June 12, 1989
TO: SEC RULES MEMBERS NO. 29-89
RE: COURT OF APPEALS AFFIRMS DISMISSAL OF EXCESSIVE FEE CLAIM
IN KRINSK CASE
__________________________________________________________
Attached is a copy of the opinion of the U.S. Court of
Appeals for the Second Circuit in Krinsk v. Fund Asset
Management, Inc., in which the court unanimously affirmed the
holding of the district court, which dismissed all of the
plaintiff's claims. Plaintiff Krinsk, a money market fund
shareholder, had alleged breach of fiduciary duty due to
excessive fees, an improper distribution plan under rule 12b-1
and misleading disclosure in the fund's proxy statement.
With respect to the plaintiff's claim under Section 36(b)
of the 1940 Act concerning the level of fees, the court applied
the Gartenberg standard, namely "whether the fee schedule
represents a charge within the range of what would have been
negotiated at arm's length in light of all of the surrounding
circumstances". The court stated that six factors were to be
considered in applying that standard: (1) the nature and quality
of the services provided to shareholders, (2) profitability to
the adviser-manager, (3) "fall-out benefits" to the adviser-
manager, (4) economies of scale, (5) comparative fee structures,
and (6) the independence and conscientiousness of the trustees.
The court explicitly rejected the plaintiff's argument that
"excessive profitability alone should suffice to support a
finding of unreasonableness". The court also laid particular
emphasis on the role of the trustees, stating: "The expertise of
the trustees, whether they are fully informed, and the extent of
care and conscientiousness with which they perform their duties
are among the most important factors to be examined in evaluating
the reasonableness of compensation under section 36(b)."
The court rejected the plaintiff's argument that 12b-1 plan
violated section 12(b) became the fee, based on the fund's
assets, did not vary with the number of shares sold. The court
stated that this claim was indistinguishable from the plaintiff's
section 36(b) claim and that he could not circumvent this by
bringing the claim under section 12(b). The court also noted
that the 12b-1 fee "seems to have benefited the shareholders".
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The court also rejected the plaintiff's argument that a
fixed fee for participation in the cash management program, of
which the fund was one component, violated section 15(a) since it
was not described in the advisory agreement and affirmed the
finding of the lower court that the fund's proxy statement was
not false and misleading.
Craig S. Tyle
Assistant General Counsel
Attachment