# Petition — Daily Income Fund, Inc. v. Fox > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0302%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1984 - **Citation:** 464 U.S. 523 ## Text No. 82-/20 fu Lirfes IN THE Supreme Court of the United States | October Term, 1982 DAILY INCOME FUND, INC. and REICH & TANG, INC. Petitioners, v. MARTIN FOX, Respondent. PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT DANIEL A. POLLACK* FREDERICK P. SCHAFFER 61 Broadway (Suite 2500) New York, New York 10006 (212) 952-0330 Counsel for Petitioner Daily Income Fund, Inc. GEORGE C. SEWARD ANTHONY R. MANSFIELD Wall Street Plaza New York, New York 10005 (212) 248-2800 Counsel for Petitioner Reich & Tang, Inc. January 14, 1983 *Counsel of Record Question Presented for Review Is a shareholder’s derivative action under § 36(b) of the Investment Company Act of 1940 exempt from the direc- tor demand requirement of Rule 23.1 of the Federal Rules of Civil Procedure? iil TABLE OF CONTENTS PAGE Opinions Below .. ... «+s — No. 81 Civ. 2602 (KTD). United States District Court, S. D. New York. March 29, 1982. = MARTIN Fox, Plaintiff, — REICH & TANG, INC. and Daily Income Fund, Inc., Defendants. _ Money market investment company shareholder brought derivative action against the company and the investment adviser to the company to recover allegedly excessive advisory fees paid by the company to the invest- ment adviser. On the defendants’ motion to dismiss, the District Court, Kevin Thomas Duffy, J., held that: (1) the shareholder was required to make demand on the com- pany board of directors prior to bringing suit, and (2) the shareholder’s failure to make such a demand was not excused by his unsubstantiated allegtion that all the com- pany directors were involved in the wrongdoing and were necessarily hostile to his claim. Motion granted. 2a Milberg, Weiss, Bershad & Specthrie, New York City, for plaintiff; Richard M. Meyer, New York City, of counsel. Seward & Kissel, New York City, for defendant Reich & Tang, Inc.; Anthony R. Mansfield, New York City, of counsel. Pollack & Kaminsky, New York City, for defendant Daily Income Fund, Inc.; Daniel A. Pollack, Edward T. McDermott, Frederick P. Schaffer, New York City, of counsel. ++—_. OPINION & ORDER KEVIN THOMAS Durry, District Judge: Martin Fox, a shareholder of Daily Income Fund, Inc. (“Fund”), sued the Fund, a money market investment company, and Reich & Tang, Inc. (“R&T”), the invest- ment adviser to the Fund, to recover allegedly excessive advisory fees paid by the Fund to R&T. Plaintiff’s deriva- tive suit is premised on Section 36(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-35(b), which places a fiduciary duty on an investment adviser with respect to compensation for services.' R&T is alleged to have breached that duty. l 15 U.S.C. § 80a-35(b) provides in relevant part: (b) 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 3a Defendants move to dismiss plaintiff's complaint for failing to plead that a demand was made on the Fund’s board of directors prior to the filing of its complaint. Federal Rule of Civil Procedure 23.1 expressly states that a derivative suit complaint: shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority. . . and the reasons for his failure to obtain the action or for not making the effort. Plaintiff concedes that no demand was made and suggests that Section 36(b) does not require such a demand. The issues presented to this Court are two-fold: one, whether a demand is required in a Section 36(b) action and, two, if a demand is mandated, whether plaintiff is excused from the strictures of Fed.R.Civ.P. 23.1. The 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 pay- ments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered invest- ment company or by the security holders thereof to such investment adviser or person. With respect to any such action the following provisions shall apply: es . . . . @ (2) In any such action approval by the board of directors of such investment company of such compensation or pay- ments, 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 appropri- ate under all the circumstances. 4a answers to these questions have apparently resulted in a split within this district. Judge Ward recently held in Markowitz v. Brody, et al., 90 F.R.D. 542 (S.D.N.Y.1981) that Section 36(b) does not obviate the need for a Rule 23.1 demand. In direct contrast, Judge Lasker states in dictum that “a demand on the directors of the Fund was not intended to be a prerequisite to suit under § 36(b).” Blatt v. Dean Witter Reynolds Intercapital Inc., et al., 528 F.Supp. 1152, 1155 (S.D.N.Y.1981). Plaintiff argues that the Blart decision should control this case for the following reasons: (1) the board of directors inability to terminate a Section 36(b) action renders any demand futile; (2) the legislative history supports plaintiff’s con- tentions; and (3) a suit maintained under Section 16(b), an analogous section, need not comply with Rule 23.1. I do not find any of these arguments to be persuasive. DISCUSSION Before I begin to address plaintiff’s three arguments, I must start my discussion of the question presented neither with the particular section of the Investment Company Act in issue nor with the Federal Rules of Civil Proce- dure, but with the overall congressional intent behind the Investment Company Act and its requirement that there be “unaffiliated” persons on the board of directors of investment companies. Clearly in mandating this type of membership on the decision making board of an invest- ment company, Congress recognized the need for protec- tion of investors from unscrupulous investment advisors who might be in a position to mulct the public investor. The advisor to an investment company is entrusted with enormous amounts of money collected from the public shareholders and also with the day-to-day management of Sa those funds. S.Rep.No.184, 91st Cong., Ist Sess. (1969) reprinted in {1970} U.S.Code Cong. & Admin.News, 4897, 4903, 4910. The temptation for self dealing whether through inflated fees or other nefarious schemes is self- evident. It was to inhibit such self dealing that Congress insisted that directors unaffiliated with either the investment advi- sor or the Fund’s principal underwriter constitute forty percent of the board of an investment company, 15 U.S.C. § 80a-10. “Since the adviser and underwriter are usually the same or related entities, a majority of the directors of most funds [including the Daily Income Fund] are unaffiliated with their managers.” S.Rep.No.184, 91st Cong., Ist Sess. (1969) reprinted in [1970] U.S.Code Cong. & Admin.News at p. 4901. Thus, under the statutory mandate the board of directors of an investment company is to be the first line of defense for the individual investor against any self dealing onto which an advisor might be tempted. Foge/ v. Chesnutt, 668 F.2d 100 at 104 (2d Cir. 1981); Moses v. Burgin, 445 F.2d 369, 376 (Ist Cir.), cert. denied, 404 U.S. 994, 92 S.Ct. 532, 30 L.Ed. 2d 547 (1971). To require that an individual shareholder must first bring a problem to the board of an investment company therefore is not unreasonable. The unaffiliated directors can easily solve the problem (if it be real) without the need for litigation and its concomitant expense to the investment company. Thus, absent extraordinary circum- stances, a Rule 23.1 demand is a sine qua non in this type of litigation. To hold otherwise is to rule that the congres- sional enactment of the Investment Company Act is, in the main, ineffective, and the arguments advanced by plaintiff do not lead to such an anomalous result. 6a 1. Termination of a Section 36(b) Suit Mr. Fox correctly states that a Section 36(b) suit cannot be terminated by the Fund’s board of directors. Burks v. Lasker, 441 U.S. 471, 484, 99 S.Ct. 1831, 1840, 60 L.Ed.2d 404 (1979); Markowitz, supra, 90 F.R.D. at 559. However, it does not logically follow that this safeguard obliterates any need for compliance with Rule 23.1. Even assuming, as plaintiff suggests, that the Fund’s board of directors, which consists of three disinterested and two interested members, are hostile to his claim, this is not adequate justification for abandonment of the Federal Rules of Civil Procedure. The underlying basis for impos- ing the demand requirement on a derivative suit plaintiff extends beyond providing an opportunity for director termination. Directors should be given an opportunity to redress an aggrieved plaintiff without resort to litigation, Untermeyer v. Fidelity Daily Income Trust, et al., 79 F.R.D. 36, 42 (D.Mass.1978), or to institute a private right of action themselves.’ Acceptance of plaintiff's argument would foreclose any opportunity for prelitiga- tion director involvement and as such is untenable. 2. Lesiglative History Mr. Fox’s bare contention that a demand on the Fund director’s in a Section 36(b) suit is futile and consequently unnecessary and unreasonable, is not sufficient reason to ignore Rule 23.1. A “statute should be so construed as to harmonize with the Federal Rules if that is at all feasi- ble.” 7 Moore’s Federal Practice ¢ 86.04[4] at 4966. 2 It is unsettled whether or not the directors are empowered to maintain a private right of action. Fogel v. Chestnutt, 668 F.2d 100, 112, (2d Cir. 1981); Markowitz, supra, 90 F.R.D. at 557 n.12; Untermeyer, supra, 79 F.R.D. at 46 n.30. Ja Section 36(b) silence on the necessity of demand on the directors assumes compliance with Rule 23.1. The Federal Rules may, however, be superseded by congressional enactments that “abridge, enlarge or modify any substan- tive right.” 28 U.S.C. § 2072. {I]t is plain to the Court that a security holder’s right to sue under Section 36(b) would in no way be modified or abridged within the meaning of 28 U.S.C. § 2072 simply by requiring compliance with Rule 23.1 . . . Section 2072 is not triggered by an instance where application of the federal rules would be unreasonable, but only in a case where the rules directly conflict with substantive rights. No such conflict exists here. Markowitz, supra, 90 F.R.D. at 555. The legislative history provides scant basis for conclud- ing that statutory disharmony exists with the traditional demand requirement. Plaintiff cites passages from a Sen- ate Committee Report expressing guarded concern for the directors’ ability to “secure changes in the level of advi- sory fee rates in the mutual fund industry.” H.R.Rep.No.2337, 89th Cong., 2d Sess. (1966) at 131. Congress’s proper concern with the issue of investment adviser compensation does not raise the presumption that Congress intended to abrogate Rule 23.1 nor has plaintiff presented this Court with any language supporting such a presumption. In 1970, Section 36(b) was added to the Investment Company Act to “specify that the adviser has a fiduciary duty with. respect to compensation for services of other payments paid by the fund ... to the adviser.” S.Rep.No.184, 91st Cong., Ist Sess. (1969), reprinted in 8a [1970] U.S.Code Cong. & Admin.News at 4902. The enactment of Section 36(b), is not designed to ignore concepts developed by the courts as to the authority and responsibility of direc- tors. Indeed, this section is designed to strengthen the ability of the unaffiliated directors to deal with these matters and to provide a means by which the Federal courts can effectively enforce the federally- created fiduciary duty with respect to management compensation. The section is not intended to shift the responsibility for managing an investment com- pany in the best interests of its shareholders from the directors of such company to the judiciary. Id. at 4903. This legislative history supports defendants’ position that the congressional motivation behind Section 36(b) was to combine forces between the unaffiliated directors and the Federal courts to adequately and equita- bly supervise the amount of advisory fees. Plaintiff’s inference that this supervision can only occur at the sacrifice of Rule 23.1 is unreasonable and unwarranted. It would indeed be inconsistent with the expressed motives of the 1970 Amendments “to have been willing to rely largely upon ‘watchdogs’ [unaffiliated directors] to pro- tect shareholder interests and yet, where the ‘watchdogs’ have done precisely that, require that they be totally muzzled.” Burks, supra, 441 U.S. at 485, 99 S.Ct. at 1840. Judge Lasker’s decision in Blatt ignored the congres- sional imperative for independent management of money market funds and mistakenly presumed, in reliance on Boyko yv. Reserve Fund, Inc., 68 F.R.D. 692 (S.D.N.Y.1975) (LPG), that the directors of an invest- ment company are uniformly antagonistic to “an action 9a against the Fund’s advisors for breach of fiduciary duty with respect to the receipt of compensation.” /d. at 696. Section 10 of the Investment Company Act which man- dates that directors unaffiliated with both the investment advisor and the fund’s principal underwriter comprise forty percent of an investment company’s board of direc- tors, refutes on its face the presumption of hostility found in both the Blatt and Boyko decisions. Unless plaintiff is prepared to contest the true “disinterest” of each unaffi- liated director, these independent board members will continue to examine with a discerning eye, as Congress intended, the payments of advisory fees. Without diligent observation of Rule 23.1 these directors will be denied an opportunity to fulfill the congressional mandate. The importance of director involvement in the instant case is underscored in Section 36(b)(2), which provides that director approval of any advisory fees “shall be given such consideration by the court as is deemed appropriate under all the circumstances.” 