The opinion of the court was delivered by: WARD
This is an action brought pursuant to the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a-1 et seq. ("ICA"). Defendants T. Rowe Price Associates, Inc. ("Price Associates"), Carter O. Hoffman, Edward A. Taber III and George J. Collins move pursuant to Rule 12(b)(6), Fed. R. Civ. P., for an order dismissing Count III of the Third Amended Complaint. Defendants argue that Count III, which purports to assert a claim under § 20(a) of the ICA, 15 U.S.C. § 80a-20(a), fails to state a claim upon which relief can be granted in that § 36(b) of the ICA, 15 U.S.C. § 80a-35(b), provides the exclusive federal statutory remedy for a claim of excessive investment adviser fees. For the reasons hereinafter stated, defendants' motion is denied.
The original complaint in this action was filed on January 25, 1980. In the original pleading, plaintiff alleged that she was a shareholder in the Rowe Price Prime Reserve Fund, Inc. (the "Fund"), a no load, diversified, open-end investment company incorporated and doing business in Maryland. The complaint further alleged that defendant Price Associates, also incorporated and doing business in Maryland, was serving as an investment adviser to the Fund under the terms of an investment advisory agreement dated May 1, 1976. Defendants Hoffman, Taber and Collins, the complaint alleged, were serving, respectively, as chairman of the board of directors of the Fund as well as vice president and director of Price Associates, president and director of the Fund in addition to vice president of Price Associates, and vice president and director of the Fund as well as vice president of Price Associates.
In the original complaint, brought derivatively on behalf of the Fund,
plaintiff alleged that the fees paid by the Fund to Price Associates for services rendered in 1978 had been excessive and unreasonable. This excessive compensation, plaintiff asserted, constituted violations of §§ 1(b)(2), 10, 15, 36 and 37 of the ICA, as well as a breach of fiduciary duty under state law. Plaintiff therefore sought from defendants Price Associates, Hoffman, Taber and Collins an accounting and repayment of all excessive advisory fees paid by the Fund to Price Associates, as well as an injunction against Price Associates from "continuing its unlawful contract." Complaint at 8.
On July 14, 1980, the Court dismissed the original complaint with respect to all claims asserted under sections of the ICA other than § 36, and with respect to all pendent state law claims against the individual defendants. At the same time, the Court granted plaintiff leave to serve and file an amended complaint. On August 18, 1980, plaintiff filed an amended complaint asserting three claims against some or all of the original defendants: first, against Price Associates for excessive fees under § 36(b) of the ICA; second, against all defendants for breach of fiduciary duty under §§ 1(b)(2) and 15 of the ICA; and third, against all defendants for breach of fiduciary duty under state law. In a stipulation and order filed on January 23, 1981, plaintiff withdrew the second claim without prejudice.
The parties subsequently entered into a stipulation to the filing of a second amended complaint, which was signed by the Court and filed on March 2, 1981. A copy of the proposed amended pleading, annexed to the stipulation filed on March 2, 1981, indicated that the second amended pleading was to contain two claims, one against Price Associates for excessive fees under § 36(b) of the ICA, the other against all defendants for breach of a state law fiduciary duty.
The case subsequently was placed on the suspense calendar by stipulation of the parties, and was restored to the active docket by stipulation on January 13, 1984. Some months later, plaintiff moved for leave to file a third amended complaint. In a memorandum endorsement dated June 28, 1984, the Court granted plaintiff leave to file an amended complaint asserting an additional claim of violation of the proxy rules. Plaintiff filed her Third Amended Complaint on July 2, 1984.
The amended pleading now before the Court asserts three claims for relief. Count I, asserted against Price Associates, raises a claim for excessive fees under § 36(b) of the ICA. Count II, brought against all defendants, is based on diversity of citizenship and alleges breach of fiduciary duty under state law. Count III, also asserted against all defendants, alleges violations of § 20(a) of the ICA and Rule 20a-1 promulgated thereunder, 17 C.F.R. § 270.20a-1, in connection with proxy statements disseminated to Fund shareholders to solicit their approval of proposed investment advisory agreements for 1980 and 1981 (the "1980 and 1981 Agreements").
In connection with the three claims asserted, plaintiff seeks various forms of monetary relief, including repayment to the Fund of excessive fees under Count I, payment to the Fund of defendants' profits and/or the Fund's damages under Counts II and III, and reimbursement to the Fund under Count III of all payments made to defendants under the 1980 and 1981 Agreements. In addition, plaintiff seeks under Count I to enjoin the Fund from payment of excessive fees to Price Associates, and seeks under all three counts a declaration that the 1980 and 1981 Agreements are void as a consequence of defendants' violations of statute and common law.
Defendants Price Associates, Hoffman, Taber and Collins now move to dismiss Count III of the Third Amended Complaint pursuant to Rule 12(b)(6), Fed. R. Civ. P. Defendants contend in the instant motion that, inasmuch as "the essence of [plaintiff's § 20(a)] claim is a charge of excessive fees," Defendants' Reply Memorandum at 3, § 36(b) of the ICA provides "the sole, exclusive and complete federal statutory remedy" for such an alleged wrong, Defendants' Memorandum at 1.
The Investment Company Act of 1940 comprehends a broad regulatory scheme, and was enacted to address Congress' concern about "the potential for abuse inherent in the structure of investment companies." Burks v. Lasker, 441 U.S. 471, 480, 60 L. Ed. 2d 404, 99 S. Ct. 1831 (1979). Section 20 of the ICA, which was part of the original statute enacted in 1940, provides in relevant part:
It shall be unlawful for any person, by use of the mails or any means or instrumentality of interstate commerce or otherwise, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security of which a registered investment company is the issuer in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
15 U.S.C. § 80a-20(a). As both plaintiff and defendants acknowledge, the courts of this circuit have implied a private right of action under § 20(a) for shareholders of mutual funds who seek to redress violations of the proxy rules promulgated by the SEC. See, e.g., Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir. 1977); Galfand v. Chestnutt Corp., 545 F.2d 807 (2d Cir. 1976).
Section 36(b) of the ICA was added to the statute as part of the Investment Company Amendments Act of 1970, and provides in pertinent part:
For the purposes of this subsection, 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. An action may be brought under this subsection by the Commission, or by a security holder of such registered investment company on behalf of such company, against such investment adviser, or any affiliated person of such investment adviser, or any other person enumerated in subsection (a) of this section who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty in respect of such ...