Investment indiscipline: A behavioral approach to mutual fund jurisprudence

University of Illinois Law Review

Volumn 2010, Issue 1, 2010, Pages 61-108

  Birdthistle, William A ^a  

^a CHICAGO KENT COLLEGE OF LAW   (United States)

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EID: 78650673848     PISSN: 02769948     EISSN: None     Source Type: Journal    
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References (413)

1. Jones v. Harris Assoes. L.P., 537 F.3d 728, 732-33 (7th Cir. 2008) (Posner, J., dissenting from denial of rehearing en banc).
2. Id. at 730.
3. See Jones v. Harris Assoes. L.P., 129 S. Ct. 1579, 1580 (2009).
4. See Floyd Norris, Judges in Dispute Over Mutual Funds, N.Y. TIMES, Aug. 16, 2008, at C3 ("They are both known as conservatives and were pioneers in the economic analysis of the law. Each is a past president of the American Law and Economics Association. ... A 2001 poll of Legal Affairs Magazine readers listed them among the 20 most influential legal thinkers in the country. Only one other circuit court judge made the list.").
5. Both have also been chosen to write the foreword to the Supreme Court issue of the Harvard Law Review. Frank H. Easterbrook, The Supreme Court, 1983 Term-Foreword: The Court and the Economic System, 98 HARV. L. REV. 4 (1984)
6. Richard A. Posner, The Supreme Court, 2004 Term-Foreword: A Political Court, 119 HARV. L. REV. 31 (2005).
7. See Norris, supra note 4
8. see also Stephen J. Choi & G. Mitu Gulati, Choosing the Next Supreme Court Justice: An Empirical Ranking of Judge Performance, 78 S. CAL. L. REV. 23, 44-50 (2004) (presenting empirical data that rank Judges Posner and Easterbrook as the first and second, respectively, most prolific publishers and most cited authors of appellate judicial opinions published between 1998 and 2000).
9. See, e.g., FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW (1991)
10. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (7th ed. 2007)
11. Frank H. Easterbrook, William M. Landes & Richard A. Posner, Contribution Among Antitrust Defendants: A Legal and Economic Analysis, 23 J.L. & ECON. 331 (1980).
12. 815 F.2d 429 (7th Cir. 1987).
13. See, e.g., WILLIAM A. KLEIN, J. MARK RAMSEYER & STEPHEN M. BAINBRIDGE, BUSINESS ASSOCIATIONS 628-39 (7th ed. 2009) (excerpting Jordan v. Duff& Phelps, Inc.).
14. 537 F.3d 728 (7th Cir. 2008).
15. See, e.g., Brief of Amici Curiae Law Professors in Support of the Issuance of a Writ of Certiorari, Jones v. Harris Assoes. L.P., 129 S. Ct. 1579 (2009) (No. 08-586) [hereinafter Brief of Amici Curiae Law Professors] (setting forth the argument of fifteen legal scholars of federal securities regulation, business organizations, and the law of investment funds). In addition to law firms publishing several client alerts immediately following the publication of Posner's dissent, the Securities and Exchange Chairman, Mary L. Schapiro, recently stated that she "expect[s] that the SEC will voice its views [in this case] through the amicus process." Mary L. Schapiro, Chairman, U.S. Sec. & Exch. Comm'n, Address to Mutual Fund Directors Forum Ninth Annual Policy Conference: Critical Issues for Investment Company Directors (May 4, 2009), available at http://www.sec.gov/news/speech/ 2009/spch050409mls.htm.
16. Jones v. Harris Assoes. L.P., 527 F.3d 627 (7th Cir. 2008), cert, granted, 129 S. Ct. 1579 (2009).
17. See, e.g., KLEIN, RAMSEYER & BAINBRIDGE, supra note 8, at 392-95 (excerpting Jones v. Harris Associates L.P.).
18. See INV. Co. INST., 2008 FACT BOOK 7-8 (48th ed. 2008), http://www.ieifactbook.org/ pdf/2008-factbook.pdf; Schapiro, supra note 10.
19. 15 U.S.C. S 80a-35(b) (2006) (stating, in pertinent part, that an "investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services"); Jones, 527 F.3d at 630.
20. See INV. Co. INST.,supra note 13, at 7-8; Schapiro, supra note 10.
21. See, e.g., Paul G. Mahoney, Manager-Investor Conflicts in Mutual Funds, 18 J. ECON. PERSP. 161, 166-68 (2004) (computing the total cost that investors pay to invest through mutual funds).
22. See PETER J. WALLISON & ROBERT E. LITAN, COMPETITIVE EQUITY: A BETTER WAY TO ORGANIZE MUTUAL FUNDS 8-11 (2007).
23. See Javier Gil-Bazo & Pablo Ruiz-Verdú, The Relation Between Price and Performance in the Mutual Fund Industry, 64 J. FIN. 2153, 2178-79 (2009)
24. see also Mark M. Carhart, On Persistence in Mutual Fund Performance, 52 J. FIN. 57, 80 (1997)
25. Burton G. Malkiel, Returns from Investing in Equity Mutual Funds 1971 to 1991, 50 J. FIN. 549, 570-72 (1995).
26. See Donald C. Langevoort, Private Litigation to Enforce Fiduciary Duties in Mutual Funds: Derivative Suits, Disinterested Directors and the Ideology of Investor Sovereignty, 83 WASH. U. L.Q. 1017, 1030-32 (2005).