15 U.S.C. § 80a-35(b)(2). This provision permits the court to scrutinize the directors judgment in approving adviser compensation and to eval- uate whether the “deliberations of the directors were a matter of substance or a mere formality.” S.Rep.No.184, 91st Cong., Ist Sess. (1969) reprinted in [1970] U.S.Code Cong. & Admin.News at 4910. Rule 23.1, which fosters director input, is crucial to the court’s determination and despite plaintiff’s arguments, it will not be ignored. 3. Section 16(b) Plaintiff's final argument rests on an ill conceived analogy between Section 16(b)’ of the Securities Exchange 3 “Section 16(b) authorizes actions on behalf of a corporation to recover short-swing profits realized by corporate insiders as a 10a Act of 1934, 15 U.S.C. § 78p(b), and Section 36(b). Plaintiff cites cases for the proposition that Rule 23.1 does not apply to Section 16(b) cases, Dottenheim v. Murchison, 227 F.2d 737 (Sth Cir. 1955), cert. denied, 351 U.S. 919, 76 S.Ct. 712, 100 L.Ed. 1451 (1957); Blau v. Mission Corp., 212 F.2d 77 (2d Cir.), cert. denied, 347 U.S. 1016, 74 S.Ct. 872, 98 L.Ed. 1138 (1954). However, these cases dealt with the contemporaneous ownership requirement of Rule 23.1 and not the demand clause at issue here. Thus, plaintiff’s reliance on this case law is misplaced. This crucial distinction destroys plaintiff's suggested analogy between Section 16(b) and Section 36(b). I am convinced that Rule 23.1 and Section 36(b) can and should co-exist compatibly. Plaintiff's arguments do not persuade me otherwise. Plaintiff's failure to make a Rule 23.1 demand on the fund directors is grounds for dismissal of the complaint unless Mr. Fox’s failure to make such a demand may be excused by some extraor- dinary circumstances. Plaintiff's complaint states at paragraph 14: No demand has been made by the plaintiff upon the Fund or its directors to institute or prosecute this action for the reason that no such demand is required under § 36(b) of the Act. Moreover, all of the direc- tors are beholden to R&T for their positions and have participated in the wrongs complained of in this action. Their initiation of an action like the instant one would place the prosecution of this action in the hands of persons hostile to its success. result of their purchases and sales of the corporation's equity securi- ties.” Markowitz, supra, 90 F.R.D. at 551. lla This averment, besides being inconsistent with plaintiff's argument that the directors cannot maintain their own action, presents no adequate grounds for disobedience with Rule 23.1. The contention that all the Fund directors are involved in the wrongdoing and necessarily hostile to plaintiff's claim is unfounded. First of all, this presump- tion is contrary to the congressional entrustment of sur- veillance responsibilities to the unaffiliated directors discussed supra. Burks, supra, 441 U.S. at 486, 99 S.Ct. at 1841. Secondly, plaintiff’s only proof of the potential hostility of the Fund directors to the instant case is found in the Fund’s proxy statement dated September 4, 1981. This statement, issued four months after plaintiff filed his complaint discusses the instant litigation: “The Manager and the Corporation believe that the advisory fees paid by the Corporation have not been and are not excessive, and the Manager and the Corporation intend to deny and contest the material allegations of the complaint.” at p. 10. This post-complaint hindsight cannot excuse Mr. Fox’s failure to make a demand on the directors before filing his complaint. Plaintiff has presented no justification for his noncom- pliance with Rule 23.1. Plaintiff alternatively requests that if this Court rules unfavorably, leave be granted to file an amended complaint. The rule in this Circuit is that leave to file amended complaints is usually freely granted absent prejudice to the parties. State Teachers Retirement Board vy. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981). In the instant case, prejudice to the directors would result from plaintiff’s dilatory amendment. One of the purposes of Rule 23.1 is to allow the directors to respond to plaintiff’s claim prior to the initiation of a lawsuit. Allowing plaintiff to now file an amended complaint l2a would make a mockery of the demand requirement. See Shlensky v. Dorsey, 574 F.2d 131, 141 (3d Cir. 1978); Weiss v. Temporary Investment Fund, Inc., 520 F.Supp. 1098 (D.C.Del.1981). Thus, defendants’ motion to dismiss is granted and plaintiff is denied leave to file an amended complaint. SO ORDERED. Decision of the Court of Appeals l3a aoe No. 74, Docket 82-7296. United States Court of Appeals, Second Circuit. Argued September 16, 1982. Decided October 26, 1982. 7 MARTIN Fox, Plaintiff-Appellant, — REICH & TANG, INC. and DAILY INCOME FUND, INC., Defendants-Appellees. aoe Shareholder appealed from dismissal by the United States District Court for the Southern District of New York, Kevin Thomas Duffy, J., 94 F.R.D. 94, of share- holder’s action to recover allegedly excessive fees paid by investment company to its adviser. The Court of Appeals, Irving R. Kaufman, Circuit Judge, held that: (1) invest- ment company did not possess right of action under section of Investment Company Act of 1940 that provides right of action to recover excessive fees by Securities and Exchange Commission or by security holder, and (2) demand requirement of Federal Rule of Civil Procedure l4a governing derivative actions was inapplicable to share- holder’s suit. Reversed and remanded. + Richard M. Meyer, New York City (Milberg, Weiss, Bershad & Specthrie, New York City, of counsel), for plaintiff-appellant. Daniel A. Pollack, New York City (Pollack & Kaminsky, Frederick P. Schaffer, New York City, of counsel), for defendant-appellee Daily Income Fund, Inc. Seward & Kissel, New York City (Anthony R. Mans- field, New York City, of counsel), for defendant-appellee Reich & Tang, Inc. aoe Before FEINBERG, Chief Judge, and FRIENDLY and KAUFMAN, Circuit Judges. —- IRVING R. KAUFMAN, Circuit Judge: This case presents an issue of first impression in this Circuit. The question before us is whether, in a share- holder action brought pursuant to § 36(b) of the Invest- ment Company Act of 1940 to recover allegedly excessive fees paid by an investment company to its adviser,' the | Section 36(b) imposes upon the investment adviser of a registered investment company “a fiduciary duty with respect to the receipt of compensation for services.” 15 U.S.C. § 80a-35(b). It creates a cause of action for breach of that duty, id., and specifically limits “[aJny award of damages. . . to the actual damages resulting from the breach of fiduciary duty[,]. . . in no event exceed[ing] the 15a shareholder plaintiff is required to plead that a “demand” was made on the company’s board of directors prior to filing of the complaint.’ At first blush, resolution of this question would seem to require merely clarification of a technical pleading rule. As our discussion makes clear, however, analysis of the issue is not uncomplicated, nor is our conclusion without important ramifications for suits brought pursuant to § 36(b). Because this case comes to us from a dismissal at the pleading stage, the factual record is sparse. Martin Fox, a shareholder of Daily Income Fund, Inc. (“the Fund”), brought this action on behalf of the Fund to recover allegedly excessive fees paid by the Fund to its investment adviser, Reich & Tang, Inc. (“R & T”). The Fund, an open-end investment company of the type commonly referred to as a “money-market fund,” pursues as its basic business strategy the goal of achieving high current income levels while preserving capital. To this end, it invests in a portfolio of short-term money market instru- ments, principally United States government and federal agency obligations, obligations of major banks, and prime commercial paper. The Fund experienced a dra- matic surge in its assets, in a relatively short period of amount of compensation or payments received from [the] investment company. . . .” Ihe legislative history reveals that Congress created this somewhat particularized fiduciary duty with specific reference to the recurring problem of payment of excessive adviser and manage- ment fees, e.g., S.Rep. No. 184, 91st Cong., Ist Sess. 5-6 (1969), reprinted in 1970 U.S.Code Cong. & Ad.News 4897, 4901-02. 2 This pleading requirement in the federal courts is embodied in Federal Rule of Civil Procedure 23.1, the text of which is set out at note 6. l6a time. As of June 80, 1978, the Fund’s net assets were approximately $75 million. Less than three years later, on April 15, 1981, they had reached a level of $775,000,000. Precisely this sort of “dramatic growth”’ impelled enact- ment of the 1970 amendments to the Investment Com- pany Act of 1940, and, in particular, § 36(b), which created a cause of action for return of excessive adviser fees. Because fees are usually calculated as a percentage of assets, substantial portfolio appreciation brings with it the risk of unduly high adviser compensation. See S.Rep. No. 184, 91st Cong., Ist Sess. 6 (1969), reprinted in 1970 U.S.Code Cong. & Ad.News at 4902; see also J. Barnard, Jr., Reciprocal Business, Sales Charges and Management Fees, in 1966 Fed. B.A. Conference on Mutual Funds 127-29, Despite this substantial increase in Fund assets, no adjustment was made in the rate at which R & T was to be paid for investment advice and other management ser- vices rendered. R & T's fee was originally set one-half of One percent of the Fund’s net assets, and it remains fixed at that rate. Consequently, yearly payments by the Fund to its adviser increased from approximately $375,000 in 3 S.Rep. No. 184, 91st Cong., Ist Sess. 3 (1969), reprinted in 1970 U.S.Code Cong. & Ad.News at 4899. After passage of the Investment Company Act of 1940, the industry experienced a period of relative stability. During the first year 436 companies registered, pursuant to the Act, At the end of fiscal year 1959, the number of companies had increased to only 453 with aggregate assets of about $20,000,000,000, By 1966, just seven years later, 727 companies were registered, representing assets of nearly $50 billion. 1966 SEC Ann.Rep. 100. Not surprisingly, that same year Congress requested the Securities and Exchange Commission to investigate this matter. The SEC's findings, and recommendations for legislative action are contained in Report on the Public Policy Implications of Investment Company Growth, reprinted in H.R.Rep. No. 2337, 89th Cong., 2d Sess. (1966) (“/966 SEC Report”). 17a 1978, to a projected $3,875,000 in 1981. During the fiscal year ending June 30, 1980, R & T received more than $2,000,000 in management fees from the Fund. It is this extraordinary leap in fees of which Fox complains. Fox’s complaint alleged that management of the assets of a money market fund requires no detailed analysis of industries (or of large individual industrial concerns), nor the retention of a large staff of highly paid, sophisticated securities analysts. Essentially, he claimed that investment decisions are more or less routine, concentrated as they are in the relatively limited realm of “turning over” , money market investments with a small number of insti- tutions. In short, Fox alleged that R & T was continuing to provide the services it had always rendered, for what had become an exorbitant amount of money. Rather than approach the Fund’s directors with his grievance, Fox chose to allege in his complaint that no “demand” is required under § 36(b).* In response, the 4 Fox's complaint asserted, in addition to this legal conclusion, that “all of the [Fund's] directors are beholden to R & T for their positions and have participated in the wrongs complained of in this action. Their initiation of an action like the sib 84 would place the prosecution of this action in the hands of persons hostile to its success.” Apparently by way of response, the Fund notes that a majority of its Board of Directors, three of five, are “disinterested directors.” We need not deal with the effect of these statements. Some courts have held demand will be excused when a plaintiff shows that a majority of the investment company’s directors possess an interest in the subject matter of the lawsuit sufficient to conclude that it would have been futile to ask for board action. E.g., Markowitz v. Brody, 90 F.R.D. 542, §§6 (S.D.N.Y. 1981). Yet, the mere presence of a majority of directors not directly employed by the adviser may not automatically result in the conclusion that a demand will be required. See Lewis v. Curtis, 671 F.2d 779, 785-86 (3d Cir. 1982). Because we agree with Fox that a § 36(b) action is exempt from the director demand requirement of Rule 23.1, we do not pass on the excuse issue. 18a Fund (later joined by R & T) moved to dismiss for failure to comply with Rule 23.1. After noting that the issue had resulted in a split among the district courts in this Cir- cuit, Judge Duffy concluded that a Rule 23.1 demand was required in a § 36(b) suit, and dismissed the com- plaint. Fox appealed. For the reasons stated below, we disagree with the district court’s conclusion, 94 F.R.D. 94, and reverse. P We begin by noting that the Rule 23.1 demand require- ment applies only when a corporation or association has “failed to enforce a right which may properly be asserted by it.”° We agree with Fox that the rule applies only when s Indeed, the conflict between previous district court cases could not be more stark. In Markowitz v. Brody, supra, 90 F.R.D. at §54-S5, Judge Ward concluded that Rule 23.1 applies to § 36(b) shareholder suits. Accord, Gartenberg v. Merrill Lynch Asset Management, Inc., 91 F.R.D. §24, §26-28 (S.D.N.Y.1981). In direct contrast, Judge Lasker has stated: “a demand on the directors of the fund was not intended to be a prerequisite to suit under § 36(b).” Blatt v. Dean Witter Reynolds Intercapital, Inc., $28 F.Supp. 1152, 1188 (S.D.N.Y.1982) (dictum). Cf. Bovko v. Reserve Fund, Inc., 68 F.R.D. 692, 696 (S.D.N.