[15207]
September 25, 2002
TO: CLOSED-END INVESTMENT COMPANY MEMBERS No. 45-02
DIRECTOR SERVICES COMMITTEE No. 7-02
SEC RULES MEMBERS No. 80-02
RE: APPEALS COURT AFFIRMS DISMISSAL OF SECTION 36(b) CLAIM
The Third Circuit Court of Appeals recently affirmed the dismissal of the amended
complaint in a case alleging breach of fiduciary duty under Section 36(b) of the Investment
Company Act of 1940.1 The plaintiff, a fund shareholder, alleged that the adviser breached its
fiduciary duty with respect to the receipt of compensation. He sought to recover fees paid to
the adviser on the basis that the management and distribution agreements were not approved
properly because at least 40% of the board was not independent. According to the plaintiff, the
directors were not independent because they serve on numerous other boards managed by the
defendant adviser and receive large aggregate compensation for their combined services. The
amended complaint also alleged that the fees were excessive.
The district court dismissed the amended complaint finding that the plaintiff failed to
allege sufficient facts that, if true, would support either of the claims. The appeals court upheld
the dismissal, relying heavily on the analysis by the Fourth Circuit in a similar case.2 In
addition, the court rejected the plaintiff’s claim that the district court abused its discretion when
it did not allow him to amend the complaint a second time. The court found that the plaintiff
was on notice prior to filing the amended complaint that case law was developing that
supported the defendant’s argument that service on multiple boards does not make a director
an “interested person.”
Marguerite C. Bateman
Associate Counsel
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1 Krantz v. Prudential Investments Fund Management LLC, et al. (No. 02-1266)(3rd Cir. Aug. 30, 2002).
2 Migdal v. Rowe Price-Fleming Int’l Inc., 248 F.3d 321 (4th Cir. 2001).