Published: Monday, 2 Nov 2009 | 1:54 PM ET

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Supreme Court justices questioned Monday whether judges should decide the fairness of fees charged by the nation's $11 trillion mutual fund industry.

The top court heard arguments in a case involving the decades-old legal standard on how mutual fund overseers determine fees for shareholders and whether those fees are excessive.

Photo: Oliver Quillia for CNBC.com A trader at the New York Stock Exchange.

An attorney for three individual investors argued that Harris Associates LP of Chicago, through its mutual fund unit Oakmark Funds, charged fees twice as high for individuals as for large institutional clients like pension funds.

An attorney for Harris replied that the correct comparison involved the fees charged by similar mutual funds.

If the view of the individual investors prevailed, with the comparison to institutional clients and with judges deciding the fairness of fees, then the Supreme Court will be consigning the nation's 8,000 mutual funds to face trial, the attorney said.

The closely watched case could determine whether the high court makes it tougher for individual investors to sue over fees or adopts a version of the standard in place since the early 1980s.

In 2008, 92 million individual investors in 52.5 million households owned mutual funds. Those investors could choose from 8,022 funds offered by 717 advisory firms, according to the industry trade group the Investment Company Institute.

The lawsuit was brought by three shareholders of the Oakmark Funds. Harris Associates serves as those funds' investment adviser, deciding which stocks the funds should buy and sell. Harris is an indirect subsidiary of Natixis SA affiliate Natixis Global Asset Management LP.

David Frederick, a Washington, D.C., attorney arguing for the shareholders, told the Supreme Court the fees were unfair because Harris charged individuals twice as much as institutional clients for virtually identical services.

But Justice Ruth Bader Ginsburg asked whether more services were provided to individual investors, justifying higher fees.

How is the Court Supposed to Decide?

Chief Justice John Roberts questioned whether the courts should decide what a fair fee should be when a mutual fund beats the industry average on its investment returns.

"How is the court supposed to decide that?" he asked.

Roberts also said individual investors could easily find out the fees being charged and could use that information to decide whether to pull out their money.

Justice Antonin Scalia said the Securities and Exchange Commission must be aware of the different fee levels, yet the agency has not brought any lawsuits over the issue in decades.

Scalia also said an independent board of directors can cut the fees an adviser can charge, especially if investors are leaving because of excessive compensation.

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Justice Department attorney Curtis Gannon supported the shareholders and said a judge should consider all circumstances, including fees for comparable services to institutional clients.

He said an investment adviser violated its duty if it negotiated and received an excessive fee, even if it fully disclosed the facts to the fund's board of directors.

Boston-based attorney John Donovan, arguing for Harris Associates, said the proper and first comparison should be to the fees charged by other similar mutual funds.

There appeared to be little support among the justices to go as far as a U.S. appeals court in Chicago in its ruling in the case. The appeals court adopted a tough new standard by requiring shareholders to show an adviser misled the fund's directors who approved an excessive fee.

Some questions focused on just how independently mutual funds' independent directors can act, long an area of dispute between the industry and its critics.

Susan Wyderko, executive director of the Mutual Fund Directors Forum, which represents independent fund trustees, said she was glad to hear the justices focus on that area. Establishing that independent directors have real power would tend to support the current standards regarding how fund fees are set, as her group has urged.

A ruling is likely by the middle of next year.

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