The opinion of the court was delivered by: Denise Cote, District Judge
This Opinion addresses the question of whether an investment adviser can be held liable under Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. (1988) ("Section 36(b)" and "ICA"), for allegedly excessive fees paid by a mutual fund to broker-dealers. Plaintiff Milton Pfeiffer ("Pfeiffer") brought this lawsuit on the assumption that defendant Bjurman, Barry & Associates ("BB&A") continued to charge and receive marketing and distribution fees from its no-load mutual fund Bjurman, Barry Micro Cap Growth Fund (the "Fund") after the Fund had closed to new investors. Discovery has revealed that the disputed fees are not paid to BB&A for marketing and distribution expenses, but are instead service fees paid by the Fund to broker-dealers. Defendants move for summary judgment on the ground that they cannot be held liable under Section 36(b) for the payment of fees to broker-dealers. Plaintiff has filed a cross-motion for summary judgment. For the reasons stated below, defendants' motion is granted, and plaintiff's cross-motion is denied.
The following facts are undisputed or taken in the light most favorable to the plaintiff, unless otherwise indicated.*fn1
The Bjurman, Barry Funds (the "Trust") is a diversified, open-end investment company organized under the laws of Delaware and registered under the ICA. The Trust offers shares in three mutual funds, including the Fund that is the subject of this action. The Fund invests in companies with market capitalizations between $30 million and $300 million. It closed to new investors on May 30, 2003. Existing shareholders and shareholders of the Trust's other funds, however, retained the ability to make additional investments. The two principal shareholders of the Fund are Charles Schwab & Co., Inc. ("Schwab") and Fidelity Brokerage Services, Inc./National Financial Services Corp. (collectively, "Fidelity"), broker-dealers that hold shares for the benefit of their clients. As of July 3, 2004, Schwab and Fidelity investors owned over 70% of the outstanding voting shares of the Fund.
Pursuant to 17 C.F.R. § 270-12b-1 ("Rule 12b-1"), the Fund has paid fees for marketing, distribution, and account servicing. Rule 12b-1 permits a mutual fund to use a percentage of its assets to reimburse "underwriters, dealers, and sales personnel."
17 C.F.R. § 270.12b-1(a)(2). Rule 12b-1 requires a mutual fund that makes such payments to issue a written distribution plan detailing "all material aspects of the proposed financing of distribution" of its shares. 17 C.F.R. at § 270-12b-1(b). This plan must be approved at least annually by a majority of the fund's board of directors, including a majority of the disinterested directors. Id. at (b)(2).
Although Rule 12b-1 does not limit the amount that a fund's shareholders may be charged under such a plan, the NASD has limited Rule 12b-1 fees for no-load funds to a maximum of one quarter of 1% of a fund's average daily net assets per year. See NASD Rule 2830(d)(4) and (5). This limit applies to both "sales related expenses and/or service fees." Id. at (d)(4). Sales charges include fees that are "paid to finance sales or sales promotion expenses." Id. at (b)(8). Service fees are defined as "payments by an investment company for personal service and/or the maintenance of shareholder accounts." Id. at (b)(9). These limits have been approved by the SEC.
The Trust is governed by a five-member board of trustees (the "Board"). Three of the five trustees are independent; the remaining two are affiliated with BB&A. In 1999, the Board filed with the SEC a distribution plan (the "Plan") pursuant to Rule 12b-1. It provides for the reimbursement of the Advisor, Distributor or others for all expenses incurred by such parties in the promotion and distribution of shares of the Fund ... as well as any distribution or service fees paid to securities dealers or others who have executed a servicing agreement with the Trust on behalf of the Fund. (Emphasis supplied.) The Plan complies with the NASD cap on Rule 12b-1 fees of 0.25% of the Fund's average daily net assets.
The Fund entered into servicing agreements with broker-dealers, including Schwab and Fidelity. Prior to the Fund's closure, the broker-dealers provided "shelf space" on their distribution platforms, as well as service for shareholder accounts. After closure, the broker-dealers' role was limited to maintenance and servicing of the accounts. The Fund continued to make Rule 12b-1 payments, however, at a constant 0.25% rate both before and after the Fund's closure. Because the assets held by the Fund appreciated significantly in the year ending September 30, 2003, the amount paid in Rule 12b-1 fees increased substantially even after the Fund closed to new investors.
As the investment adviser to the Fund, BB&A determines which securities the Fund will buy or sell, and, together with the Trust's officers, administers the Fund's daily operations. The amount of the investment advisory fee that the Fund pays to BB&A is not the subject of this lawsuit. BB&A also pays broker-dealers service fees in excess of the 0.25% cap established by the Plan. Schwab and Fidelity, for example, charge 0.40% and 0.35% respectively for their services. After the Fund contributes 0.25%, BB&A covers the remaining 0.15% and 0.10% due under the service agreements.
The plaintiff contends that the 0.25% paid by the Fund to Schwab and Fidelity is funneled through BB&A. Its sole evidence of this is the Board Minutes of September 29, 2003, which state: the Funds will pay to the Adviser [BB&A], on a monthly basis, up to one-twelfth of 0.25% of average daily net assets of distribution expenses ... and that the Adviser [BB&A] will pay to IFS Funds Distributors, Inc., the Funds' distributor, the total amounts owed for distribution expenses, such payment to include the Funds' payment to the Adviser and any additional amounts that are necessary.
IFS Funds Distributors, Inc. is Integrated Funds Services, Inc. ("Integrated"). Integrated is the Fund's transfer agent and administrator.
Defendants contend that the Board merely authorized the payments to be made in this manner, but that all of the documentation for the transfers establish that the Fund continued to make its payments to Schwab and Fidelity either directly or via Integrated. Plaintiff, however, argues that the minutes are sufficient to show that the payments flowed through BB&A. As described below, the parties dispute the ...