I recently published an article on section 36(a) of the Investment Company Act of 1940. Section 36(a) provides a federal cause of action for â€œa breach of fiduciary duty involving personal misconduct in respect of any registered investment companyâ€? by an officer, director, investment adviser, or principal underwriter of an investment company, among others. Although the article is dated October 2005, it did not actually come out until two months ago. Hence, I was pleased to discover today that a court has already cited it (S.E.C. v. Treadway, Slip Copy, 2006 WL 1293499, S.D.N.Y.); that is, until, I read this part of the courts opinion:
One commentator has suggested that “involving personal misconduct” should be interpreted to incorporate the substance of the business-judgment rule–an enumerated party under section 36(a) is not liable for what turns out to be a bad business decision as long as the party made the decision “on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” William K. Sjostrom, Jr., Tapping the Resevior: Mutual Fund Litigation Under Section 36(a) of the Investment Company Act of 1940, 54 U. Kan. L.Rev. 251, 302 (2005) (quoting Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984)). One court in this district has found that the business judgment rule applies to claims under Section 36(b) of the Investment Company Act, which imposes a fiduciary duty with respect to investment advisers’ compensation, against an investment company’s independent directors. See Reserve Mgmt. Corp. v. Anchor Daily Income Fund, Inc., 459 F.Supp. 597, 611 (S.D.N.Y.1978). Although Sjostrom’s effort to fill the interpretive gap is well-intentioned and well-argued, it fails to account for the fact that the benefit of the business judgment rule is ordinarily extended only to disinterested and independent parties.
As a corporate law professor, I obviously know that the BJR can be rebutted by proving a director has a conflict of interest, etc. I mention this in my article and was not trying to suggest it should be any different in the context of 36(a). So there was no reason for me to â€œaccount for the factâ€? because I was not arguing otherwise. Unfortunately, it looks like the court misinterpreted (or perhaps defense counsel purposely misinterpreted) this part of my article. But at least the court said the article was â€œwell-argued.”