Appeal from judgment entered in the United States District Court for the Southern District of New York (Walker, J.) granting pre-trial dismissal of plaintiff's claims under sections 12(b) and 15(a) of the Investment Company Act of 1940, and dismissal of plaintiff's claims under sections 20(a) and 36(b) of the Act following a bench trial. Affirmed.
Van Graafeiland and Miner, Circuit Judges, and Lasker,*fn* District Judge.
Plaintiff-appellant Jeffrey Krinsk is a shareholder in the CMA Money Fund ("Fund"), which is one component of the Cash Management Account program ("CMA program"), a financial services package offered by Merrill Lynch, Pierce, Fenner & Smith Inc. ("MLPF & S"). He brought this action derivatively on behalf of the Fund against the Fund itself and those MLPF & S-related entities responsible for administering and servicing the Fund. In his amended complaint, Krinsk pleaded violations of sections 12(b), 15(a), 20(a) and 36(b) of the Investment Company Act of 1940 ("Act"), 15 U.S.C. §§ 80a-12(b), 80a-15(a), 80a-20(a), 80a-35(b) (1982), and demanded a jury trial. Krinsk alleges a breach of fiduciary duty in that the fees paid by the Fund and its shareholders are excessive; attacks the 12b-1 distribution plan as being improper; and contends that a proxy statement of the Fund was false and misleading in regard to defendants' profitability and in comparing fees of the Fund with those of another fund.
The district court rejected all of Krinsk's claims, granting pre-trial dismissal of two claims and dismissal of the remaining claims after a bench trial. Krinsk appeals from the final judgment dismissing the amended complaint.
We find no error in the district court's determination that Krinsk failed to prove that the fees are disproportionately large. In addition, we agree with the district court that there can be no private right of action under section 12(b) when the claim is indistinguishable from a section 36(b) claim; that the section 15(a) claim fails because that claim must be asserted by the shareholders rather than the Fund; that the omission in the proxy statement is not material; and that a jury trial properly was denied because the claims sound in equity.
The CMA Program and the Fund
The CMA program was introduced by MLPF & S in 1977 and has been widely imitated since that time. It consists of a bundle of financial services administered through a central asset account that combines (1) a securities trading account, (2) a savings vehicle, consisting of one of three money market funds (one of which is the Fund) or an insured savings account, (3) a VISA debit card, (4) check-writing privileges and (5) a detailed monthly statement. The focal point of the CMA program is the securities account, which generates substantial revenue for MLPF & S. The program links the securities account to the savings vehicle through a "sweep" feature that automatically transfers idle cash into the savings vehicle -- credit balances of $1,000 or more are transferred into savings the day after receipt; balances of less than $1,000 are swept weekly. An initial deposit of $20,000 is required to open a CMA program account, but a minimum balance thereafter need not be maintained.
The subject of this lawsuit, the Fund, is a no-load, diversified, open-ended investment company and thus subject to provisions of the Act. The Fund is the largest registered money market mutual fund, with approximately $19 billion in assets and over 850,000 shareholders as of January 1987. Investors in the Fund hold their investment as shares, on which dividends are declared and reinvested daily. Participation in the CMA program is required in order to invest in the Fund. Participants in the program, however, are not required to invest in the Fund and instead may designate one of the other savings vehicles as their primary savings account.
Other components of the CMA program -- the VISA debit card and check writing privileges -- are linked to the savings vehicle and securities account, providing immediate access to money in the Fund and to margin credit. Thus, when a customer's check or VISA transaction clears, the debt is first paid out of any free credit balance, then out of the Fund or other savings vehicle and, finally, from the margin loan value in the securities account.