¥Y.1975) (Gagliardi, J.) (when at least one affiliated or interested director on mutual fund board, futility of demand will be presumed, and, therefore, Rule 23.1 will be satisfied). 6 Fed.R.Civ.P. 23.1 provides, in its entirety: Derivative Actions by Shareholders In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law, and (2) that the action is not a collusive one to confer 19a the specified entity has an opportunity to “assert,” in a court, the same action under the same rule of law on which the shareholder plaintiff relies. Thus, if the Fund may not sue pursuant to § 36(b), no demand upon its board of directors will be required. In rejecting the Fund’s argument that even if it cannot bring an action under § 36(b), a demand must be made upon its directors to utilize other, informal means to “enforce its right” to return of excessive adviser fees, Brief of Defendant-Ap- pellee Daily Income Fund, Inc. at 5-6, we announce no jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or mem- bers, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not tairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs. 7 As indicated, we disagree that availability of informal methods of attempting to recoup excessive adviser fees is sufficient to trigger the demand requirement of Rule 23.1. Moreover, we find the examples given by the Fund—negotiating with the Adviser to obtain a refund, and terminating the contract, Brief for Defendant-Appellee Daily Income Fund, Inc. at 5-6—not persuasive. Negotiations may well fail, and termination of the contract, although perhaps depriving the adviser of future business, may not effect the remedy sought by the shareholder plaintiff, which is the return of excessive fees. Additionally, “a mutual fund cannot, as a practical matter sever its relationship with [its] adviser.” S.Rep. 184, 91st Cong., Ist Sess. § (1969), reprinted in 1970 U.S.Code Cong. & Ad.News at 4901. Moreover, given the directors’ past relationship with the adviser in approving the contract in the first place, 1S U.S.C. § 80a-15(c), the 20a new rule of law. As long ago as the beginning of this century, the Supreme Court construed Equity Rule 94, 104 U.S. ix (1882), the precursor of Rule 23.1, and determined that its nearly identical language’ referred to “a suit founded on a right of action existing in the corporation itself, and in which the corporation itself is the appropriate plaintiff.” Delaware & Hudson Co. v. Albany & Susq. R.R., 213 U.S. 435, 447, 29 S.Ct. 540, $43, §3 L.Ed. 862 (1909); see also Ross v. Bernhard, 396 U.S. §31, §34-35, 90 S.Ct. 733, 735-736, 24 L.Ed.2d 729 (1970). Accordingly, we turn initially to the question whether an investment company can bring an action under § 36(b) of the Investment Company Act of 1940. A Our starting point, as in every case involving construc- tion of a statute, is examination of the language utilized likelihood that negotiations will prove effective is highly speculative. See Blatt v. Dean Witter Reynolds Intercapital, Inc., supra, $28 F.Supp. at 1186 (dictum). In reaching this conclusion, we do not ignore the salutary purpose served by requiring complaining share- holders to first “activate intracorporate remedies,” Mills v. Esmark, Inc., 91 F.R.D. 70, 72 (N.D.1I.1981). Rather we conclude that a demand will not be mandated unless, should intracorporate efforts prove insufficient, the corporation itself may bring suit. /d. (quoting Hawes v. Oakland, 104 U.S. 480, 460-61, 26 L.Ed. 827 (1882)). 8 Equity Rule 94 provided, in relevant part: Every bill brought by one or more stockholders in a corporation against the corporation and other parties founded upon the rights which may properly be asserted by the corporation . . . must. . . set forth with particularity the efforts of the plaintiff to secure such action as he desires on the part of the managing directors. . . Eq.R. 94, 104 U.S. ix (1882) (emphasis added). 2la by Congress. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197, 96 S.Ct. 1375, 1382, 47 L.Ed.2d 668 (1976). The second sentence of § 36(b) is quite clear that an action may be brought under that subsection only “by the [Securities and Exchange] Commission, or by a security holder of [a] registered investment company on behalf of such company.”” No action by the investment company is 9 The full text of § 36(b) is as follows: 1S U.S.C. § 80a-35. Breach of fiduciary duty (b) 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 pay- ments, for breach of fiduciary duty in respect of such compensation or payments paid by such registered invest- ment 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 pay- ments, 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 circum- stances. (3) No such action shail be brought or maintained against any person other than the recipient of such compensation or 22a authorized. When Congress has provided specific and elaborate enforcement provisions, and entrusted their use to particular parties, we will not lightly assume an unex- pressed intention to create additional ones. See Middlesex County Sewerage Auth. v. National Sea Clammers Ass’n, 453 U.S. 1, 13-18, 101 S.Ct. 2615, 2622-2624, 69 L.Ed.2d 335 (1981). Appellee points to the words “on behalf of such com- pany,” and argues they demonstrate that the right of the shareholder created by § 36(b) is derivative, and therefore the director demand requirement of Rule 23.1 applies, as it does to other “derivative” actions in the federal courts. The words “on behalf of” do not create by implication a statutory right of the company itself to sue, from which the stockholders’ right may be said to be “derivative.” payments, and no damages or other relief shall be granted against any person other than the recipient of such compen- sation or payments. No award of damages shall be recover- able 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 80a-17 of this title, or rules, regulations, or orders thereunder, or to sales loans for the acquisition of any security issued by a registered investment company. (S$) 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 subchapter for the purposes of sections 80a-9 and 80a-48 of this title, section 780 of this title, or section 80b-3 of this title, or (B) for an injunction to prohibit any person from serving in any of the capacities enumerated in subsection (a) of this section. 23a These words, which apply as much to the Securities and Exchange Commission as to a private security holder, signify only that either party so entitled to bring an action under § 36(b) must do so to seek return of excessive management fees to the company treasury and not to individual or governmental coffers. The action is not, strictly speaking, “derivative” in the sense of deriving from a right properly asserted by the corporation, but rather constitutes individual security holders as “private attorneys general” to assist in the enforcement of a duty imposed by the statute on investment advisers. We recognize that the one Court of Appeals to have considered the question reached a different conclusion. Grossman vy. Johnson, 674 F.2d 115 (1st Cir.), cert. denied, ___._ U.S. , 103 S.Ct. 85, 73 L.Ed.2d— (1982). In rejecting the argument that because § 36(b) explicitly provides for, it therefore only permits, suit by the SEC or a security holder, the First Circuit stated: We cannot believe, however, that, for example, a new and independent board of directors, intent on recov- ering excessive fees from an investment adviser, would be precluded from suing under section 36(b). Id. at 120. Equally cogent is our belief that this situation was regarded as so remote or unlikely that the legislature chose not to provide for it, and was wary of permitting the Fund to control the suit, see Burks v. Lasker, 441 U.S. 471, 483-84, 99 S.Ct. 1831, 1839-1840, 60 L.Ed.2d 404 (1979). Moreover, the Grossman court offers scant support for its conclusion that the Fund may sue. It refers, first, to the ‘ton behalf of’’ language in the statute. We have already indicated the meaning we attach to that phrase. Similarly, we are unpersuaded by the argument that ‘‘Congress could well have believed that, 24a though it was appropriate to specify that the Commission and shareholders had the new statutory cause of action[,] . . it Was unnecessary to say with particularity that the company also did.’* /d. This seems totally inconsistent with what we would expect Congress to have done. If Congress had intended to provide the company with a cause of action, it would have passed a statute saying so, in which case the derivative right of a shareholder to initiate suit would have followed automatically. A mere statement of what Congress ‘‘could have believed’ seems to us not enough. Congress has not expressed, anywhere at all, the policy appellee would have us adopt. Moreover, as the First Circuit itself notes, § 36(b)(3) ‘*‘directly forbids’’ an action against any person ‘‘other than the recipient of . . . compensation or payments [for adviser services].’’ Yet, the opinion relies on the proceed- ing in that case having been brought against ‘‘forbidden”’ defendants (the ‘‘disinterested’’ directors and the Fund itself) as support for its conclusion that a § 36(b) suit is a typical derivative suit. The idea, apparently, is that Grossman was operating under the assumption that a § 36(b) action is the standard derivative action, in which the complaining shareholder would join the company and its directors, ‘‘in the ordinary fashion,’ after the corpo- ration had declined to initiate the suit as a plaintiff. See H. Henn, Handbook of the Law of Corporations and Other Business Enterprises § 358 at 750 (2d ed. 1970). It is difficult to understand how a defect in a pleading—or a misreading of § 36(b)—can take precedence over the clear dictates of a statute. The language of a statute controls when sufficiently clear in its context. Ernst & Ernst v. Hochfelder, supra, 425 U.S. at 201, 96 S.Ct. at 1384. Nevertheless, mindful 2Sa of our obligation to supplement application of rules of Statutory construction by searching for ‘‘persuasive evi- dence of a contrary legislative intent,’’ Transamerica Mortgage Advisors, Inc. v. Lewis, supra, 444 U.S. 11 at 21, 100 S.Ct. 242 at 247, 62 L.Ed.2d 146 we move now to an examination of the legislative history of § 36(b). B Prior to enactment of the Investment Company Act of 1940, open-end investment companies,’” or mutual funds, played a minor role in the world of finance. In 1940, investment companies held assets of approximately $2.1 billion; of this sum, mutual funds accounted for $450 million. 1/966 SEC Report 2. The 1940 Act was directed at the most flagrant self-dealing and other abuses within the investment company industry. See United States v. Deutsch, 451 F.2d 98, 108 (2d Cir. 1971), cert. denied, 404 U.S. 1019, 92 S.Ct. 682, 30 L.Ed.2d 667 (1972). It prohibits, for example, most transactions between invest- ment companies and their advisers. 15 U.S.C. § 80a-17. Generally, the Act requires at least forty percent of a fund's board of directors to be ‘‘unaffiliated’’ with the adviser, and it mandates that payment for management and other investment advice be the subject of a contract between the fund and the adviser which has received both shareholder and director approval, 15 U.S.C. § 80a-15(a), (c). Moreover, a duty is imposed on the directors of a fund to evaluate the terms of the adviser contract. 15 U.S.C. 80a-15(c). 10 An “open-end” company is one which continually offers shares for sale and will redeem outstanding shares at their propor- tionate net asset value. 1§ U.S.C. § 80a-S(a)(1). 26a The 1940 Act proved most successful in controlling the serious problems covered by its broad brush approach. Indeed, an ironic measure of its success has been the public’s growing confidence in the investment company industry, which led to a period of extraordinary growth in the number of investors and in net asset levels of the funds. In turn, this expansion created a specific and largely unforeseen problem. Because adviser fees are usually calculated at a percentage of a fund’s net assets, and vary in proportion as portfolio value goes up or down, a period of sustained industry success would—and did—yield substantially increased fees. But the Act ‘‘did not provide any mechanism by which the fairness of management contracts could be tested in court.’’ S.Rep. No. 184, 91st Cong., Ist Sess. 5 (1969), reprinted in 1970 U.S. Code Cong. & Ad.News at 4901. What the drafters of the 1940 Act did foresee, in a general way, was the possibility that the future success of the industry might entail the need for statutory change. As a result, a section of the original statute provided (and still states) that the SEC may study the ramifications of ‘‘any substantial further increase in size of investment companies . . . involving the protection of investors or the public interest,’ and present recommendations for legislative change. 15 U.S.C. § 80a-14(b). Accordingly, in 1958, the Commission authorized the securities research unit of the Wharton School of Finance and Commerce of the University of Pennsylvania to study investment com- panies and report its findings. The Wharton Report identified the salient issues, but made no proposals. Subsequently, the Commission undertook further re- search, and presented the results and recommendations for detailed amending legislation in its Report on the = 27a Public Policy .Implications of Investment Company Growth, transmitted to Congress in 1966. The 1/966 SEC Report reiterated the Wharton unit's findings. It concluded that mangement fees tended to be fixed at the traditional level of one-half of one percent of the fund’s net assets. It noted that they markedly ex- ceeded fees charged by investment advisers to other insti- tutional clients and the cost of management to those funds which manage themselves. Moreover, no evidence existed to demonstrate a willingness on the part of the advisers to provide services at a ‘‘reasonable’’ rate, not necessarily a percentage of assets. The Report further stated that the 1940 Act was not equipped to deal with this emerging problem, and that shareholder suits, al- though occasionally forcing settlements, basically had been ineffective. 