27. Id.
28. S. REP. NO. 91-184, at 5 (1969), as reprinted in 1970 U.S.C.C.A.N. 4897, 4901.
29. See generally William A. Birdthistle, Compensating Power: An Analysis of Rents and Rewards in the Mutual Fund Industry, 80 TUL. L. REV. 1401 (2006) [hereinafter Birdthistle, Compensating Power]
30. William A. Birdthistle, The Fortunes and Foibles of Exchange-Traded Funds: A Positive Market Response to the Problems of Mutual Funds, 33 DEL. J. CORP. L. 69 (2008) [hereinafter Birdthistle, Fortunes and Foibles]
31. Stephen Choi & Marcel Kahan, The Market Penalty for Mutual Fund Scandals, 87 B.U. L. REV. 1021 (2007)
32. James D. Cox & John W. Payne, Mutual Fund Expense Disclosures: A Behavioral Perspective, 83 WASH. U. L.Q. 907 (2005)
33. Tamar Frankel, How Did We Get Into This Mess?, 1 J. BUS. & TECH. L. 133 (2006)
34. Tamar Frankel & Lawrence A. Cunningham, The Mysterious Ways of Mutual Funds: Market Timing, 25 ANN. REV. BANKING & FIN. L. 235 (2006).
35. Many of the best known investment advisors in the retirement savings industry have paid eight- and nine-figure settlements over the past five years, including Bank of America ($675 million), Bear Stearns ($250 million), Putnam Investments, Massachusetts Financial Services ($225 million), Janus Capital Group ($225 million), Alliance Capital Management ($600 million), Pilgrim Baxter ($100 million), and many others.
36. See, e.g., Greg Farrell, Bear Stearns to Pay $250M, USA TODAY, Mar. 17, 2006, at 2B
37. Josh Friedman, FleetBoston, BofA to Pay $675 Million, L.A. TIMES, Mar. 16, 2004, at C1;
38. Tom Lauricella, Alliance Offers to Cut Fees 20%, WALL ST. J., Dec. 16, 2003, at Cl.
39. Investment Company Institute, Trends in Mutual Fund Investing, December 2008, http://www.ici.org/pressroom/news/trends-12-08 (last visited Dec. 1, 2009) (showing a one-year decline in mutual fund assets from approximately $12 trillion to $9.6 trillion)
40. Schapiro, supra note 10.
41. See Jones v. Harris Assoes. L.P., 527 F.3d 627, 631-35 (7th Cir. 2008).
42. See Jones v. Harris Assoes. L.P., 537 F.3d 728, 731-33 (7th Cir. 2008) (Posner, J., dissenting from denial of rehearing en bane).
43. See, e.g., Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019, 1019 (2007) (initiating "an in-depth analysis" of credit default swaps and collateralized debt obligations)
44. Paul M. Jonna, Comment, In Search of Market Discipline: The Case for Indirect Hedge Fund Regulation, 45 SAN DIEGO L. REV. 989, 1001 (2008).
45. See, e.g., RICHARD A. POSNER, A FAILURE OF CAPITALISM xii-xiv (2009).
46. Posting of Brian Tamanaha to Balkinization, http://balkin.blogspot.com/ 2008/12/are-wewitnessing-receding-tide-of-law.html (Dee. 17, 2008, 10:22 EST) ("Recent events appear to have genuinely shaken Posner's faith in the self-correcting power of the market.")
47. see also Scott A. Moss & Peter H. Huang, How the New Economics Can Improve Employment Discrimination Law, and How Economics Can Survive the Demise of the "Rational Actor," 51 WM. & MARY L. REV. 183, 254-58 (2009).
48. See DAN ARIELY, PREDICTABLY IRRATIONAL: THE HIDDEN FORCES THAT SHAPE OUR DECISIONS XX (2008).
49. See generally David Hirshleifer, The Blind Leading the Blind: Social Influence, Fads, and Informational Cascades, in THE NEW ECONOMICS OF HUMAN BEHAVIOR 188 (Mariano Tommasi & Kathryn Ierulli eds., 1995)
50. Christine Jolis & Cass R. Sunstein, Debiasing Through Law, 35 J. LEGAL STUD. 199 (2006)
51. Dan M. Kahan & Donald Braman, Cultural Cognition and Public Policy, 24 YALE L. & POL'Y REV. 149 (2006)
52. Amos Tversky & Daniel Kahneman, Introduction to JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES 3 (Daniel Kahneman, Paul Slovie & Amos Tversky eds., 1982).
53. See Gallus v. Ameriprise Fin., Inc., 561 F.3d 816, 822 (8th Cir. 2009).
54. See id. at 822-23.
55. See Sam Mamudi, Ruling Over Fees Raises the Stakes, WALL ST. J., Apr. 16, 2009, at C9 (citing Professor James Cox for the proposition that "the Eighth Circuit's ruling against Ameriprise is the first time a federal court has taken the side of investors in a fees case").
56. See, e.g., Franklin Foer & Noam Scheiber, Nudge-ocracy: Barack Obama's New Theory of the State, NEW REPUBLIC, May 6, 2009, at 22, 23-24
57. Ryan Lizza, Money Talks, NEW YORKER, May 4, 2009, at 51, 53 ("Orszag has turned the O.M.B. into something of a behavioral-economics think tank.").
58. See RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS 5-6, 104 (2008)
59. see also Gregory Mitchell, Libertarian Paternalism Is an Oxymoron, 99 Nw. U. L. REV. 1245, 1245-46 (2005)
60. Cass R. Sunstein & Richard H. Thaler, Libertarian Paternalism Is Not an Oxymoron, 70 U. CHI. L. REV. 1159, 1159-62 (2003).
61. See Pension Protection Act of 2006, Pub. L. No. 109-280, 7sect; 624, 120 Stat. 780, 980 (codified at 29 U.S.C. S 1104(c) (2006)).
62. See, e.g., Troy A. Paredes, Comm'r, U.S. Sec. & Exch. Comm'n, Remarks Before the Mutual Fund Directors Forum Ninth Annual Policy Conference (May 4, 2009), available at http://www.sec. gov/news/speech/2009/spch050409tap.htm ("It is hard to argue that the mutual fund industry, on the whole, has been anything but a success for investors and our capital markets more generally.").
