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DERENZIS v. LEVY

March 19, 1969

DeRenzis, Plaintiff,
v.
Levy et al., Defendant.


Frankel, District Judge.


The opinion of the court was delivered by: FRANKEL

FRANKEL, District Judge:

Plaintiff, who owns (with his son) some 56 1/2 shares in defendant Oppenheimer Fund, Inc., brings this derivative action on behalf of the corporation. That nominal defendant is a mutual fund registered under the Investment Company Act of 1940, 15 U.S.C. § 80a -- 1 et seq. The court's jurisdiction is invoked under that statute and under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.

 The alleged wrongdoers are the defendant directors of the Fund; the defendant Oppenheimer Management Corporation, which has acted, and continues to act, as the Fund's investment adviser; and defendant Oppenheimer & Co., a partnership, which is the Fund's sponsor, which owns about 80% of the Management Corporation's stock, including all of its voting stock, and is a member firm of the New York Stock Exchange as well as other national securities exchanges. The last-named defendant, registered under the Investment Advisers Act of 1940, 15 U.S.C. § 80b -- 1 et seq., has had a sub-investment advisory contract with the Management Corporation, receiving thereunder 35% of the fees earned by the latter from the Fund.

 The complaint alleges a variety of wrongs, including the exaction by the Management Corporation and Oppenheimer & Co. of advisory fees that were "illegal and excessive" in a variety of respects; the charging of these same defendants of "illegal and excessive" underwriting fees; and the receipt by Oppenheimer & Co. of brokerage fees that "were and are excessive and illegal * * *." From among these asserted wrongs the parties have selected one as a subject said to be ripe now for decision as a matter of law. The plaintiff and most of the defendants, *fn1" by opposed motions for partial summary judgment, pose the question whether the advisory fees paid by the Fund were unlawful because they transgressed a so-called "rule" of the New York Stock Exchange. The issue, arising from facts which are not disputed in any material respect, requires a brief description of the questioned fee arrangement and of the Stock Exchange pronouncement which is said to outlaw it. *fn2"

 During all the times in question, *fn3" defendant Management Corporation received for its services as the Fund's investment adviser an annual fee equal to the sum of (1) 10% of the Fund's net realized capital gains, diminished by unrealized net loss (i.e., the difference between unrealized gains and losses), and (2) 10% of dividend and interest income. The fee so computed was subject to a maximum limitation (which never became pertinent): it could not exceed 4% of the Fund's year-end net asset value. It appears also that certain Fund salaries and expenses came out of the advisory fees and that effective January 1, 1967, the Management Corporation "voluntarily waived any compensation in excess of 1% of the net asset value of the Fund." *fn4" Over the years in question, the annual fee ranged from $25,242 (in 1962) to $1,508,226 (in 1967), from a low of.17% of year-end asset value in 1962 to a high of 1.25% in 1964.

 In the specific allegations which are of concern on the present motions, paragraph 9(h) (4) of the complaint says this:

 
"(4) Oppenheimer & Co. is a member of the New York Stock Exchange * * * so that it and its affiliated companies are governed by the Rules of the New York Stock Exchange that regulate member firms and their affiliates and organizations. The advisory fee that is charged the Fund is in violation of a section of Rule 440, which provides in relevant part that the 'fee for investment advisory service may not be based upon the profits realized.' Such Rule governs the fee that Oppenheimer & Co. and Management may charge the Fund by virtue, among other things of §§ 6 and 15A of the Exchange Act."

 That reference to "a section of Rule 440," and the language ostensibly quoted therefrom, turns out to generate an annoying problem as to what are fairly to be deemed "rules" of the New York Stock Exchange and which of its recorded utterances, headed "Supplementary Material," may be something other and less than "rules." As will appear, this annoyance might serve to bar summary judgment in plaintiff's favor. But assuming plaintiff's broad definition of "rules" to be correct, the higher authority of Congress defeats plaintiff's contention because it precludes any judicially enforceable restriction like the one plaintiff finds in the quoted declaration of the New York Stock Exchange.

 1. In a volume both parties cite and urge the court to consult, New York Stock Exchange, Constitution and Rules (CCH, July 1, 1968), there is a section, at page 3781, headed P2440 and entitled "Books and Records." Immediately under that title, the following appears:

 
"Rule 440. Every individual member and every member organization shall make and preserve for at least three years such books and records as the Exchange may prescribe."

 That sentence, which appears to tender itself as "Rule 440," the numbered rule purportedly invoked by the complaint, is obviously not relevant to our problem.

 Proceeding onward in the book, we come to a subheading (still on page 3781), "Supplementary Material," followed by a page or so of directions to members having equally little to do with present concerns. Then, at page 3781-3, under a new paragraph heading, " P2440A -- Statistical and Investment Advisory Services," toward the end of another page subheaded "Supplementary Material," there appears the sentence plaintiff invokes:

 
"The fee for investment advisory service may be based on a percentage of the principal amount of the funds involved but may not be based upon the profits realized."

 That is unquestionably language directive in nature and relevant to our subject. It is at a far physical remove, however, from the nearest preceding pronouncement labeled a "rule." It is under a separate, different, seemingly coordinate heading following the one under which plaintiff purported to cite the authoritative ...


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