1966 SEC Report 84-149. To deal with this issue, the SEC recommended amending the Act to require that mangement fees be ‘treasonable.’’ Reason- ableness was to be determined by reference to various criteria, including the fees paid for similar services by like institutions, the nature and quality of services rendered, and any other factors determined to be appropriate in the public interest. The SEC was to have an enforcement action available to it (as in fact it does under present § 36(b)), and would also possess the right to intervene in private shareholder suits. /d. at 143-47. Nowhere does the Report mention an action brought by the investment company itself. The standard of ‘‘reasonableness’’ proposed in the 1966 SEC Report was contained in the first bills consid- ered by Congress, H.R.9510, 90th Cong., Ist Sess. § 8(d) (1967) and S.1659, 90th Cong., Ist Sess. § 8(d) (1967). Not surprisingly, it was met by vigorous industry opposi- 28a tion, see generally Hearings on §.1659 Before the Senate Comm, on Baking and Currency, 90th Cong., Ist Sess., pt. 1, at 191-201 (°'/967 Senate Hearings’’); Investment Company Act Amendments of 1967; Hearings on H.R.9510, H.R.9511 Before the Subcomm, on Commerce and Finance of the House Comm. on Interstate and Foreign Commerce, 90th Cong., Ist Sess., ser, 90-21, pt, 1, at 237-43 (1967) (statemeni of John R. Haire, chair- man-elect, Investment Company Institute), and neither bill passed. The industry claimed fees were already rea- sonable, the legislation would encourage ‘‘strike’’ suits, and the SEC would be empowered to regulate a competi- tive industry. 1/967 Senate Hearings at 191-92, 202. In one sense, of course, the relative merits of each side of this debate are irrelevant. The ultimate passage of § 36(b) settled the issue and expressed the legislative conclusion that imposing a ‘‘fiduciary duty’’ and leaving its exegesis to the judiciary'' provided the best solution. This decision represented the compromise reached by industry repre- 1] E.e@., 1§ U.S.C, § 80a-35(b)(2); see 1967 Senate Hearings at 1016: It is for Congress to decide in each case just what mix of administrative and judicial participation is best adapted to the problem in hand. One end of the spectrum provides more in administrative expertise and uniformity, the other more in those qualities of restraint, freedom from bureaucratic rigid- ity, Open-mindedness and good sense that judges like to believe are special attributes of courts. (Statement of Judge Henry J. Friendly) The quoted language goes to the question whether case-by-case judicial evaluation of allegations of excessive adviser fees, on the one hand, or an administrative procedure which would also weigh in- dustry-wide factors, on the other, is best suited to adjudication of shareholder complaints. Congress apparently believed, along with my brother Friendly, that courts possessed sufficient good qualities to make them appropriate forums in which § 36(b) complaints might be heard. 29a sentatives and the SEC. See Hearings on H.R.11995, §.2224, H.R.13754, H.R.14737 Before the Subcomm, on Commerce and Finance of the House Comm, on Inter- state and Foreign Commerce, 91st Cong., Ist Sess., ser. 91-33, pt. 1, at 138 (1969) (''/969 House Hearings’’), On the other hand, that the focus of legislative inquiry, from the introduction of the first bills through a period of several years until enactment, remained fixed on this question, is of special significance for our purpose. The normal conclusion to be drawn from intensive—and ex- clusive—Congressional scrutiny of a particular subject is that Congress did not concern itself with others. Put differently, if the voluminous legislative history of § 36(b) and its unsuccessful predecessors persuades us that Con- gress’s first order of business was now to make share- holder suits (and SEC enforcement actions) effective, rather than whether it might also be useful to sanction suit by a fund, we would be hard-pressed to conclude that Congress intended to empower the courts to permit a fund to sue. It is obviously difficult, under the best of circum- stances, to prove a negative. Because the extensive legisla- tive history of § 36(b) neither approves nor disapproves suits brought directly by mutual funds, it cannot be shown to a certainty (and perhaps never to the satisfac- tion of those disposed to believe otherwise) that Congress foreclosed their use of the section. What can be shown, in this instance, ‘s that the Congressional approach to a specific problem—excessive adviser fees—consisted of, first, identifying the source of that problem; next, deter- mining why the 1940 Act, in other respects effective, had been and would continue to be incapable of remedying it; and finally, amending the relevant portion of the Act. If, therefore, the source of the problem is inconsistent with a 30a corporate right of action as a solution, we can say with confidence that Congress never intended to create one. Moreover, if the flaw in the 1940 Act was unrelated to the unavailability of a suit by the fund, our conclusion becomes virtually certain, since we know that the statu- tory lacuna was filled by a provision conspicuous for its failure to name the fund as a potential plaintiff. Several years of careful study indicated that the prob- lem derived from the peculiar nature of the mutual fund industry (seen in light of its rapid growth): Mutual funds, with rare exceptions, are not oper- ated by their own employees. Most funds are formed, sold, and managed by external organiza- tions, that are separately owned and operated. These separate organizations are usually called investment advisers. The advisers select the funds’ investments and operate their businesses. For these services they receive management or advisory fees. These fees are usually calculated at a percentage of the funds’ net assets and fluctuate with the value of the funds’ portfolio. Because of the unique structure of this industry the relationship between mutual funds and their invest- ment adviser is not the same as that usually existing between buyers and sellers or in conventional cor- porate relationships. Since a typical fund is or- ganized by its investment adviser which provides it with almost all management services and because its shares are bought by investors who rely on that service, a mutual fund cannot, as a practical matter sever its relationship with the adviser. Therefore, the forces of arm's-length bargaining do not work in the 3la mutual fund industry in the same manner as they do in other sectors of the American economy. It is noted . . . that problems arise due to the economies of scale attributable to the dramatic growth of the mutual fund industry. In some in- stances these economies of scale have not been shared with investors. Recently there has been a desirable tendency on the part of some fund man- agers to reduce their effective charges as the fund grows in size. Accordingly, the best industry practice will provide a guide. S.Rep. No. 184, 91st Cong., Ist Sess. 5-6 (1969), re- printed in 1970 U.S. Code Cong. & Ad. News at 4901-02; see also 1966 SEC Report 131; H.R.Rep. No. 1382, 91st Cong., 2d Sess. 7 (1970); Galfand v. Chestnutt Corp., 545 F.2d 807, 808 (2d Cir. 1976). Additionally, the requirement that a percentage of the directors of the investment company be ‘‘independent”’ of the adviser and underwriter, 15 U.S.C. § 80a-10, and that they annually approve the adviser contract, 15 U.S.C. § 80a-15, cannot seriously be expected to induce arm's-length bargaining. As the SEC long ago recog- nized, any so-called independent directors would ‘‘ob- viously have to be satisfactory to the dominating stockholders who are in a position to continue to elect a responsive board.’’ Petroleum & Trading Corp., 11 S.E.C. 389, 393 (1942); see 1969 House Hearings, ser. 90-22 at 696-97 (testimony of SEC Chairman Manuel F. Cohen). 32a In sum, the root of the excessive adviser fee problem is basically incompatible with a corporate right of action as an effective solution. We believe the Senate Committee on Banking and Currency (referring to the pill eventually passed) had in mind exactly the plaintiffs it named and no others when it stated: **[Y]our committee has adopted the basic principle that, in view of the potential conflicts of interest involved in the setting of [adviser] fees, there should be effective means for the court to act where mutual fund shareholders or the SEC believe there has been a breach of fiduciary duty.’’ S.Rep. No. 184, 91st Cong., Ist Sess. 1 (1969), reprinted in 1970 U.S. Code Cong. & Ad.News at 4898. Neither the parties’ briefs nor Our own research has disclosed any indication in the comprehensive legislative history of § 36(b) that suits by directors themselves were to be expected or encouraged: Although we agree with Judge Duffy that Congress in- tended the directors would perform a ‘‘watchdog’’ func- tion, see also Burks v. Lasker, supra, 441 U.S. at 484, 99 S.Ct. at 1840; Boyko v. Reserve Fund, Inc., supra, 68 F.R.D. at 695-96 n.2, it defies logic to conclude their contemplated role included suing their advisers. Moreover, the 1940 Act was not deficient or ineffective because a fund could not use it. By the time consideration of the 1970 Amendments was at hand, it had become clear that shareholders were hard pressed to prove a ‘*gross abuse of trust,’ the standard of old § 36. Saxe v. Brady, 40 Del.Ch. 474, 184 A.2d 602 (1962) (Seitz, Ch.), decided under traditional corporate law concepts, pro- vided the model adhered to by federal courts in suits alleging excessive management fees. See Kurach v. Weiss- man, 49 F.R.D. 304, 305-06 (S.D.N.Y. 1970). In Saxe, mutual fund shareholders challenged adviser fees amounting to one-half of one percent of net assets. The 33a adviser contract had been approved almost unanimously by the shareholders. Chancellor Seitz (now Chief Judge of the Third Circuit Court of Appeals) concluded that the adviser fee level must be evaluated according to the usual legal rules applicable to shareholder ratification cases: When the stockholders ratify a transaction, the interested parties are relieved of the burden of prov- ing the fairness of the transaction. The burden then falls on the objecting stockholders to convince the court that no person of ordinary, sound business judgment would be expected to entertain the view that the consideration was a fair exchange for the value which was given. Saxe v. Brady, supra, 40 Del.Ch. at 486, 184 A.2d at 610. In concluding that plaintiffs must show “actual waste,” or a fee level so high as to be “unconscionable,” id., the Chancellor noted that a 0.5% adviser fee rate was com- mon and that the shareholders had approved the adviser contract virtually unanimously. /d. at 489, 184 A.2d at 611-12. Since these determinative factors were inevitably present, showing “actual waste” and overcoming a pre- sumption of “sound business judgment” was well nigh impossible. Kurach v. Weissman, supra, 49 F.R.D. at 305-06; Goodman v. Von Der Heyde, [1969-1970 Transfer Binder] Fed.Sec.L.Rep. (CCH) € 92,541 (S.D.N.Y.1969); Lessac v. Television-Elecs. Fund, [1967-1969 Transfer Binder] Fed.Sec.L.Rep. ¢ 92,305 (S.D.N.Y.1968); see Ro- senfeld v. Black, 445 F.2d 1337, 1345-46 (2d Cir.1971). Recognizing that shareholder plaintiffs had difficulty sus- taining their burdens, Congress changed only the stan- dard of duty. Cf. Burks v. Lasker, supra, 441 U.S. at 483-84, 99 S.Ct. at 1839-1840 (1979). 34a Despite the long odds, shareholders did sue for return of allegedly excessive fees. Starting in 1959, over fifty suits were instituted under common law principles and pursuant to the 1940 Act. /966 SEC Report 132. What happened is instructive. Advisers were sometimes willing to settle, because even Save left open the possibility that the point might be reached at which “profits outstripp[ed] any reasonable relationship to expenses and effort even in a legal sense.” 40 Del.Ch. at 498, 184 A.2d at 616-17. Given the substantial sums at stake, this willingness is not surprising. For precisely the opposite reason—that is, the slim likelihood of success on the merits—courts felt constrained to approve settlements, even when the terms were something less than desirable. E.g., Jurach vy. Weissman, supra, 49 F.R.D. at 305. This confluence of inconsistent, but complementary, motives resulted in reduction of adviser fees in individual cases, but the effect on the industry as a whole was insignifi- cant. In 1967, SEC Chairman Manuel Cohen noted that “(tlhe median advisory fee paid by the 59 externally managed mutual funds with net assets of $100 million or more in fiscal years ending in 1966 was still 0.48 percent, down only 0.02 percent from the traditional 0.50 percent rate.” 1967 Senate Hearings, pt. 1, at 14-15. Obviously, the pressure to settle was analytically unrelated to the identity of the plaintiff. Our retracing of the analysis employed by Congress, and of its extensive documentation, persuades us that an investment company was not intended to possess a right of action under § 36(b). The relationship of a Fund to its adviser makes it a part of the problem in a way that precludes it from being part of the solution, at least at the 3Sa litigation stage. The provision for evaluation of the ad- viser contract, 15 U.S.C. § 80a-15(c), and the general tightening of the powers of disinterested directors, e.g., 15 U.S.C. §§ 80a-2(a)(19); 80a-10(a); 80a-15(c), provide for “an independent check on management. . . and the representation of shareholder interests in investment com- pany affairs,” S.Rep. No. 184, 91st Cong., Ist Sess. 32 (1969), reprinted in 1970 U.S.Code Cong. & Ad.News at 4927. We take this language to be nothing more nor less than a declaration by Congress that it was imposing duties on the directors to run the ongoing business of the Fund in a responsible manner, and with due regard for investors. Cf. United States v. National Ass’n of Sec. Dealers, 422 U.S. 694, 705 n. 13, 95 S.Ct., 2427, 2436 n. 13, 45 L.Ed.2d 486 (1975)(1940 Act concerned with im- posing controls on “internal management [and] practices of investment companies”). These functions and duties having proved ineffective in a particular case, at least in the eyes of the complaining shareholder plaintiff, the iss'ie for Congressional scrutiny was how to particularize the already existing statute to make judicial relief a genuine possibility. Experience with shareholder suits had demonstrated that the Saxe standard, drawn from pre-ex- isting corporate law principles but applied to the invest- ment company industry, was useless. The fiduciary duty standard was imposed, and courts were empowered to view “all the circumstances,” 15 U.S.C. § 80a-35(b)(2). The extensive number of suits brought under the earlier, less favorable law suggested that shareholders would move with alacrity pursuant to the new one. Given the nature of the problem and reasons for the 1940 Act’s failure to remedy it, creating a corporate right of action 36a would have made little sense and we conclude Congress never intended to do so.”