63. Investment Company Act of 1940 S 36(b), 15 U.S.C. S 80a-35(b) (2006).
64. See, e.g., Jones v. Harris Assoes. L.P., 527 F.3d 627, 633 (7th Cir. 2008) ("Today thousands of mutual funds compete. The pages of the Wall Street Journal teem with listings.").
65. See, e.g., Hecker v. Deere & Co., 556 F.3d 575, 586 (7th Cir. 2009) (asserting that a set of mutual funds "were also offered to investors in the general public, and so the expense ratios necessarily were set against the backdrop of market competition" (emphasis added)), reh'g denied, 569 F.3d 708 (2009).
66. Robert Lenzer, Lessons Learned a Year After Lehman's Demise, FORBES.COM, Aug. 21, 2009, http://www.forbes.com/2009/08/21/bernanke-bailout-paulson- personal-finance-investing-ideaslehman-brothers.html.
67. See INV. Co. INST.,supra note 13, at 9.
68. See generally Birdthistle, Compensating Power, supra note 22.
69. Id. at 1429-30.
70. Id. at 1439-46.
71. See Brief of Amici Curiae Law Professors, supra note 10, at 4
72. (discussing Investment Company Amendments Act of 1970, Pub. L. No. 91-547, 84 Stat. 1413).
73. See, e.g., id. at 2-5; INV. Co. INST., supra note 13, at 164-65
74. Birdthistle, Compensating Power, supra note 22, at 1419-20.
75. See Birdthistle, Compensating Power, supra note 22, at 1403 n.2, 1409-10.
76. See Alan R. Palmiter & Ahmed E. Taha, Star Creation: The Incubation of Mutual Funds, 62 VAND. L. REV. 1485, 1487-88, 1497-98 (2009).
77. More specifically, "[t]he composition of the board must, however, comport with certain federal requirements." Brief of Amici Curiae Law Professors, supra note 10, at 3 n.5; see also Birdthistle, Compensating Power, supra note 22, at 1422.
78. See Investment Advisers Act of 1940 S 205(a)(1), 15 U.S.C. S 80b-5(a)(1) (2006).
79. Rule 205-3 of the Adviser's Act, however, permits performance fees only if the investment advisor is entering into an agreement with a "qualified client." 17 C.F.R. S 275.205-3(a) (2009). For an excellent discussion of the regulatory limits and policy limitations of compensation in mutual funds,
80. see Mahoney, supra note 16, at 177-81.
81. This process is also referred to as the "15(c) process" (because of the relevant provision requiring annual approval) or the "Gartenberg process" (because of the leading federal case relating to this procedure). See Investment Company Act of 1940 S 15(c), 15 U.S.C. S 80a-15(c). For a discussion of proposals for heightened enforcement of the duties of mutual fund directors,
82. see Donna M. Nagy, Regulating the Mutual Fund Industry, 1 BROOK. J. CORP. FIN. & COM. L. 11, 41-43 (2006).
83. See Birdthistle, Compensating Power, supra note 22, at 1424.
84. See id. at 1423-24.
85. See Palmiter & Taha, supra note 50, at 1488-89.
86. Investment Company Amendments Act of 1970, Pub. L. No. 91-547, 84 Stat. 1413 (codified as amended at 15 U.S.C. SS 8Oa-I to -64).
87. S. REP. NO. 91-184, at 5 (1969), as reprinted in 1970 U.S.C.C.A.N. 4897, 4901.
88. John C. Coates IV, Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis 31 (Dec. 30, 2008), available aihttp://ssrn.com/abstract=1311945.
89. See id. at 31-32.
90. 15 U.S.C. S 80a-35(b).
91. See id.
92. See, e.g., JONATHAN R. MACEY, CORPORATE GOVERNANCE: PROMISES KEPT, PROMISES BROKEN 50 tbl.3.1 (2008).
93. See id.
94. Langevoort, supra note 19, at 1031-32 (footnote omitted).
95. Id. at 1032.
96. Id.
97. The array of effective mechanisms that Jonathan Macey catalogs also includes initial public offerings (IPOs) as a governance measure. See MACEY, supra note 63, at 127-29. In the corporate context, IPOs may indeed involve "rigorous monitoring by a cadre of lawyers, investment bankers, and financial analysts, all of whom face reputational and legal risks for failure to do an adequate job of protecting investors." Id. at 127. In mutual funds, however, the public offering process is very different, as it is overseen primarily by the advisor and its affiliated distributor and is not shepherded by investment banks.
98. See Jennifer S. Taub, Able but Not Willing: The Failure of Mutual Fund Advisors to Advocate for Shareholders' Rights, 34 J. CORP. L. 843, 844-51 (2009). Nor are the funds rated by financial analysts in the same manner as equity offerings.
99. See, e.g., John C. Coates IV & R. Glenn Hubbard, Competition in the Mutual Fund Industry: Evidence and Implications for Policy, 33 J. CORP. L. 151, 183 (2007).
100. See supra note 68 and accompanying text.
101. See Birdthistle, Compensating Power, supra note 22, at 1446
102. Langevoort, supra note 19, at 1034 (positing a "suspicion that the market for mutual funds is indeed segmented into more and less sophisticated consumer groups, with funds (or even classes within the same fund) with different quality attributes appealing to different segments").
103. See Birdthistle, Compensating Power, supra note 22, at 1446
104. Langevoort, supra note 19, at 1033.
105. See Langevoort, supra note 19, at 1034.
106. See Birdthistle, Compensating Power, supra note 22, at 1446.
107. For a discussion of the weaknesses of informational intermediaries and conflicts of brokers in the mutual fund context, see id. at 1459
108. see also Jill E. Fisch, Fiduciary Duties and the Analyst Scandals, 58 ALA. L. REV. 1083, 1097-98 (2007) (discussing the conflicts of interests and questionable independence of mutual fund analysts).
109. See Langevoort, supra note 19, at 1036-40.
110. See infra notes 225-34 and accompanying text.
111. For a discussion of corporate governance in the mutual fund context, see A. Joseph Warburton, Should Mutual Funds Be Corporations? A Legal and Econometric Analysis, 33 J. CORP. L. 745, 746-50 (2008).
