Securities Lawyer's Deskbook
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The
Investment Company Act of 1940





Section 36 -- Breach of Fiduciary Duty


  1. Civil actions by Commission; jurisdiction; allegations; injunctive or other relief. The Commission is authorized to bring an action in the proper district court of the United States, or in the United States court of any territory or other place subject to the jurisdiction of the United States, alleging that a person serving or acting in one or more of the following capacities has engaged within five years of the commencement of the action or is about to engage in any act or practice constituting a breach of fiduciary duty involving personal misconduct in respect of any registered investment company for which such person so serves or acts--

    1. as officer, director, member of any advisory board, investment adviser, or depositor; or

    2. as principal underwriter, if such registered company is an open-end company, unit investment trust, or face-amount certificate company.

    If such allegations are established, the court may enjoin such persons from acting in any or all such capacities either permanently or temporarily and award such injunctive or other relief against such person as may be reasonable and appropriate in the circumstances, having due regard to the protection of investors and to the effectuation of the policies declared in section 1(b) of this title [15 USCS § 80a-1(b)].

  2. Compensation or payments as basis of fiduciary duty; civil actions by Commission or security holder; burden of proof; judicial consideration of director or shareholder approval; persons liable; extent of liability; exempted transactions; jurisdiction; finding restriction. 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 compensation or payments paid by such registered investment company or by the security holders thereof to such investment adviser or person. With respect to any such action the following provisions shall apply:

    1. It shall not be necessary to allege or prove that any defendant engaged in personal misconduct, and the plaintiff shall have the burden of proving a breach of fiduciary duty.

    2. In any such action approval by the board of directors of such investment company of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, and ratification or approval of such compensation or payments, or of contracts or other arrangements providing for such compensation or payments, by the shareholders of such investment company, shall be given such consideration by the court as is deemed appropriate under all the circumstances.

    3. 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. No award of damages shall be recoverable for any period prior to one year before the action was instituted. Any award of damages against such recipient shall be limited to the actual damages resulting from the breach of fiduciary duty and shall in no event exceed the amount of compensation or payments received from such investment company, or the security holders thereof, by such recipient.

    4. This subsection shall not apply to compensation or payments made in connection with transactions subject to section 17 of this title [15 USCS § 80a-17], or rules, regulations, or orders thereunder, or to sales loads for the acquisition of any security issued by a registered investment company.

    5. Any action pursuant to this subsection may be brought only in an appropriate district court of the United States.

    6. No finding by a court with respect to a breach of fiduciary duty under this subsection shall be made a basis (A) for a finding of a violation of this title for the purposes of sections 9 and 49 of this title [15 USCS § § 80a-9, 80a-48], section 15 of the Securities Exchange Act of 1934 [15 USCS § 78o], or section 203 of title II of this Act [15 USCS § 80b-3], or (B) for an injunction to prohibit any person from serving in any of the capacities enumerated in subsection (a) of this section.

  3. Corporate or other trustees performing functions of investment advisers. For the purposes of subsections (a) and (b) of this section, the term "investment adviser" includes a corporate or other trustee performing the functions of an investment adviser.


Legislative History


Aug. 22, 1940, ch 686, Title I, § 36, 54 Stat. 841; Dec. 14, 1970, P.L. 91-547, § 20, 84 Stat. 1428; June 4, 1975, P.L. 94-29, § 28(7), 89 Stat. 166; Dec. 4, 1987, P.L. 100-181, Title VI, § 622, 101 Stat. 1262.

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