* We have not as yet considered the applicability of Rule 23.1 head-on. Instead, we posed the analytically prece- dent question, whether a Fund may use § 36(b), and thereby trigger the rule. Our answer, that Rule 23.1 does not apply because the Fund has no right of action, renders superfluous any extensive discussion of the policy behind requiring demand. Nonetheless, because we be- lieve neither policy nor logic compels application of the demand requirement to actions for return of excessive adviser fees, we briefly discuss the distinctiveness of § 36(b). Unlike the board in the common variety of derivative Suit, the directors have no power to terminate a § 36(b) action. Other provisions of the Investment Company Act. e.g., 1S U.S.C. § 80a-13(a)(3), governed by state rules to the extent they are not inconsistent with federal law, leave unanswered the question whether independent directors of an investment company may terminate suit. Burks v. Lasker, supra, 441 U.S. at 483-86, 99 S.Ct. at 1839-184!. “[W)hen Congress . . . intend[ed] to prevent board ac- tion from cutting off derivative suits, it said so expressly. Section 36(b) . . . , added to the act in 1970, performs precisely this function. . . .” Jd. at 484, 99 S.Ct. at 1840 (citation omitted). Since directors cannot cut off a suit 12 We agree with the First Circuit, Grossman v. Johnson, supra, 674 F.2d at 121, that debate over the legislative history “end[s] in a draw,” but we proceed under a different assumption, that § 36(b) does not permit an action by the investment company, and reach the opposite conclusion that Congress intended no demand requirement would apply. 37a and § 36(b) does not authorize them to institute one, and because shareholder plaintiffs are necessarily challenging fees the directors evaluated and approved, 15 U.S.C. § 80a-15; see Rosenfeld v. Black, supra, 445 F.2d at 1345, the traditional reason for the demand requirement simply does not apply. See Note, The Demand and Standing Requirements in Stockholder Derivative Actions, 44 U.Chi.L.Rev. 168, 171-72 (1976)."° Moreover, although requiring demand normally im- poses only minor hardship on the complaining share- holders, in a § 36(b) suit the consequences can be severe. Section 36(b) expressly limits recovery to excessive fees paid up to one year prior to the commencement of suit. 15 U.S.C. § 80a-35(b)(3). The demand requirement im- plies a reasonable time in which directors may analyze the issues and determine whether they believe the company has a grievance. The delay caused by this process would, in many cases,’* have the untoward result of precluding 13 One court, analogizing Burks v. Lasker, concluded that the question whether a board of directors is sufficiently “interested” in the challenged transaction to excuse demand shall be resolved by reference to “the same factors used to determine whether a court should defer to the board’s decision not to pursue the action” Lewis v. Curtis, supra, 671 F.2d at 785. Under this view, the termination and excuse issues are functions of the same indicia of “interested- ness.” Burks may be regarded as recognizing the Congressional determination that directors in § 36(b) actions are never sufficiently disinterested to permit them to terminate suit, 441 U.S. at 484, 99 S.Ct. at 1840. Viewing these two principles in tandem, it is possible to infer that Congress also believed directors would always be so “interested” that demand would inevitably be “excused.” This is but another way of saying Congress intended that § 36(b) suits would be exempt from Rule 23.1. 14 — At oral argument, Fox’s counsel referred to the case where the fund may have awarded a substantial one-time payment for allegedly remarkable services. No doubt other examples could be cited. 38a full recovery of excessive fees while the directors deter- mined whether they had acted against the interests of the shareholders in approving the contract initially. We do not believe Congress was unaware of this pitfall. IV In a different contest, Justice Jackson eloquently described the origin and rationale of the derivative suit: Equity came to the relief of the stockholder, who had no standing to bring civil action at law against faithless directors and managers. Equity, however, allowed him to step into the corporation's shoes and to seek in its right the restitution he could not demand in his own. It required him first to demand that the corporation vindicate its own rights, but when, as was usual, those who perpetrated the wrongs also were able to obstruct any remedy, equity would hear and adjudge the corporation’s cause through its stockholder with the corporation as a defendant, albeit a rather nominal one. This remedy, born of stockholder helplessness, was long the chief regulator of corporate management and has afforded no small incentive to avoid at least grosser forms of betrayal of stockholders’ interests. It is argued, and not without reason, that without it there would be little practical check on such abuses. Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548. 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949). In holding that a Rule 23.1 demand will not be required in a shareholder Suit brought pursuant to § 36(b) of the Investment Com- pany Act, we do not ignore the appropriateness, in the typical derivative suit alleging corporate wrongdoing, of first asking the corporation to “vindicate” what are, after 39a all, “its own rights.” We conclude, however, that in the unique context of a § 36(b) lawsuit, the shareholder need not afford the fund an opportunity to vindicate its rights because such a requirement would be an empty, unfruitful and dilatory exercise. The judgment of the district court is reversed and the case is remanded. Decision of the Court of Appeals for the First Circuit in Grossman v. Johnson 4la os No. 81-1348. United States Court of Appeals, First Circuit. Argued Nov. 5, 1981. Decided March 29, 1982. —s STANLEY M. GROSSMAN, Plaintiff-Appellant, — a EDWARD C. JOHNSON, 3rd, et al., Defendants-Appellees. + Shareholder brought derivative action on behalf of investment fund. The United States District Court for the District of Massachusetts, Joseph L. Tauro, J., dismissed the suit, 89 F.R.D. 656, and plaintiff appealed. The Court of Appeals, Davis, Judge, sitting by designation, held that: (1) in adding amendment to Investment Company Act to prescribe separate statutory claim for excessive advisory fees to investment adviser, Congress neither repealed nor limited demand provision of rule, under which complaint to enforce right of corporation or unin- corporated association must allege with particularity ef- forts if any made by plaintiff to obtain action he desires from directors or comparable authority and, if necessary, 42a from shareholders or members, and reasons for failure to obtain such action or for not making the effort; (2) where shareholder claims to be excused from compliance with such rule requirement, proper excuse of control or domination calls for particularized allegations and spe- cific facts, and mere “participation” or “acquiescence” by directors in level of challenged advisory fees is insuffi- cient excuse where corporate activity is normal one of setting and paying advisory fees, and allegation that directors had already announced firm opposition to suit was equally unavailable where disinterested directors’ position did not preclude their first consideration of plaintiff's demand; and (3) on claim of failure to recap- ture excessive underwriting commissions, discounts and spreads paid by fund on its purchases of securities, shareholder's allegations of excuse for failing to make demand before bringing suit, i.e., that directors all had conflict of interest, was insufficient. Affirmed. > Richard M. Meyer, Washington, D.C., with whom Avram G. Hammer, Boston, Mass., and Milberg, Weiss, Bershad & Specthrie, New York City, were on brief, for appellant. James S. Dittmar, Boston, Mass., with whom Berman, Dittmar & Engel, P. C., Boston, Mass., was on brief, for appellees Edward C. Johnson, 3d, et al. E. Milton Farley, III, Richmond, Va., with whom Sumner H. Babcock, E. Susan Garsh, Bingham, Dana & Gould, Boston, Mass., John W. Riely, Joseph C. Kearfott 43a and Hunton & Williams, Richmond, Va., were on brief, for appellees Dwight L. Allison, Jr., et al. Jerome P. Facher, Boston, Mass., with whom Harry T. Daniels, James R. Gomes, Hale & Dorr, Peter M. Sa- paroff, and Gaston Snow & Ely Bartlett, Boston, Mass., were on brief, for appellee Fidelity Municipal Bond Fund, Inc. Richard A. Kirby, Sp. Counsel, Washington, D. C., with whom Ralph C. Ferrara, Gen. Counse!, Paul Gon- son, Sol., Edward F. Greene, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Robert Mills and Louis C. Whitsett, Attys., Washington, D.C., were on briefs, for the Securities and Exchange Commission, amicus curiae. + Before CAMPBELL, and Bownes, Circuit Judges, and Davis,* Judge. + Davis, Judge. Plaintiff-appellant Stanley M. Grossman brought this derivative action in the District Court for Massachusetts, under the Investment Company Act of 1940, as amended, 15 U.S.C. §§ 80a-1 ef seg. (1976) (the Act).' He is and has been a shareholder of Fidelity Municipal Bond Fund, Inc. (“the Fund”), a registered open-end investment com- ° Of the United States Court of Claims, sitting by designation. l For the purposes of our iimited disposition, we rest on facts alleged by plaintiff in his amended complaint, and merely capsule the facts and proceedings. t4ta pany, and he sues the Fund's investment adviser, Fidelity Management & Research Company (“FMR”), the corpo- ration that is the sole owner of that adviser (“FMR Corp.”), the affiliated directors of the Fund, as well as most of the unaffiliated directors (whom we shall call “disinterested”).* Against these defendants, Grossman makes two charges: (a) breach of fiduciary duty to the Fund with respect to the allegedly excessive amount of advisory fees paid to FMR by the Fund; and (b) breach of fiduciary duty to the Fund by failing to recapture (or have recaptured) excessive underwriting commissions, dis- counts and spreads paid by the Fund on its purchases of securities. Before instituting the suit, plaintiff made no demand on the Fund or its directors to bring or prosecute an action on either of these two bases. Defendants moved to dismiss the complaint, asserting, as One point, that plaintiff had failed to comply with Rule 23.1 of the Federal Rules of Civil Procedure, governing demand by shareholders in derivative actions. During the lengthy argument on those motions, the District Court Suggested that it might be advisable, it might even end the controversy, for plaintiff to send a demand letter to the directors specifying his position, although the litigation had already commenced. After consideration, plaintiff did make such demand. The District Court then stayed action on the motion and ordered the “disinterested” directors’ to review the 2 The “affiliated” directors own 5% or more of the shares of FMR Corp. and are officers and directors of FMR. The “unaffi- liated” directors do not have those connections with FMR and FMR Corp. 3 These were the “unaffiliated” director defendants, plus one unaffiliated director who had not been sued though he had previously 48a demand and report back to the court. These directors delegated responsibility to a Special Committee composed of the two directors who were not defendants (see note 3, supra). The latter retained a former Chairman of the Securities and Exchange Commission (and his outside law firm) to make a study and render a report on the issues presented by plaintiff's demand. A lengthy report was made, concluding that there had been no statutory viola- tion or breach of fiduciary duty on either branch of the suit, and recommending that the Special Committee seek to have this suit dismissed. The Committee accepted that recommendation. Defendants then moved to dismiss the amended compa- lint,* and, alternatively, for summary judgment, urging two grounds which the District Court considered: (a) the failure to make a proper and timely demand, and (b) the court should accept the Special Committee’s good faith “business judgment” that the suit should be terminated. In the decision now before us, the District Court accepted both of these contentions, alternatively. 