112. See supra note 23.
113. See generally Birdthistle, Compensating Power, supra note 22, at 1451-64 (explaining the participants and mechanisms involved in the mutual fund investment irregularities).
114. See discussion infra Part I.B.2.C.
115. See THALER & SUNSTEIN, supra note 36, at 104
116. see also James J. Choi et al., For Better or For Worse: Default Effects and 401 (k) Savings Behavior, in PERSPECTIVES ON THE ECONOMICS OF AGING 81 (David A. Wise ed., 2004).
117. This may also be due to reluctance resulting from recent economic downturn. See Gail Marksjarvis, Many Investors Too Scared to Take Wing, CHI. TRIB., Aug. 26, 2009, http://www. chicagotribune.com/business/yourmoney/chi-tc- biz-investors-gail-0825-0aug26,0,7183761.column.
118. See infra Part I.B.2.
119. See Richard M. Phillips, Mutual Fund Independent Directors: A Model for Corporate America?, PERSPECTIVE, Aug. 2003, at 1, 12, http://www.ici.org/pdf/ per09-04.pdf.
120. See id. at 1-2.
121. See Press Release, Office of the N.Y. Att'y Gen. Eliot Spitzer, State Investigation Reveals Mutual Fund Fraud (Sept. 3, 2003), http://www.oag.state. ny.us/media-center/2003/sep/sep03a-03.html.
122. See id.
123. Birdthistle, Compensating Power, supra note 22, at 1403.
124. See supra note 23 and accompanying text.
125. See Mercer E. Bullard, The Mutual Fund as a Firm: Frequent Trading, Fund Arbitrage and the SECs Response to the Mutual Fund Scandal, 42 HOUS. L. REV. 1271, 1272-73 (2006).
126. See Birdthistle, Compensating Power, supra note 22, at 1453-56
127. see also Mahoney, supra note 16, at 173-75.
128. Mahoney, supra note 16, at 173-74.
129. See id. at 174.
130. See id.
131. See Disclosure Regarding Market Timing and Selective Disclosure of Portfolio Holdings, 69 Fed. Reg. 22,300, 22,301-05 (Apr. 23, 2004) (to be codified at 17 C.F.R. pts. 239, 274).
132. Id. at 22,300.
133. Mahoney, supra note 16, at 175.
134. See Birdthistle, Compensating Power, supra note 22, at 1455.
135. See Amendments to Rules Governing Pricing of Mutual Fund Shares, 68 Fed. Reg. 70,388, 70,390-91 (proposed Dec. 17, 2003) (to be codified at 17 C.F.R. pt. 270)
136. see also Birdthistle, Compensating Power, supra note 22, at 1458.
137. See Amendments to Rules Governing Pricing of Mutual Fund Shares, 68 Fed. Reg. at 70,388;
138. Birdthistle, Compensating Power, supra note 22, at 1453.
139. See Amendments to Rules Governing Pricing of Mutual Fund Shares, 68 Fed. Reg. at 70,388.
140. See id. at 70, 388-90.
141. See id.
142. See, e.g., In re Charles Schwab & Co., Exchange Act Release No. 50,360, Investment Company Act Release No. 26,595, 83 SEC Docket 2252 (Sept. 14, 2004) (setting forth SEC allegations of late trading).
143. See Birdthistle, Compensating Power, supra note 22, at 1456-58.
144. See id.
145. See id.
146. See id.
147. Investment advisors have also settled allegations of other illicit practices, including selective disclosure, revenue sharing, and others. See id. at 1450-60.
148. See, e.g., Farrell, supra note 23;
149. Friedman, supra note 23;
150. Lauricella, supra note 23.
151. See, e.g., Edmund L. Andrews, World Bankers Suggest Rebound May Have Begun, N.Y. TIMES, Aug. 21, 2009, http://nytimes.com/2009/08/22/business/ economy/22fed.html.
152. See, e.g., Chuck Jaffe, Fee Reform? Better Luck Next Year: SECs Decision to Delay New Rules on 12b-1 Fees Hurts Investors, MARKETWATCH, Apr. 12, 2009, http://www.marketwatch.com/ story/sec-fumbles-mutual-fund-fee.
153. 17 C.F.R. S 270.12b-1 (2009);
154. see also U.S. Sec. & Exch. Comm'n, Mutual Fund Fees and Expenses, http://www.sec.gov/answers/mffees.htm (last visited Dec. 1, 2009).
155. 17 C.F.R. S 270.12b-1.
156. See, e.g., Jaffe, supra note 111.
157. See U.S. Sec. & Exch. Comm'n, supra note 112.
158. See id. (providing link to calculators for investors to determine total fees and sales charges).
159. See generally Inv. Co. Inst., The U.S. Retirement Market, Third Quarter 2008, 17 RESEARCH FUNDAMENTALS, Feb. 2009, http://www.ici.org/pdf/retmrkt- update.pdf.
160. See COLLEEN E. MEDILL, INTRODUCTION TO EMPLOYEE BENEFITS LAW: POLICY AND PRACTICE 21-23, 470-73 (2d ed. 2007).
161. See Inv. Co. Inst., supra note 117, at 11 fig.A-1 (reporting a steady decline over the past twenty years of assets held in pension funds and a concomitant rise in the assets held in private accounts).
162. See id.
163. See, e.g., Mary Williams Walsh, Pensions: Big Holes in the Net, N.Y. TIMES, Apr. 12, 2005, at G1 (discussing poor investment performance in private savings accounts and corresponding deficits in amounts needed for retirement security).
164. See, e.g., Mary Williams Walsh, Public Pension Plans Face Billions in Shortages, N.Y. TIMES, Aug. 8, 2006, at Al (reporting major deficits in state and local government pension plans).
