed as percentages yet add up to a multibillion-dollar windfall for advisers.

Important Ruling

The fund industry’s trade association, the Washington-based Investment Company Institute, says the case may produce the most important Supreme Court ruling in the history of the business, changing the legal standard governing fees and inviting new investor suits. The industry has grown 200-fold since 1969, when it had $50 billion in assets.

Growth has brought steady reductions in the management fees paid by investors, with average fees for stock funds falling to 0.99 percent in 2008 from 2.32 percent in 1980, the trade group says.

The shareholders say fees on the three funds -- Oakmark, Oakmark Equity and Income and Oakmark Global -- are in percentage terms more than twice what Harris charges pension funds and other independent clients. For the Oakmark Fund, Harris charged 0.88 percent during the 12 months before the suit was filed in August 2004, court documents show.

“There is no reason why the mutual fund should be charged twice as much,” argued the shareholders’ lawyer, David Frederick.

Harris Lawyer

Harris’s lawyer, John Donovan, argued that the shareholders’ position would “consign 8,000 mutual funds to a trial.”

Donovan acknowledged that judges are required under the Investment Company Act to scrutinize fees and consider the payments made to the same adviser by institutional clients. Still, he argued that in his case, a federal trial judge concluded the higher fees Harris charged to mutual fund clients were warranted by the additional services they received.

The case turns on the Investment Company Act, which protects investors from close relationships between fund managers, also known as investment advisers, and their fund directors. An adviser, such as Harris, typically sets up the fund and often selects some of the directors, who are responsible for approving the adviser’s fees.

Since it was amended in 1970, the Investment Company Act has addressed that conflict of interest by imposing on advisers “a fiduciary duty with respect to the receipt of compensation for services.”

Kennedy Puzzled

Justice Anthony Kennedy said he was puzzled by Congress’s choice of words, saying the standards courts have applied for fiduciaries in other contexts weren’t applicable.

“It seems to me an odd use of the term ‘fiduciary,’” Kennedy said.

The one-hour hearing was unusually subdued. Only seven of the nine justices spoke up, as Justice Clarence Thomas maintaining his customary silence and Justice Samuel Alito asked no questions. Justice John Paul Stevens asked only one question, and the normally talkative Breyer was limited by laryngitis.

Donovan, the lawyer for Harris, was restrained as well, using less than 25 of his allotted 30 minutes for argument.

The justices will rule by the end of the term in late June or early July. The case is Jones v. Harris Associates, 08-586.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: November 2, 2009 14:23 EST