89 F.R.D. 656 (1981). Judgment was entered for defendants. For the reasons to be given in Parts I, II and III of this opinion, we affirm on the former ground, by-passing the latter. Rule 23.1 of the Rules of Civil Procedure (“Derivative Actions by Shareholders”) declares: joined the board, and one unaffiliated director who became a board member after the suit had been brought (and accordingly was not sued). 4 In the course of the proceedings plaintiff had been permitted to file an amended complaint. 46a In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder or member at the time of the transaction of which he complains or that his share or membership thereafter devolved on him by operation of law, and (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. The deriva- tive action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders or members similarly situated in enforcing the right of the corporation or association. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs. Plaintiff urges that Rule 23.1 is wholly inapplicable to that portion of his case charging the payment of excessive advisory fees to the investment adviser (FMR), which is brought under the special provisions of section 36(b) of 47a the Act, 15 U.S.C. § 80a-35(b)(1976). In this segment of our opinion we consider that contention.* Section 36(b), added in 1970, prescribes a separate statutory claim for excessive advisory fees to an invest- ment adviser.” The Securities and Exchange Commission 5 Plaintiff also says that, even if Rule 23.1 applies, he was excused from making a demand on the directors for this aspect of his complaint. We discuss that point in Part Il, infra. As for the recapture of commissions, Grossman does not argue that Rule 23.1 is wholly inapplicable; he mainly says, instead, that he was excused from making a demand. We also consider that argument in Part II, infra. On both sectors of his case, plaintiff insists, in addition, that the demand he made after the beginning of the suit was adequate compliance with Rule 23.1. Part III, infra, deals with that premise. The Securities and Exchange Commission, which participated in this appeal as amicus curiae, takes no position on the applicability of the demand provisions of Rule 23.1 or the alleged excuses for noncompliance. 6 The relevant parts of section 36(b) read: “(b) 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 pay- ments [including directors], 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. 48a and security holders of the investment company are specifically authorized to sue “on behalf of such com- pany” to recover such fees. The section (among other limitations) places on the plaintiff the burden of proof of showing a breach of fiduciary duty, restricts monetary relief to actual damages and to the persons receiving such compensation, establishes a one-year statute of limita- tions on recovery, and provides that approval or ratifica- tion by the paying company’s directors of the compensation to the investment adviser “shall be given such consideration by the court as is deemed appropriate under all the circumstances.” There is no express reference to Rule 23.1 or to demand by the suing shareholder, but plaintiff gives several rea- sons why, in his view, the structure, terms, and purpose of the provision show that the Rule is wholly inapplicable to such excessive fee suits. We divide these arguments into (2) In any such action approval by the board of directors of such investment company of such compensation or pay- ments, 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 appropri- ate 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 compen- sation or payments. No award of damages shall be recover- able 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.” 49a three groups, first, those that we believe to have little merit, second, those that have substantial weight but are subject to countervailing arguments which likewise have merit, and then we discuss the considerations we believe to tip the balance against plaintiff on this question. A.l. Appellant says initially that Rule 23.1 must be wholly inapplicable because, though the statute says that suit must be brought on behalf of the investment com- pany and in that sense is a “derivative” action, section 36(b) does not permit an action by the investment com- pany itself (but only by the SEC or a security holder). We cannot believe, however, that, for example, a new and independent board of directors, intent on recovering excessive fees from the investment adviser, would be precluded from suing under section 36(b)." That section is explicit that recovery by a shareholder is to be on behalf of the investment company and that his suit must be brought on the same behalf. With those clear require- ments, Congress could well have believed that, though it was appropriate to specify that the Commission and shareholders had the new statutory cause of action under section 36(b), see Moses v. Burgin, 445 F.2d 369, 373 n.7 (Ist Cir. 1971), it was unnecessary to say with particular- ity that the company also did. A suit “on behalf of such 7 The first sentence of Rule 23.1, supra, requires that “the corporation or association [shall have] failed to enforce a right which may properly be asserted by it” (emphasis added). x One reason why the directors might wish to use section 34(b), instead of employing a more conventional corporate suit, is that subsection (1) expressly removes the need to allege or prove “personal misconduct” on the part of any defendant. In addition, the general standard for recovery might be easier under section 36(b) than in a non-statutory action. 50a company” (a phrase which is more than merely one “for the benefit of the company”) is normally a derivative action that the company could itself bring. Plaintiff, whose complaint and amended complaint both allege that he brings this action “derivatively on behalf of the Fund,” seems to have originally agreed that his suit under this section could have been brought by the Fund. Although subsection (3) directly forbids an action under section 36(b) 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”—barring as defendants, in this instance, the “disinterested” directors and the Fund itself—this whole proceeding (including that part under section 36(b)) was brought against those “forbidden” defendants,’ ap- parently on the correct assumption that this is a derivative suit to enforce rights the Fund could itself enforce, and in which the company and its directors should be joined in the ordinary fashion. 2. Another of plaintiff’s points we reject outright is the analogy to section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1976) (“profits from purchase and sale of security within six months”), which has been held excluded from certain non-demand parts of Rule 23.1. Dottenheim v. Murchison, 227 F.2d 737, 739-741 (Sth Cir. 1955), cert. denied, 351 U.S. 919, 76 S.Ct. 712, 100 L.Ed. 1451 (1956); Blau v. Mission Corp., 212 F.2d 77, 79 (2d Cir.), cert. denied, 347 U.S. 1016, 74. S.Ct. 872, 98 L.Ed. 1138 (1954). On the demand point, however, section 16(b) is plainly inapposite because it embodies its 9 This is also true of the amended complaint. Sla own express demand requirement different from that in Rule 23.1.'° If anything, that special demand provision indicates that Congress considered a demand essential for a shareholder suit even though Congress may have dis- pensed with other aspects of what is now Rule 23.1. 3. A related argument we cannot accept is that section 36(b) speaks of suit by a “security holder”, a term which it is said could cover pure debenture holders or other bare creditors who, not being shareholders or members, can- not comply with the demand aspects of Rule 23.1 The simple answer, we think, is that Congress used the general term “security holder” in section 36(b) to cover share- holders of mutual funds and like investors akin to stock- holders, whom Rule 23.1 undoubtedly fits. The phrase was not designed to allow mere creditors to make use of section 36(b)."' B. Plaintiff makes three stronger arguments for total exclusion of the demand requirement of Rule 23.1—but each seems to us to have a substantial counterbalance. 1. Grossman’s chief claim .. that a demand would be futile because the directors, even the “disinterested” ones, cannot by themselves terminate a section 36(b) suit 10 Suit may be brought “if the user shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter * * * " 15 U.S.C. § 78p(b). 11 ~The legislative history of § 36(b) speaks of suits thereunder by “shareholders”. See S.Rep.No. 184, 9lst Cong., Ist Sess., re- printed in [1970] U.S.Code Cong. & Ad.News 4897, 4910; H.R.Rep.No. 2337, 89th Cong., 2d Sess. 143, 146 (1966) (SEC report); 115 Cong.Rec. 13699 (1969); /nvestment Company Act Amendments of 1969: Hearings of the Senate Committee on Banking and Currency, 91st Cong., Ist Sess. 1-2 (1969). S2a through the good faith exercise of reasonable “business judgment”. We do not today decide whether or not the directors are so disabled—but it is undeniable that there are very serious reasons for accepting that proposition. Burks v. Lasker, 441 U.S. 471, 484, 99 S.Ct. 1831, 1840, 60 L.Ed.2d 404 (1979), a case on the directors’ power to terminate a suit under other portions of the Act where section 36(b) was not involved, expressly contrasted the latter provision: “And when Congress did intend to prevent board action from cutting off derivative suits, it said so expressly. Section 36(b), 84 Stat. 1428, 15 U.S.C. § 80—a—35(b)(2), added to the Act in 1970, performs precisely this function for derivative suits charging breach of fiduciary duty with respect to adviser’s fees.”'* The Supreme Court was referring to § 36(b)(2) (note 6, supra) which can easily be read to give the court, rather than the directors, the ultimate power to decide the propriety of the fees. ‘Nevertheless, even on that interpretation of the statute, a demand would not be futile. It would give the indepen- dent directors the opportunity to study the problem and decide whether to accede, in whole or in part, to the complainant’s views. When it added § 36(b), Congress also deliberately strengthened the position of independent directors, including their dealing with advisory fees. See Burks v. Lasker, supra, 441 U.S. at 482-485, 99 S.Ct. at 1839, 1840-1841. They were not designed to be ciphers or to be overlooked. Although the court would decide for itself (on the view we accept arguendo) the merits of the 12. Though this statement may technically have been “dictum” in the sense that Burks did not itself involve section 36(b), the Court's observation formed an integral part of its reasons for holding that the directors had broader powers under other parts of the Act. The statement was by no means gratuitous or obiter. S3a claim of excessive compensation, the independent and disinterested directors still have a substantial role. Surely, their decision to side with the complainant (entirely or in part) would have important consequences, and even their knowledgeable disagreement with the demand might be deemed worthy by the court of grave consideration under §$ 36(b)(2). 2. Plaintiff's appeal to the legislative history (of the 1970 amendments) to show that section 36(b) was ex- empted from the demand requirement of Rule 23.1 seems, at the very best for him, to end in a draw. There was, as he points out, emphasis on the prior ineffective- ness of independent directors with respect to advisory fees, the need for strengthening then section 36, and the significant role of the courts in determining the proper level of fees. See the S. E. C. 1966 Report on Investment Companies, H.R.Rep. No. 2337, 89th Cong., 2d Sess., 131, 143, 146 (1966); Investment Company Act Amend- ments of 1960: Hearings of the Senate Committee on Banking and Currency, 91st Cong., Ist Sess. 1-2 (1969); S.Rep. No. 184, 91st Cong., Ist Sess., 2, 6-7, reprinted in [1970] U.S. Code Cong. & Ad. News 4897, 4898, 4903; 115 Cong.Rec. 13699 (1969). But these themes are all fully consistent with the continued operation of the de- mand part of Rule 23.1, which would not impede or contradict any of the stated purposes. Indeed, the history shows an equal and concurrent stress on the authority and responsibility of the directors. S.Rep. No. 184, 91st Cong., Ist Sess. 7, reprinted in [1970] U.S. Code Cong. & Ad.News 4897, 4903. (“The section [section 36(b)] is not intended to shift the responsibility for managing an in- vestment company in the best interest of its shareholders 54a from the directors of such company to the judiciary”; and “the section is not designed to ignore concepts developed by the courts as to the authority and responsibility of directors”). At the same time, there was a concern to discourage unjustified derivative suits. H.R.Rep. No. 1382, 91st Cong., 2d Sess. 8 (1970); Mutual Fund Amend- ments; Hearings on H.R, 11995, S. 2224, H.R. 13754 and H.R. 14737 Before the Subcomm. on Commerce and Finance of the House Comm, on Interstate and Foreign Commerce, 9\st Cong., Ist Sess. 201, 662, 860 (1969). That aim is closely connected with Rule 23.1, which has such a goal among its functions. When the inquiry narrows down to the continued relevance of the Federal Rules, especially Rule 23.1, there is some direct indication that the Rules were or may have been regarded as barriers to unjustified derivative suits. The Chairman of the Securities and Exchange Commis- sion so reported. /d. at 201 (“ * * * there are adequate safeguards under the Federal Rules of Civil Procedures [sic] and under this bill to prevent unjustified shareholder litigation”); to the same effect, see id. at 860, where the Chairman specifically mentioned “e.g. Rule 23, FRCP” as one of the “sufficient safeguards against frivolous or harassing lawsuits.” Plaintiff cites a comment of another Commissioner disfavoring “the interposition of proce- dural obstacles”, /nvestment Company Act Amendments Act of 1969: Hearings on S. 34 and S. 296 Before the Senate Comm. on Banking and Currency, 9\st Cong., Ist Sess. 30 (1969), but this was a reference, not to the demand requirement of Rule 23.1, but to a proposed provision that a suing shareholder must own a specified percentage of stock or represent a stated amount of the investment fund’s assets. 