[15549]
January 15, 2003
TO: CLOSED-END INVESTMENT COMPANY MEMBERS No. 4-03
DIRECTOR SERVICES COMMITTEE No. 1-03
SEC RULES MEMBERS No. 6-03
RE: U.S. SUPREME COURT DENIES CERTIORARI IN SECTION 36(B) CASE
The U.S. Supreme Court has denied certiorari in a case alleging breach of fiduciary duty
under Section 36(b) of the Investment Company Act of 1940 (the “Act”).1 The plaintiff, a fund
shareholder, had alleged that the adviser breached its fiduciary duty by collecting fees pursuant
to advisory and distribution agreements that were not approved by a board that was at least
40% independent, as required under the Act. He claimed that the directors of the fund were not
independent because they served on the boards of other funds managed by the adviser and
received large aggregate compensation for their combined service. The shareholder further
argued that the adviser breached its fiduciary duty because the fees were excessive.
The lower court dismissed the case and the U.S. Court of Appeals for the Third Circuit
upheld the dismissal.2 In its petition for a writ of certiorari, the shareholder argued that the
appeals court improperly adopted a heightened pleading standard for the Section 36(b) claim.
According to the filing, the standard applied by the court substantially limits access to relief
under this section by requiring that complaints plead evidence of “control” not publicly
available. The Supreme Court denied the writ of certiorari, thereby signaling its unwillingness
to review the appeals court’s ruling in this case.
Marguerite C. Bateman
Senior Associate Counsel
1 Krantz v. Prudential Investments Fund Management LLC, No. 02-835 (U.S. Supreme Court, January 13, 2003).
2 See Memorandum to Closed-End Investment Company Members No. 45-02, Director Services Committee No. 7-02 and SEC
Rules Members No. 80-02, dated September 25, 2002.