August 16, 1990
TO: SEC RULES MEMBERS NO. 60-90
RE: SEVENTH CIRCUIT HOLDS NO RIGHT TO JURY TRIAL FOR
SECTION 36(b) CLAIM
__________________________________________________________
The U.S. Court of Appeals for the Seventh Circuit has held
that there is no right to a jury trial in a case brought under
Section 36(b) of the Investment Company Act alleging excessive
management fees. The case, Kamen v. Kemper Financial Services,
Inc., was on appeal from the District Court. The plaintiff, a
shareholder in a money market fund, had filed a suit under
Section 36(b) and also claimed that the fund's proxy statement
was misleading.
The court followed past decisions in the Evangelist, Schuyt
and Krinsk cases in holding that suits under Section 36(b) were
not "suits at common law" and thus not entitled to a jury trial
under the Seventh Amendment. This affirmed the decision of the
District Court.
However, the court reversed the District Court's holding
that the Section 36(b) claim was barred because the plaintiff was
not an adequate representative of the other investors in the
fund. The court found that the adequate representative
requirement of Rule 23.1 of the Federal Rules of Civil Procedure
is applicable only to derivative suits and that, in contrast, a
claim under Section 36(b) is not one the fund itself could
assert. The court also noted that, in any event, the plaintiff
was "no less adequate a representative than most plaintiffs in
class actions".
The court affirmed the District Court's finding that the
plaintiff's claim under Section 20(a), alleging that the fund's
proxy statement was misleading, was barred because she was
required, but failed, to make a demand on the fund's board of
directors. (The court's decision abolished the "futility"
exception to the demand requirement in the Seventh Circuit.) The
court expressed no opinion on whether a claim under Section 20
was a derivative claim (since the plaintiff had conceded the
point) nor on whether Section 20 creates a private right of
action.
A copy of the court's opinion is attached.
Craig S. Tyle
Associate General Counsel
Attachment