MLPF & S, the sponsor of the CMA program, is the largest securities firm in the United States. It acts as a distributor for the Fund and services the individual CMA program accounts. The day-to-day management of the Fund is performed by Merrill Lynch Asset Management, Inc. ("MLAM"), which serves as investment adviser to approximately forty to fifty mutual funds as well as to institutional and individual investors. Both MLPF & S and MLAM are owned by Merrill Lynch & Co., Inc. ("ML & Co."). The Fund's investment adviser is Fund Asset Management, Inc. ("FAM"), a wholly-owned subsidiary of MLAM. These companies--MLPF & S, MLAM, ML & Co. and FAM (collectively "Merrill Lynch") -- are the defendants-appellees in this action along with the Fund.
To service the accounts, MLPF & S employs financial consultants, who act as its sales representatives to investors. Supporting the financial consultants are sales assistants, an extensive "back office" operation and the services of other Merrill Lynch affiliates and subsidiaries.
Direct compensation for services and management comes from three fees: (1) a $65 annual service fee paid by each CMA program participant to MLPF & S; (2) an investment advisory fee paid by the Fund to FAM based on the Fund's asset level; and (3) payments made by the Fund to MLPF & S pursuant to a 12b-1 plan, under which the payments are passed on almost entirely to the financial consultants.
Although all program participants are obliged to pay the service fee, approximately 25% of them do not invest in the Fund. The second fee, the advisory fee, is based on a schedule of declining percentages as assets increase beyond certain breakpoints: 0.5% of the average daily value of net assets under $500 million, 0.425% of that amount between $500 million and $1 billion, and 0.375% of that amount in excess of $1 billion. The third fee, paid pursuant to the 12b-1 plan, is based on a distribution each month at an annual rate of 12.5 basis points (0.125% of the Fund's assets), which MLPF & S passes through to the financial consultants, save for 1 basis point that it pays to sales management and up to .50 of a basis point retained for administrative costs of the program.
The Fund is governed by a Board of Trustees, comprised of one affiliated trustee and six independent trustees. The unaffiliated trustees have joined the Board at the invitation of Merrill Lynch, and each acts as a trustee or director of one or more of Merrill Lynch's other mutual funds. The Board oversees the investments and administration of the Fund, and evaluates the advisory fee annually and the 12b-1 plan quarterly. The district court found, and the parties do not dispute, that the trustees were at all times fully informed on matters relevant to the issues underlying this litigation.
The investment advisory fees of the Fund have been approved by the shareholders. In July of 1984, defendants mailed to the shareholders a proxy statement, one of the principal purposes of which was to obtain shareholder approval of the continuance of the investment-advisory fee agreement. The proxy statement set forth the three-tier schedule of the Fund's advisory fee. It listed also all the other investment companies for which FAM and MLAM act as investment advisers. The list included two columns, indicating for each of the listed companies its "Rate" and "First Breakpoint." The first of the listed money market funds was Merrill Lynch's Ready Asset Trust ("RAT"), with a listed rate of 0.5% and first breakpoint at $500 million, the same percentage and breakpoint as the Fund. The statement failed to indicate, however, the relevant differences between the RAT and the Fund -- that RAT had no service fee (as opposed to the then -- $50 annual charge for participation in the Fund's program) and had seven break-points (as opposed to the Fund's three). Also omitted in the statement was the fact that the annual rate of the advisory fee of the RAT effectively was 0.34% as opposed to 0.38% for the Fund.
The District Court Proceedings
Krinsk brought this action derivatively on behalf of the Fund against the Merrill Lynch defendants and the Fund. The suit was filed in the United States District Court for the Southern District of California on May 16, 1985, and was transferred in October of that year to the Southern District of New York, where it was assigned to Judge Walker. A jury trial was demanded in the amended complaint, which alleged that: (1) FAM and MLPF & S breached their fiduciary duties to the Fund by 'taking excessive fees, in violation of section 36(b) of the Act, 15 U.S.C. § 80a-35(b); (2) the distribution agreement and plan entered into and continued by the Fund violates section 12(b) of the Act, 15 U.S.C. § 80a-12(b), and Securities and Exchange Commission ("SEC") Rule 12b-1, 17 C.F.R. § 270.12b-1; (3) the annual service fee required for all program participants is not authorized by a written advisory agreement, as required by section 15(a) of ...