165. See Micheline Maynard, Saab in Bankruptcy Filing; G.M. Seeks More Aid, N.Y. TIMES, Feb. 21, 2009, at B3 (discussing pension difficulties for U.S. automobile manufacturers).
166. See Inv. Co. Inst., supra note 117, at 1-2.
167. INV. CO. INST., supra note 13, at 86-87.
168. See Inv. Co. Inst., supra note 117, at 11.
169. See id.
170. THALER & SUNSTEIN, supra note 36, at 104.
171. See id. at 103-07;
172. Shlomo Benartzi & Richard H. Thaler, Naive Diversification Strategies in Defined Contribution Savings Plans, 91 AM. ECON. REV. 79, 79-80 (2001).
173. See INV. Co. INST.,supra note 13, at 86.
174. See THALER & SUNSTEIN, supra note 36, at 108;
175. see also Daniel Gross, The Empty 401 (k): If White House Press Secretary Tony Snow Won't Save for Retirement, Why Should You?, SLATE, Sept. 4, 2007, http://www.slate.com/id/217288.
176. See THALER & SUNSTEIN, supra note 36, at 107.
177. See Pension Protection Act of 2006, Pub. L. No. 109-280, 120 Stat. 780 ("An Act to provide economic security for all Americans").
178. See James J. Choi et al, $100 Bills on the Sidewalk: Suboptimal Investment in 401 (k) Plans 3 (Yale Int'l Ctr. Fin., Working Paper No. 08-05, 2007), available at http://papers.ssrn.com/sol3/papers. cfm?abstract-id=1084442.
179. Id.
180. See THALER & SUNSTEIN, supra note 36, at 107-10 (citing 2006 Investment Company Institute statistics); Choi et al., supra note 134, at 4.
181. See Sheena Sethi-Iyengar et al, How Much Choice Is Too Much? Contributions to 401 (k) Retirement Plans, in PENSION DESIGN AND STRUCTURE: NEW LESSONS FROM BEHAVIORAL FINANCE 83, 83-95 (Olivia S. Mitchell & Stephen P. Utkus eds., 2004).
182. See Brigitte C. Madrian & Dennis F. Shea, The Power of Suggestion: Inertia in 401 (k) Participation and Savings Behavior, 116 Q.J. ECON. 1149,1176-79 (2001).
183. See INV. Co. INST.,supra note 13, at 19-20.
184. See id. at 86, 99.
185. Id. at 10 fig.1.3.
186. SEE DAVID F. SWENSEN, UNCONVENTIONAL SUCCESS: A FUNDAMENTAL APPROACH TO PERSONAL INVESTMENT 151-52 (2005).
187. See, e.g., Tara Siegel Bernard, Target-Date Funds: Seven Questions to Ask Before Jumping In, N.Y. TIMES, June 28, 2009, http://nytimes.com/2009/06/29/ your-money/mutual-funds-and-etfs/29target. html.
188. See generally Harry Markowitz, Portfolio Selection, 1 J. FIN. 77 (1952). Given increasing life expectancies and longer retirements, investors might want to maintain a degree of risk in their portfolios, even upon retirement, but not to the extent reported in these stories.
189. See id.
190. See SWENSEN, supra note 142, at 83-84.
191. See Birdthistle, Fortunes and Foibles, supra note 22, at 81.
192. See, e.g., Mark Hulbert, The Index Funds Win Again, N.Y. TIMES, Feb. 22, 2009, at BU5 (citing the recent study by Mark Kritzman of M.I.T.'s Sloan School of Management which found "that, after fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund").
193. See id.
194. Langevoort, supra note 19, at 1033.
195. Mahoney, supra note 16, at 169.
196. Langevoort, supra note 19, at 1033 & nn.102 & 103 (citing an extensive array of financial studies demonstrating poor behavioral decisions by mutual fund investors) (emphasis omitted).
197. See, e.g., Tamar Frankel, Advisory Fees-Who Decides How Much Is Too Much?, BOARDIQ, Apr. 28, 2009, http://www.boardiq.com/articles/20090428/opinion- advisory-fees-decides- much-much ("Dissatisfied small investors may indeed sell their fund shares to express their dissatisfaction, but such sales are often constrained by adverse tax consequences and other problems."). Of course, taxes would not be an issue for funds in tax-advantaged savings accounts.
198. For a discussion of the tax regime governing mutual fund investments generally, see Coates, supra note 59.
199. For a discussion of the rules governing market timing in mutual funds, see generally Mutual Fund Redemption Fees, 71 Fed. Reg. 11,351 (proposed Mar. 7, 2006) (to be codified at 17 C.F.R. pt. 270).
200. See Birdthistle, Compensating Power, supra note 22, at 1429-31;
201. see also Randall S. Thomas & Kenneth J. Martin, Litigating Challenges to Executive Pay: An Exercise in Futility?, 79 WASH. U. L.Q. 569, 602 n.117 (2001).
202. See Birdthistle, Compensating Power, supra note 22, at 1424.
203. See Brehm v. Eisner, 746 A.2d 244, 250 (Del. 2000).
204. Cf., e.g., id. at 259-60.
205. See Hulbert, supra note 148 ("Fees and taxes can have a huge impact on funds' net returns.").
206. WALLISON & LITAN, supra note 17, at 8.
207. Carhart, supra note 18, at 80;
208. see also Gil-Bazo & Ruiz-Verdú, supra note 18, at 2178.
209. 527 F.3d 627, 629-31 (7th Cir. 2008).
210. See id., cert, granted, 129 S. Ct. 1579 (2009).
211. See supra notes 4-5 and accompanying text.
212. See supra note 13 and accompanying text.
213. Choi & Gulati, supra note 5, at 44-50.
214. Jones v. Harris Assoes. L.P., 537 F.3d 728, 732-33 (7th Cir. 2008) (Posner, J., dissenting from denial of rehearing en banc).
