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Academic Analyzes 36(b) History, Pinpoints Shortcomings

An academic paper by a University of Virginia law professor examines the historical context of Section 36(b) and recent litigation and concludes that the statute has been ineffective in protecting investors. The current regulatory approach establishes liability based on the fiduciary duty flowing from the adviser, “the recipient of the management fee, to the mutual fund itself” instead of set fee limits or in terms of fee reasonableness, professor Quinn Curtis writes. He observes that this “odd” approach is the result of historical compromises between the SEC and the major industry trade group. “The SEC’s preferred approach was to adopt a standard of reasonableness, but the ICI worried that a reasonableness standard was vague and would give too little deference to the judgment of mutual fund boards in approving fees.” The resulting case law has only further entrenched the confusion, according to Curtis.  The Gartenberg and Jones legal cases established liability with a multi-factor test, which according to Curtis “created a worst-of-all-worlds arrangement in which strike suits are hard to dismiss, but meritorious suits are almost impossible to win.” The article suggests that 36(b) case law provides strong incentives to bring lawsuits but has not successfully protected investors. Curtis suggests setting aside historical concerns and instead allowing the admittance of evidence of comparable fees, for example, saying that such a shift would focus 36(b) litigation on funds that are actually very expensive and potentially harm investors.

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