November 20, 1990
TO: SEC RULES MEMBERS NO. 77-90
RE: COURT FINDS NO PRIVATE RIGHT OF ACTION UNDER SECTION 37
OF THE 1940 ACT
__________________________________________________________
In a recent derivative action brought in federal district
court by a fund shareholder alleging excessive management fees,
the court found, among other things, that controlling law in the
relevant circuit (Eighth) established that the 1940 Act does not
create a private right of action to recover damages for
violations of Section 37 of the Act. A copy of the court's
opinion is attached.
In addition to asserting a claim under Section 36(b), the
complaint alleged that the defendants (the fund's manager,
transfer agent and certain officers and directors) unlawfully
converted fund assets to their own use or the use of others, in
violation of Section 37 of the 1940 Act. Section 37 subjects
anyone who steals or embezzles from an investment company to the
penalties prescribed by Section 49 of the 1940 Act (in the
absence of a state court judgment on the merits with respect to
the same act or acts). In dismissing the Section 37 count, the
court noted that in view of the earlier controlling decision, it
was not necessary to determine whether a private right of action
under Section 37 for excessive fees, previously recognized by the
Second Circuit, was preempted by the adoption of Section 36(b) of
the 1940 Act in 1970. The court acknowledged that a subsequent
Eighth Circuit decision criticized the previous case in light of
various Supreme Court decisions favoring recognition of private
rights of action under the federal securities laws. The court
further observed, however, that the more recent trend has been to
limit the availability of such rights of action.
Frances M. Stadler
Assistant General Counsel
Attachment