215. Jones v. Harris Assoes. L.P., 527 F.3d 627, 633-34 (7th Cir. 2008).
216. 129 S. Ct. 1187,1204 (2009).
217. 129 S. Ct. 538, 551 (2008).
218. Wyeth, 129 S. Ct. at 1199-1200;
219. Altria Group, 129 S. Ct. at 561 (Thomas, J., dissenting).
220. Investment Company Act S 36(b), 15 U.S.C. S 80a-35(b) (2006).
221. See supra text accompanying notes 58-62.
222. See 15 U.S.C. S 80a-35(b) (providing a private right of action for violation of the fiduciary duty).
223. 694 F.2d 923 (2d Cir. 1982).
224. See, e.g., Krantz v. Prudential Invs. Fund Mgmt. LLC, 305 F.3d 140,143 (3d Cir. 2002);
225. Green v. Fund Asset Mgmt., L.P., 286 F.3d 682, 685-86 (3d Cir. 2002);
226. Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 326 (4th Cir. 2001);
227. Krinsk v. Fund Asset Mgmt., Inc., 875 F.2d 404, 409 (2d Cir. 1989).
228. See, e.g., 17 C.F.R. SS 239.15A, 274.11A (2009);
229. Disclosure Regarding Approval of Investment Advisory Contracts by Directors of Investment Companies, 69 Fed. Reg. 7852, 7854 (proposed Feb. 19, 2004) (to be codified at 17 C.F.R. pts. 239, 240, 270) (noting, with approval, the Gartenberg approach in contract renewal);
230. Form N1-A, Item 22, http://www.sec.gov/about/forms/formn-la.pdf (requiring boards of trustees of mutual funds to disclose whether they discussed Gartenberg factors in renewing investment advisory contracts).
231. Lyman Johnson, A Fresh Look at Director "Independence": Mutual Fund Fee Litigation and Gartenberg at Twenty-Five, 61 VAND. L. REV. 497, 516 (2008).
232. Id.
233. Gartenberg, 694 F.2d at 928.
234. Id.
235. See Johnson, supra note 179, at 516.
236. Gartenberg, 694 F.2d at 929-30.
237. See, e.g., cases cited infra note 197.
238. Gartenberg, 694 F.2d at 930 n.3.
239. See JAMES D. Cox ET AL., SECURITIES REGULATION: CASES AND MATERIALS 1211-14 (3d ed. 2001).
240. Johnson, supra note 179, at 519.
241. See supra text accompanying notes 43-74.
242. 527 F.3d 627 (7th Cir. 2008), cert, granted, 129 S. Ct. 1579 (2009).
243. Id. at 632.
244. See id.
245. Id.
246. See id. at 632-33.
247. See id. at 633-35.
248. See supra notes 26, 46 and accompanying text.
249. See, e.g., Gallus v. Ameriprise Fin., Inc., 561 F.3d 816, 818 (8th Cir. 2009);
250. Green v. Fund Asset Mgmt. L.P., 286 F.3d 682, 683 (3d Cir. 2002);
251. Migdal v. Rowe Price-Fleming Int'l, Inc., 248 F.3d 321, 325 (4th Cir. 2001).
252. See Jones v. Harris Assoes. L.P., No. 04-C-8305, 2007 WL 627640, at *1-2 (N.D. 111. Feb. 27, 2007).
253. See Lyman P.Q. Johnson & David Milion, Recalling Why Corporate Officers Are Fiduciaries, 46 WM. & MARY L. REV. 1597,1601 (2005).
254. SEC v. Chenery Corp., 318 U.S. 80, 85-86 (1943).
255. Jones v. Harris Assoes. L.P., 527 F.3d 627, 632 (7th Cir. 2008).
256. Id.
257. 15 U.S.C. § 80a-33(b) (2006).
258. Id. § 80b-6.
259. Id. §§ 77k, 771, 77q.
260. Id. § 78j(b).
261. 17 C.F.R. § 240.10b-5 (2009).
262. See Jones v. Harris Assoes. L.P., 527 F.3d 627, 630, 632 (7th Cir. 2008);
263. see also 15 U.S.C. § 80a-35(b).
264. Jones, 527 F.3d at 632.
265. Id.
266. Id. at 633.
267. Id.
268. Id.
269. See id. at 631-32.
270. Id. at 631.
271. See Jones v. Harris Assoes. L.P., No. 04-C-8305, 2007 WL 627640 (N.D. 111. Feb. 27, 2007).
272. Jones, 527 F.3d at 633 (emphasis omitted).
273. Id. at 631-32.
274. See, e.g., Gil-Bazo & Ruiz-Verdú, supra note 18, at 2178-79;
275. Langevoort, supra note 19, at 1033 & nn.102 & 103;
276. Mahoney, supra note 16, at 176.
277. Jones, 527 F.3d at 634
278. (citing Alan Schwartz & Louis L. Wilde, Imperfect Information in Markets for Contract Term: The Examples of Warranties and Security Interests, 69 VA. L. REV. 1387 (1983)).
279. Id. at 632.
280. Id. at 634.
281. William H. Rehnquist, The Notion of a Living Constitution, 54 TEX. L. REV. 693, 694-96 (1976).
282. Jones, 527 F.3d at 633.
283. See Mahoney, supra note 16, at 162.
284. See supra Part I.
285. Langevoort, supra note 19, at 1019,1039.
286. See supra Part I.
287. 15 U.S.C. § 80a-35(b) (2006).
288. Jones v. Harris Assoes. L.P., 527 F.3d 627, 632 (7th Cir. 2008).
289. Coates & Hubbard, supra note 68, at 180.
290. See, e.g., Gil-Bazo & Ruiz-Verdú, supra note 18, at 2179;
291. see also WALLISON & LlTAN, supra note 17, at 8-11;
292. Carhart, supra note 18, at 80.
293. Jones, 527 F.3d at 634.
294. Id. at 634-35.
295. See EASTERBROOK & FlSCHEL, supra note 6.
296. See Jones v. Harris Assoes. L.P., 537 F.3d 728, 732-33 (7th Cir. 2008) (Posner, J., dissenting from denial of rehearing en bane).