5Sa 3. Lastly, plaintiff invokes the short one-year limita- tion period on damages" as sufficient reason for exempt- ing § 36(b) cases from the demand provision of Rule 23.1—the time taken by demand-and-response before institution of an action would, it is argued, diminish the period and the amount of recovery. The truth is, however, that ordinarily the demand requirement could change the particular one-year period for which recovery was allow- able but would not reduce the one-year recovery period, and probably not decrease the amount. In the unusual case in which the amount of recovery could actually be reduced by directors’ dawdling or the taking of excessive time to reply to a demand, a district court could allow suit to go forward without awaiting a response. See Mills v. Esmark, Inc., 91 F.R.D. 70, 73 (N.D.II1.1981). C. The residue of our discussion (to this point) is that there is no strong reason for wholly excluding section 36(b) from the demand requirement, or for thinking that Congress intended that result. In subpart A, supra, we have rejected some of plaintiff's contentions outright, and in subpart B we have found that each of his more substantial points has a fair and equivalent counterpoise. The decisive factor, we must conclude, is that there is no persuasive indication that, in adopting section 36(b), Congress wished to repeal or limit the demand provision of Rule 23.1 which has long been a general part of our federal law of practice and procedure, governing almost all derivative actions in federal courts. In the absence of a “clear inconsistency” or a demon- strated congressional purpose to exclude one or more of 13 Section 36(b)(3) (note 6, supra) provides: “No award of damages shall be recoverable for any period prior to one year before the action was instituted.” S6a the Federal Rules, “a subsequently enacted statute should be so construed as to harmonize with the Federal Rules if that is at all feasible.” 7 Moore’s Federal Practice, € 86.04[4] at 86-22 (2d ed. 1980); United States v. Gustin- Bacon Division, Certain-Teed Products Corp., 426 F.2d $39, $42 (10th Cir.), cert. denied, 400 U.S. 832, 91 S.Ct. 63, 27 L.Ed.2d 63 (1970); see also, 4 C. Wright & A. Miller, Federal Practice & Procedure, § 1001 at 30-31 (1969 ed.)'* That harmonization is quite feasible for section 36(b). Perhaps for such actions the demand re- quirement of Rule 23.1 may tend toward the status of a legal vermiform appendix—the provision’s utility may be reduced sharply in § 36(b) litigation—but the demand requirement still has a function to perform and is not totally without purpose or effect. In those -ircumstances it is not for the courts to hold inapplicable the demand requirement “which continues a long tradition in the federal courts,” Heit v. Baird, 567 F.2d 1157, 1160 (Ist Cir. 1977), where Congress has not done so, explicitly or by solid implication.'’ 14 Compare this principle with the canon against implied repeals of the statutes in the absence of clear intention to do so or re- pugnancy of the later to the earlier legislation. Morton v. Mancari, 417 U.S. $35, S81, 94 S.Ct. 2474, 2483, 41 L.Ed.2d 290 (1974); Georgia v. Pennsylvania R. R., 324 U.S. 439, 456-57, 65 S.Ct. 716, 725-726, 89 L.Ed. 1051 (1945). 1S in General Telephone Co. v. EEOC, 446 U.S. 318, 100 S.Ct. 1698, 64 L.Ed.2d 319 (1980), the Supreme Court ruled—on the basis of a “straightforward” reading of § 706 of the Civil Rights Act of 1964, the legislative intent underlying the 1972 to Title VII, and the enforcement procedures under Title Vil—that the EEOC's enforce- ment action was not properly characterized as a “class action” subject to the procedural requirements of Rule 23. As we have said, comparable factors are absent here. In addition to the court below, three district courts have passed directly on the applicability of the demand requirement of Rule 23.1 57a If, as we have held in Part I, supra, a § 36(b) action is not exempt from the demand portion of Rule 23.1, we must confront Grossman’s secondary argument that, in any event, he was excused (as to the 36(b) portion of his suit) from making demand. He takes a parallel position for the “recapture” part of his action (which is not brought under § 36(b) and as to which plaintiff makes no claim of a complete exemption from the Rule). Rule 23.1 mandates that the complaint “shall also allege with parti- cularity the efforts, if any, made by plaintiff to obtain the action he desires from the directors * * * and the reasons for his failure to obtain the action or for not making the effort.” In this circuit that requirement has been “vigor- ously enforced.” Heit v. Baird, supra, 567 F.2d at 1160. “The futility of making the demand required by Rule 23.1 must be gauged at the time the derivative action is commenced, not afterward with the benefit of hindsight.” Cramer v. General Telephone & Electronics Corp., 582 F.2d 259, 276 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979). 1. On the advisory fees (the § 36(b) claim), plaintiff's only excuses are that the Fund’s directors were controlled by or affiliated with FMR, had participated in the alleged to suits under section 36(b). Two have held Rule 23.1 applicable. Markowitz v. Brody, 9 F.R.D. 542, 548-49, 554-55, 559-61 (S.D.N.Y. 1981); Weiss v. Temporary Investment Fund, Inc., 5\6 F.Supp. 665, 668-70 (D.Del. 1981), rehearing denied, 520 F.Supp. 1098 (1981). One court held primarily that demand was futile in that instance and therefore excused under Rule 23.1, but was also “in- clined to agree with plaintiffs that a demand on the directors of the Fund was not intendei to be a prerequisite to suit under § 36(b).” Blatt v. Dean Witter Reynolds Intercapital, Inc., §.D.N.Y., 528 F.Supp. 1152 (1982). 58a wrong, and had announced their opposition to the suit. All three reasons are inadequate. Of the eight Fund director-defendants, only three were affiliated with FMR; five were unaffiliated and “disinterested.”’° As the court said in Untermever v. Fidelity Daily Income Trust, 580 F.2d 22, 23 (Ist Cir. 1978), and Jn re Kauffman Mutual Fund Actions, 479 F.2d 257, 264 (1st Cir.), cert. denied, 414 U.S. 857, 94 S.Ct. 161, 38 L.Ed.2d 107 (1973), a majority of disinterested directors negatives general alle- gations of control-by-the-adviser, comparable to those plaintiff makes here. A proper excuse of control or domination calls for particularized allegations and spe- cific facts—which are absent both in the initial and the amended complaint. As for mere ‘participation” or “acquiescence” by the directors in the level of the challenged advisory fees, that generality, too, is an insufficient excuse where the cor- porate activity is the normal one of setting and paying advisory fees; on this point, there also are no particulars asserting that a majority of the directors engaged in a “facially improper transaction.” Bare allegations of “wrongful participation” or “acquiescence” are not enough in this circuit. See /n re Kauffman Mutual Fund Actions, supra, 479 F.2d at 264-65; Heit v. Baird, supra, 567 F.2d at 1160-62. The third allegation, that the directors had already announced their firm opposition to the suit, is equally unavailing. Apart from the critical fact that the statement on which plaintiff relies in his amended complaint did not precede the suit but was part of a motion to dismiss the initial complaint, there is no doubt whatever that, in 16 One disinterested director (who was apparently such at the time suit was begun) was not sued. 59a context, the disinterested directors’ position did not pre- clude their fair consideration of plaintiff's demand. 2. The primary excuse for failing to make demand on the “recapture” element of the case is that the directors all had a conflict of interest.'* The gist of this claim is that FMR should have recovered a substantial portion of underwriting commissions, discounts and spreads paid on the Fund’s purchases of municipal bonds, but failed to do so “because FMR received from the underwriters substan- tial benefits in the form of research, statistical and other information in connection with FMR’s functions as in- vestment adviser fo the other funds which it manages” (emphasis added). The posited conflict-of-interest arises because all the Fund’s directors are directors or trustees of other funds managed by FMR, and as such directors or trustees (it is asserted) would have an interest adverse to recapture for the Fund, so that the other funds could continue to receive the information they need and want. We can assume arguendo that there might arguably be some duty to recapture as charged in the complaint, but the difficulty with plaintiff's general assumption of “con- flict of interest,” as an excuse for not making demand, is 17 ‘The full statement was: “The Disinterested Directors have no basis for believing that suit against FMR for the practices alleged in the Complaint is justified. They are anxious, however, to evaluate any information which Grossman has which suggests that it is. If they concluded that suit is justified, the Fund's best interests demand that they bring suit. They will do so.” As ground for his excuse, Grossman quotes only the first sentence, omitting the remainder. 18 Plaintiff also says, on this phase, that the directors had announced their firm opposition to the merits of his recapture claim. On that, the answer we have already given (see note 17, supra, and text) suffices. 60a that he fails to set forth with any specificality, as Rule 23.1 and our decisions require, the factual grounds why this putative “conflict of interest” was in fact an actual one. The conflicting status of the Fund’s directors here was at best tenuous and conditional, not direct, stark, apparent and “unmistakable” as in Delaware & Hudson Co. v. Albany & Susquehanna Railroad, 213 U.S. 435, 29 S.Ct. 540, 53 L.Ed. 862 (1909). The responsibility both for supplying the information to the other funds and for recapture was, not on the other funds, but on FMR, with which a majority of the Fund’s board were unconnected. The same is true of the financial detriment of recapture, which would fall on FMR; the other funds would not be interested in that money. They may be concerned with continuing to receive the information,’’ but there is no allegation or reason to believe that they would not be satisfied if FMR obtained it elsewhere than from under- writers, brokers or dealers. Although there is an allega- tion that recapture would diminish the amount of information supplied by the latter, there is no assertion that FMR (which had the duty to supply it) would not be able to, or would not, fill the gap from another source, nor is there any assertion that the other funds would have to pay FMR higher fees in order to obtain the inforina- tion they wanted. To charge a true conflict of interest the plaintiff should have at least spelled out the likelihood of one, not left the court with the bare possibility that the defendants might conceivably have the incentive to vote or push against recapture because of their interests as directors of the other funds. Heit v. Baird, supra, 567 F.2d at 1161-62, indicates tht the bare possibility or mere 19 There are, however, no particularized allegations on the necessity Or importance of the other funds’ continuing to receive the information. 6la allegation that the directors could have a self-interested purposed (there, to retain control of the corporation; here, to advance the interests of the other funds) is not enough if, as in this case, there can be valid corporate reasons for taking the position challenged in the com- plaint—or if there is in fact no conflict because of other circumstances not negated by plaintiff. Conversely, “the antagonism between the directory and the corporate in- terest” must be shown to be “unmistakable,” or deemed futile, to excuse demand. Delaware & Hudson Co. vy. Albany & Susquehanna Railroad, 213 U.S. 435, 447, 29 S.Ct. 540, 543, 53 L.Ed. 862 (1909); Jn re Kauffman Mutual Fund Actions, supra, 479 F.2d at 263. The final question is whether plaintiff's post-litigation demand cured his failure to make one before beginning the action. Rule 23.1 specifically calls upon the complaint to show that demand was made or was properly excused; there is no provision for thereafter remedying an omis- sion in the same suit, especially after the defendants have moved to dismiss because of the absence of a demand. The terms of the Rule have generally been followed by other appellate courts. Lucking v. Delano, 117 F.2d 159, 160 (6th Cir. 1941) (“Obviously the filing of the complaint cannot be regarded as a demand to sue, for by starting the action [plaintiffs] have usurped the field”); Shlensky v. Dorsey, 574 F.2d 131, 141-42 (3rd Cir. 1978) (“The contemplated showing of demand made upon the direc- tors after the filing of the shareholders’ derivative com- plaints could not have satisfied the demand requirements of the rule”); Galef v. Alexander, 615 F.2d 51, 59 (2d Cir. 1980) (“Rule 23.1 * * * is essentially a requirement that a 62a stockholder exhaust his intracorporate remedies before bringing a derivative action”). Though this court has not yet ruled squarely on the precise point, it has observed that the rule of demand is to alert the director before suit is instituted. Jn re Kauffman Mutual Fund Actions, supra, 479 F.2d at 263, we said that “to be allowed, sua sponte, to place himself in charge without first affording