The Flawed Mechanics of Mutual Fund Fee Litigation

In this Article we identify a number of serious mechanical flaws in the statutes and judicial doctrines that govern fee liability for mutual fund managers. Originating in Section 36(b) of the Investment Company Act, mutual fund fee liability allows investors to sue managers for charging fees above a judicially created standard. Commentators have extensively debated whether this liability should exist, but in this Article we focus instead on improving how it actually works. We identify a number of problems. Among other things, statutes and case law (1) impose no penalties to provide deterrence; (2) give recoveries to investors who did not actually pay the relevant fees; (3) treat similar categories of fees differently; (4) create an unusual settlement process that prevents litigants from settling their full claims; (5) expose low-cost advisers to serious litigation risk; (6) exhibit deep confusion about what makes fees excessive; and (7) provide unduly small incentives for plaintiffs’ lawyers to litigate meritorious claims. Most of these problems appear to have been accidentally caused by judges’ and lawmakers’ confusion, rather than deliberate policy choices. We conclude by offering specific ideas for reform.