297. See generally Jolis & Sunstein, supra note 31;
298. Kahan & Braman, supra note 31.
299. See Jones, 537 F.3d at 730.
300. Id. at 730.
301. Id.
302. Id.
303. Id. at 730-31
304. (quoting Camelia M. Kühnen, Social Networks, Corporate Governance and Contracting in Mutual Fund Industry, available at http://ssrn.com/abstraet= 849705) (alteration in original) (internal quotation marks omitted).
305. For Kuhnen's published piece, see Camelia M. Kühnen, Business Networks, Corporate Governance, and Contracting in the Mutual Fund Industry, 64 J. FIN. 2185 (2009).
306. See Jones, 537 F.3d at 731
307. (citing Memorandum from Chester Spatt, Chief Economist, Office of Econ. Analysis, on Literature Review on Independent Mutual Fund Chairs and Directors to Investment Company File s7-03-04 (Dec. 29, 2006), http://www.see.gov/rules/ proposed/s70304/ oeamemo122906-litreview.pdf).
308. See, e.g., Gil-Bazo & Ruiz-Verdú, supra note 18;
309. see also WALLISON & LlTAN, supra note 17, at 8-11;
310. Carhart, supra note 18, at 80;
311. Malkiel, supra note 18.
312. See infra note 314 and accompanying text.
313. Cf., e.g., U.S. SEC. & EXCH. COMM'N, PUBLIC POLICY IMPLICATIONS OF INVESTMENT COMPANY GROWTH, H.R. REP. NO. 89-2337 (1966), available at http://sechistorieal.org/museum/ papers/1960;
314. WHARTON SCH. OF FIN. & COMMERCE, A STUDY OF MUTUAL FUNDS, H.R. REP. NO. 872274 (1962), available at http://sechistorieal.org/museum/papers/1960/;
315. U.S. GEN. ACCOUNTING OFFICE, MUTUAL FUND FEES: ADDITIONAL DISCLOSURE COULD ENCOURAGE PRICE COMPETITION 56 (2000);
316. John P. Freeman, Stewart L. Brown & Steve Pomerantz, Mutual Fund Advisory Fees: New Evidence and a Fair Fiduciary Duty Test, 61 OKLA. L. REV. 83, 106-22 (2008) (critiquing the CoatesHubbard study).
317. See, e.g., U.S. SEC. & EXCH. COMM'N, PUBLIC POLICY IMPLICATIONS OF INVESTMENT COMPANY GROWTH, H.R. REP. NO. 89-2337 (1966), available at http://seehistorical.org/museum/ papers/1960;
318. WHARTON SCH. OF FIN. & COMMERCE, A STUDY OF MUTUAL FUNDS, H.R. REP. NO. 872274 (1962), available at http://seehistorical.org/museum/papers/1960/;
319. U.S. GEN. ACCOUNTING OFFICE, supra note 247, at 56;
320. John P. Freeman & Stewart L. Brown, Mutual Fund Advisory Fees: The Cost of Conflicts of Interest, 26 J. CORP. L. 609 (2001).
321. Jones, 537 F.3d at 731.
322. Id.
323. Id. at 732.
324. Id.
325. Id. at 732-33.
326. 561 F.3d 816 (8th Cir. 2009).
327. Id. at 822-23.
328. See Mamudi, supra note 34.
329. Gallus, 561 F.3d at 816-20.
330. Gartenberg v. Merrill Lynch Asset Mgmt. Inc., 694 F.2d 923, 930 n.3 (2d Cir. 1982).
331. Gallus, 561 F.3d at 819.
332. Id.
333. Id.
334. Id. at 820.
335. Id. at 823.
336. See id. at 818-23.
337. See Jones v. Harris Assoes. L.P., 527 F.3d 627 (7th Cir. 2008), cert, granted, 129 S. Ct. 1579 (2009).
338. Id. at 633.
339. See, e.g., Paredes, supra note 38.
340. 15 U.S.C. § 80a-35(b) (2006).
341. See supra Part II.B.
342. For a criticism of Easterbrook's opinion as an unwarranted act of judicial "sunsetting," see Emily D. Johnson, Note, The Fiduciary Duty in Mutual Fund Excessive Fee Cases: Ripe for Reexamination, 59 DUKE L.J. 145,149,167-68 (2009).
343. See Brief of Amici Curiae Law Professors, supra note 10, at 13.
344. 15 U.S.C. § 80a-35(b).
345. See eases cited supra note 177.
346. See Jones v. Harris Assoes. L.P., 527 F.3d 627, 632-35 (7th Cir. 2008).
347. See Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 536 (1984);
348. Burks v. Lasker, 441 U.S. 471, 480-82 (1979).
349. See Brief of Amici Curiae Law Professors, supra note 10, at 13.
350. Jones, 527 F.3d at 630;
351. see also 15 U.S.C. § 80a-35(b).
352. Jones, 527 F.3d at 632.
353. SEC v. Chenery Corp., 318 U.S. 80, 85-86 (1943).
354. Jones v. Harris Assoes. L.P., 537 F.3d 728, 733 (7th Cir. 2008).
355. See Jones, 527 F.3d at 634.
356. See, e.g., Birdthistle, Compensating Power, supra note 22, at 1405-07.
357. See, e.g., LUCIAN BEBCHUK & JESSE FRIED, PAY WITHOUT PERFORMANCE: THE UNFULFILLED PROMISE OF EXECUTIVE COMPENSATION ix (2004).
358. Jones, 537 F.3d at 730.
359. See WALLISON & LITAN, supra note 17, at 8-11.
360. Id. at 8.
361. Id. at 9.
362. Brief of Robert Litan, Joseph Mason, and Ian Ayres as Amici Curiae Supporting Petitioners, at 17, Jones v. Harris Associates L.P., 527 F.3d 627 (7th Cir. 2008), cert, granted, 129 S. Ct. 1579 (2009) (No. 08-586).