the directors the opportunity to occupy their normal status, a stockholder must show that his case is exceptional,” i.e. that demand is excused (emphasis added). The same postulate was expressed in Heit v. Baird, supra, $67 F.2d at 1162 (n.6): “The purpose of the demand requirement is, of course, to require resort to the body legally charged with conduct of the com- pany’s affairs before licensing suit in the company’s name by persons not so charged” (emphasis added). Under this court’s practice of vigorous enforcement of the Rule (Heit v. Baird, 567 F.2d at 1160; see also In re Kauffman Mutual Fund Actions, 479 F.2d at 263, 267), and of the generally “strict view” the court takes “of the require- ment of prior demand” (Untermeyer v. Fidelity Daily Income Trust, 580 F.2d 22, 23 (Ist Cir. 1978)), these statements should be, and are, now embodied in an explicit holding. It makes no difference that in this instance the belated demand was made at the suggestion of the District Court. The judge’s colloquy with counsel shows that the court was simply making that suggestion, as the opinion below says, “in the hope that expensive and lengthy litigation could be avoided”; if the directors responded favorably to plaintiff, in whole or in part, that would clearly be the result. Grossman then made his demand voluntarily, with his expressed understanding “that the demand letter 63a would not be deemed a waiver by any party of rights which it otherwise possessed.” There was no direction by the court and no agreement that the late demand would rectify the initial failure to make a demand prior to suit. IV Because we hold that the suit must be dismissed be- cause plaintiff did not make the necessary demand before suing, we refrain from considering the District Court’s alternative holding that, in any event, defendants are entitled to judgment on the ground that their “alleged actions are protected by and comply with the require- ments of the business judgment rules.” Affirmed. Decision of the Court of Appeals for the Third Circuit in Weiss v. Temporary Investment Fund 6Sa UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 81-2688 MELVYN I. WEISS, Custodian for GARY MICHAEL WEISS, U/NY/UGMA, Appellant v. TEMPORARY INVESTMENT FUND, INC., PROVI- DENT INSTITUTIONAL MANAGEMENT COR- PORATION, SHEARSON LOEB’ RHOADES, INC., RUSSELL W. RICHIE, ROBERT R. FOR- TUNE, JAMES LOUIS ROBERTSON, HENRY M. WATTS, JR., DR. RALPH A. YOUNG. THOMAS S GATES, G. WILLING PEPPER Appellees (D.C. Civil No. 80-00230) ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE Argued April 2, 1982 Betore: GIBBONS, SLOVITER and BECKER, Circuit Judges (Opinion Filed November 12, 1982) Morris and Rosenthal, P.A. One Customs House Square Post Office Box 1070 Wilmington, Delaware 19899 Wolf Haldenstein Adler Freeman & Herz 270 Madison Avenue New York, New York 10016 Of Counsel: Daniel W. Krasner ( Argued) Jeffrey G. Smith Wolf Haldenstein Adler Freeman & Herz Attorneys for Appellant Peter M. Mattoon Richard Z. Freemann, Jr. (Argued) Of Counsel: Ballard, Spahr. Andrews & Ingersoll 30 South 17th Street Philadelphia, Pa. 19103 Attorneys for Appellee, Provident Institutional Management Corporation David L. Foster Paula J. Mueller Of Counsel: Wilkie, Farr & Gallagher One Citicorp Center 153 East 53rd Street New York. New York 10022 Attorneys for Appellee. Shearson Loeb Rhoades, Inc. Morris R. Brooke James M. Sweet James C. Ingram 67a Of Counsel: Drinker Biddle & Reath 1100 PNB Building Broad and Chestnut Streets Philadelphia, Pa. 19107 Attorneys for Appellees, Russell W. Richie, Robert R. Fortune, James Louis Robertson, Henry M. Watts, Jr., Dr. Ralph A. Young, Thomas S. Gates, G. Willing Pepper OPINION OF THE COURT BECKER, Circuit Judge The principal question presented in this appeal is whether a shareholder of an investment company must make a demand on directors pursuant to Fed. R. Civ. P. 23.1 pnor to commencing suit under section 36(b) of the Investment Company Act of 1940 (ICA), 15 U.S.C. §§80a-35(b) (1976), to challenge the company's con- tracts with its investment advisers. The district judge dismissed the action for failure to satisfy the demand re- quirement, Weiss v. Temporary Investment Fund, Inc., 516 F. Supp. 665 (D. Del. 1981), and denied the appel- lant leave to replead after making a demand, Weiss v. Temporary Investment Fund, Inc., 520 F. Supp. 1098 (D. Del. 1981). Appellant Weiss contends that the ICA was a prod- uct of Congress’ recognition of potential conflicts of in- terest in the management of investment companies and that the ICA's legislative history and statutory scheme, which reflect that concern, are inconsistent with the re- 68a quirement of shareholder demand. After reviewing that legislative history and statutory scheme and the pur- poses of the demand requirement, we perceive no such inconsistency. We conclude that the contributions of the demand requirement to corporate governance mandate application of Rule 23.1 to section 36(b) suits. We also conclude that the circumstances alleged in the com- plaint do not warrant excusing such a demand as futile, and the district judge did not err in denying leave to replead. We therefore affirm. 1. INTRODUCTION A. Factual and Procedural Background Plaintiff-appellant Melvyn I. Weiss, as custodian for his son Gary Michael Weiss, is a shareholder of the Tem- porary Investment Fund, Inc. (the Fund). The Fund is a no-load open-end investment company. commonly re- terred to as a “money market fund,” whose objective is to increase the current income of its shareholders through investments in a variety of prime money market obligations. The Fund is managed by a seven-member board of directors elected by its shareholders. ' Under an Advisory Agreement, the management of the Fund's portfolio is entrusted to its investment advis- er, Provident Institutional Management Corporation (the Adviser), a wholly-owned subsidiary of Provident National Bank (Provident). Under a sub-advisory agree- ment, Provident receives seventy-five percent of the Ad- viser's fees, in return for which it supplies, inter alia, in- vestment research services, computer facilities. and operating personnel. Shearson Loeb Rhoades, Inc. (Shearson) serves as underwriter for the Fund and per- forms other administrative functions under its Adminis- tration and Distribution Agreement with the Fund. 1. In January 1980, when the advisory contracts at issue were approved, the board consisted of six members. 69a The terms of the Advisory and Administration Agreements (collectively referred to as “advisory con- tracts’) provide that the fees received by the Adviser and Shearson are computed as a percentage of the Fund's assets. The percentage rate is scaled downward: Shearson and the Adviser each received .175 percent of the first $300 million in assets, .15 percent of the next $300 million, and .125 percent of the third $300 million. For average net assets in excess of $900 million, the rate is fixed at .1 percent. The recent popularity of money market funds has dramatically increased the Fund's as- sets, to more than $2 billion when suit was commenced in 1980. This phenomenon has produced a commensu- rate increase in the fees received by the Adviser and Shearson. On May 7, 1980, Weiss brought a shareholder suit on behalf of the Fund against the Adviser, Shearson, and seven directors of the Fund. One count of the complaint charges that Shearson and the Adviser breached their fi- duciary duties to the Fund under section 36(b) of the ICA by receiving “excessive and unreasonable” compen- sation. The basis of this count is the advisory contracts, which Weiss contends permit the Adviser to receive twenty-five percent of the fees without performing any services and fail to provide for any reduction in fees after the Fund's assets exceed $900 million. Additional counts allege that all defendants breached their fidu- ciary duties by participating or acquiescing in the advi- sory contracts; that shareholder approval of the fee ar- rangements was secured through misleading proxy statements in violation of section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §78n(a) (1976); and that the management and fee arrangements violate the Banking Act of 1933, 12 U.S.C. §§24, 378(a) (1976), the ICA, and common law fiduciary duties. As relief, the plaintiff sought a judgment declaring the Advisory Agreement and the Distribution Agreement void, an or- 70a der requiring that the Adviser and Shearson repay all ex- cessive fees to the Fund, and an order requiring the indi- vidual defendants to reimburse the Fund for damages caused by their violations of the ICA and the Securities Exchange Act. The complaint acknowledges that no demand was made on the directors of the Fund. It asserts, however, that demand is not a prerequisite for the section 36(b) count and that demand would have been futile as to all counts because the directors are controlled by the Fund's advisers and because they participated in the al- leged violations. Amended Complaint at €37. The defendants moved to dismiss the complaint on a number of grounds, including the plaintiff's failure to satisfy the Rule 23.1 demand requirement. The district court, concluding that demand is required for a section 36(b) @uit and was not excused as futile, dismissed the complaint.2, Having determined that intra-corporate remedies should be exhausted first, the court found it unnecessary to address the other challenges to the com- plaint. The court subsequently denied Weiss’ motion seeking leave to make a demand on the directors and to file an amended complaint if demand was refused. Weiss appeals from all three rulings. As we indicated at the outset, section 36(b) is the principal focus of our attention. Its relevant portions are set forth in the margin.’ Although section 36(b) does not 2 The court also dismissed the action against defendant James L. Robinson for insufficient service of process. That portion of the district court's order has not been appealed. 3. Section 36(b) provides, in relevant 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 to such investment adviser or any affiliated person of such in- Tla explicitly excuse shareholders from the demand require- ment of Rule 23.1, Weiss advances two theories to sup- port his position that demand is not required. First, he argues that because the statute does not authorize a cause of action by the corporation, a section 36(b) suit is not derivative and is thus not governed by Rule 23.1 at all. Alternatively, he asserts that the legislative history and the statutory scheme supersede the policies underlying the requirement of shareholder demand. Al- though he presents a number of discrete arguments to support this latter thesis, their common predicate is that Congress, perceiving directors of investment companies to be ineffective checks on advisory fee levels, structured section 36(b) to permit shareholders to bypass the direc- tors. Before considering Weiss’ specific contentions, we must describe the contours of section 36(b) and other relevant provisions of the ICA. vestment 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 whe has a fiduciary duty concern- ing 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 plain- tiff shall have the burden of proving a breach of fiduciary duty (2) In any such action approval by the board of direc- tors of such investment company of such compensation or payments. or of contracts or other arrangements providing for such compensation or payments, and ratification or ap- 72a B. The Statutory Scheme The management of an investment cornpany is dis- tinguished by its reliance on external management and investment advisers. See, e.g., Burks v. Lasker, 441 US. 471, 480-85 (1979); Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir.), cert. denied, 434 U.S. 934 (1977): Note, Mutual Fund Independent Directors: Putting a Leash on the Watchdogs, 47 Fordham L. Rev. 568 (1979) {hereinafter cited as Fordham Note}. Typically, an exter- nal organization such as Shearson creates the invest- ment fund and appoints the initial board of directors. The board then enters into a contract with one or more external companies who manage the fund and provide investment services. In addition to receiving fees for these two functions (which may be performed by the same outside adviser), the independent advisers may re- ceive underwriting fees or brokerage commissions if they also serve.in those capacities. This web of financial ties among the fund and its advisers invites several con- NOTE — (Continued) proval of such compensation or payments. or of contracts or other arrangements providing for such compensation or payments, by the shareholders of such investment com- pany, 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 com- pensation or payments, and no damages or other relief shall be granted against any person other than the recipi- ent of such compensation or payments. No award of dam- ages 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 dam- ages resulting from the breach of fiduciary duty and shall in no event exceed the amount of compensation or pay- ments received from such investment company, or the se- curity holders thereof, by such recipient. 15 U.S.C. §80a-35(b) (1976). 73a flicts of interest. In negotiating advisory tees. tor exam- ple, directors affiliated with the adviser tace the compet- ing interests of the adviser. who seeks high tees. and the investors, who want low fees in order to maximize their return on investment. Similarly. an adviser who also serves as broker has an incentive to increase its fees through trequent portfolio transactions that may dissi- pate the earnings of the investors. See Fordham Note. supra p. 7, at 570-71 The ICA was intended to minimize the potenual conflicts a [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385010_0302%3A1. Public record. Not legal advice.