The opinion of the court was delivered by: NEAHER
This is a derivative action brought by a shareholder on behalf of Standard & Poor's Intercapital Income Securities, Inc. ("Standard"), a Maryland corporation having its principal office in New York City. Standard is a diversified closed-end investment company registered under the Investment Company Act of 1940 ("Act"), 15 U.S.C. § 80a-1, et seq. Plaintiff claims that Standard has paid excessive fees to its investment adviser, Standard & Poor's/Intercapital, Inc. ("Adviser"). Plaintiff seeks to reform the investment advisory contract and to recover damages from the Adviser, two corporate affiliates of the Adviser, and present and former officers and directors of Standard.
All of the defendants other than the Adviser and Standard have moved to dismiss the complaint as to them for failure to state a claim.They argue that § 36(b) of the Act, 15 U.S.C. § 80a-35(b), provides that an action such as this can be maintained only against the Adviser, the sole recipient of the alleged overpayments for investment advice.
Section 36(b) was one of several amendments contained in the Investment Company Act of 1970. It begins by providing that
"the investment adviser of a registered investment company shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser."
In addition, it states that a shareholder of a registered investment company may bring an action in federal court for breach of that fiduciary duty. Subdivision (3), however, places strict limits on the shareholder's right of action:
"No such action shall be brought or maintained against any person other than the recipient of such compensation or payments, and no damages or other relief shall be granted against any person other than the recipient of such compensation or payments...."
In an effort to avoid these limitations contained in § 36(b)(3), plaintiff included in her amended complaint a claim against Standard's directors under § 15(b), which provides in pertinent part:
"It shall be the duty of the directors of a registered investment company to request and evaluate, and the duty of the investment advisor to such company to furnish, such information as may reasonably be necessary to evaluate the terms of any contract whereby a person undertakes to serve or act as investment adviser of such company."
Plaintiff contends that the directors may be held liable for violation of that duty.
Defendants point out, however, that §§ 15(c) and 36(b) were both added to the Act by the 1970 amendments. They argue that it would be illogical to assume that Congress intended § 15(c) to be an implicit exception to the explicit limits of § 36(b)(3).
Defendants have the better of this argument. Congressional creation of an "express statutory provision for one form of proceeding ordinarily implies that no other means of enforcement was intended by the Legislature." SIPC v. Barbour, 421 U.S. 412, 419, 95 S. Ct. 1733, 44 L. Ed. 2d 263 (1975). Since § 36(b) affords a complete remedy for excessive fees paid to investment advisers, there is no need to imply a right of action under § 15(c). The duty created by § 15(c) can be enforced by the Securities and Exchange Commission under its authority to bring proceedings for injunctive relief pursuant to § 36(a) of the Act.
The cases cited by plaintiff to support her § 15(c) claim are inapposite. Brown v. Bullock, 294 F.2d 415 (2 Cir. 1961), dealt with §§ 15(a) and (b), which require the directors of an investment company to approve at least annually its investment advisory contracts. There the Court of Appeals for this circuit held that directors may be liable for failure to carry out this act of approval in a meaningful fashion. The case was decided a decade before §§ 15(c) and 36(b) were added to the Act, and it cannot be considered authority for the proposition that § 15(c) provides an independent right of action against directors in the fact of the limitations contained in § 36(b). Nor can such authority be found in Rosenfeld v. Black, 445 F.2d 1337 (2 Cir. 1971), cert. dismissed, 409 U.S. 802, 93 S. Ct. 24, 34 L. Ed. 2d 62 (1972), which also did not involve the relationship of §§ 15(c) and 36(b). In that case the Court of Appeals held that an investment company's adviser violated its fiduciary duty ...