363. Id. at 18.
364. Gil-Bazo & Ruiz-Verdú, supra note 18, at 2178-79.
365. Jones, 527 F.3d at 632.
366. Birdthistle, Compensating Power, supra note 22, at 1442.
367. See supra Part I.B. Note, though, that certain retirement accounts provide investors with access to more than a narrow menu of choices, while plans that are not employer-sponsored (such as IRAs) also have greater numbers of investment options.
368. See Birdthistle, Compensating Power, supra note 22, at 1415-16.
369. See Cox & Payne, supra note 22, at 923 (explaining why, under current practices, investors cannot be expected to make rational choices among funds in the fashion described by the Seventh Circuit).
370. See generally Langevoort, supra note 19;
371. Mahoney, supra note 16.
372. Jones, 527 F.3d at 634.
373. See, e.g., Langevoort, supra note 19, at 1034;
374. Mahoney, supra note 16, at 179-80;
375. see also, e.g., DREYFUS EQUITY INCOME FUND, PROSPECTUS (Oct. 1, 2009), http://www.dreyfus.com/compliance/ pdf/prs/6144-prs.pdf.
376. See, e.g., DREYFUS EQUITY INCOME FUND, supra note 297, at 11-15.
377. See, e.g., id.
378. See, e.g., id.
379. See Brief of Amici Curiae Law Professors, supra note 10, at 19.
380. Jones v. Harris Assoes. L.P., 537 F.3d 728, 732 (7th Cir. 2008) (Posner J., dissenting from denial of rehearing en banc).
381. See generally David A. Latzko, Economics of Scale in Mutual Fund Administration, 22 J. FIN. RES. 331 (1999).
382. Jones v. Harris Assoes. L.P., 527 F.3d 627, 631 (7th Cir. 2008).
383. Jones, 537 F.3d at 732.
384. INV. CO. INST., supra note 13, at 8.
385. See TAMAR FRANKEL & ANN TAYLOR SCHWING, THE REGULATION OF MONEY MANAGERS: MUTUAL FUNDS AND ADVISERS § 12.03[C] (2d ed. 2001 & Supp. 2009).
386. Of course, these issues raise the question whether the SEC might be best situated to bring lawsuits, inasmuch as the mutual funds with the most suspicious fees may be unattractive to the plaintiffs' bar.
387. EDWARD F. GREENE ET AL., U.S. REGULATION OF THE INTERNATIONAL SECURITIES AND DERIVATIVES MARKETS § 8.03[8] (9th ed. 2006).
388. See Johnson, supra note 179, at 536 (pointing out that a new doctrinal approach would not necessarily increase litigation materially).
389. See, e.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 371 (Del. 1993);
390. Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
391. See, e.g., Phred Dvorak & Joann S. Lublin, Pay Changes Ripple Beyond Bailouts, WALL ST. J., Feb. 17, 2009, http://online.wsj.com/article/ SB123379295977649947.html.
392. See M. Todd Henderson, The Nanny Corporation and the Market for Paternalism 7-8 (Univ. Chi. Law Sch. John M. Olin Law & Economics, Working Paper No. 456, 2009), available at http://ssrn. com/abstract=1348235.
393. Posting of Brian Tamanaha, supra note 29 ("Recent events appear to have genuinely shaken Posner's faith in the self-correcting power of the market.").
394. See generally POSNER, supra note 28.
395. While Coates and Hubbard insist that those who disagree with them are "[s]tuck in the [sjixties," D. Bruce Johnsen (who also believes the industry is competitive) insists that behavioral economics has "no place in law courts," "no place in legal proceedings," and constitutes "avante garde economic theory whose analytical contours have yet to be worked out and for which scientific testing is years away and far from inevitable." Coates & Hubbard, supra note 68, at 155;
396. D. Bruce Johnsen, Myths About Mutual Fund Fees: Economic Insights on Jones v. Harris 66-67 (George Mason Univ. Law & Econ. Res. Paper Series, Working Paper No. 09-49, 2009), available at http://ssrn.com/abstract- id=1483862).
397. See Jones v. Harris Assoes. L.P., 527 F.3d 627, 629-32 (7th Cir. 2008).
398. See, e.g., EASTERBROOK & FlSCHEL, supra note 6;
399. POSNER, supra note 6.
400. See Jolis & Sunstein, supra note 31, at 214-16.
401. See generally POSNER, supra note 28;
402. THALER & SUNSTEIN, supra note 36, at 72-76.
403. See INV. Co. INST., supra note 13, at 2.
404. See, e.g., Choi et al, supra note 80.
405. I.R.C. § 72(t) (2006). Of course, owners may borrow certain amounts from these accounts in the meantime.
406. Pension Protection Act of 2006, Pub. L. No. 109-280, S 624, 120 Stat. 780, 980 (codified at 29 U.S.C. § 1104(c) (2006)).
407. Chris Silva, Pension Bill Gives Big Boost to Auto-Enrollment, EMPLOYEEBENEFIT NEWS, Oct. 2, 2006, http://ebn.benefitnews.com/news/pension- bill-gives-big-boost-auto-enrollment-39611-1. html.
408. Id.
409. see also Julie Connelly, The Ease of Index Funds: No Ins and Outs to Know, N.Y. TIMES, Oct. 23, 2007, at H2.
410. See Birdthistle, Compensating Power, supra note 22, at 1411.
411. See, e.g., BEBCHUK & FRIED, supra note 283, at 23-44.
412. See Jones v. Harris Assoes. L.P., 527 F.3d 627, 633 (7th Cir. 2008).
413. See William J. Carney & George B. Shepherd, The Mystery of Delaware Law's Continuing Success, 2009 U. ILL. L. REV. 1,1-4 (describing Delaware court's dominance of the corporate market).