## Facts

- Shareholders of the Merrill Lynch Ready Assets Trust, a large no-load money market mutual fund, brought derivative actions under § 36(b) of the Investment Company Act of 1940.
- The fund invested in short-term money market instruments and offered investors liquidity through purchases and redemptions without charges or penalties.
- Merrill Lynch Asset Management, Inc. served as the fund’s investment adviser/manager and received an advisory fee under a breakpoint schedule with declining percentages as assets increased.
- An affiliated Merrill Lynch broker-dealer handled most shareholder orders and related processing functions.
- Plaintiffs alleged that the aggregate compensation paid for advisory, administrative, and shareholder servicing functions was so high that it breached the adviser’s fiduciary duty, including claims that Merrill Lynch obtained additional benefits such as “float” on redemption checks.
- After a bench trial, the district court dismissed the complaints, finding no excessive fee within § 36(b).
- Plaintiffs appealed.

## Issues

1. What standard governs a claim under § 36(b) that a mutual fund adviser breached its fiduciary duty regarding compensation?
2. Under that standard, were the adviser’s fees so excessive as to violate § 36(b)?

## Decision

- The Second Circuit affirmed the judgment dismissing the § 36(b) claims.
- The court held an adviser violates § 36(b) only if the challenged fee is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.
- Applying that test, the court concluded the record did not show the adviser’s compensation was disproportionately large.
- The court credited evidence of strong fund performance and high-quality services, and noted the declining fee schedule as relevant to economies of scale.
- The court treated comparisons to other industry fees and claims of collateral benefits (including float) as relevant considerations, but insufficient to establish liability on this record.

## Legal Principles

- Section 36(b) imposes a fiduciary duty on investment advisers with respect to compensation, but does not authorize courts to reprice fees based on generalized notions of “reasonableness.”
- Liability requires proof that fees are so disproportionately large relative to services that they could not result from arm’s-length bargaining.
- Fee litigation under § 36(b) requires consideration of all relevant factors, including service quality and performance, the nature and extent of services provided, economies of scale and any sharing of those savings, the board’s approval process, and appropriate comparative fee information.
- Industry fee levels and adviser fees in other markets may inform the analysis, but are not controlling because mutual funds may be effectively controlled by their advisers and industry practices could still reflect excessive fees.

## Conclusion

The court affirmed dismissal of the shareholders’ derivative actions, holding that § 36(b) is violated only when an adviser’s compensation is so disproportionate to the services rendered that it cannot reflect arm’s-length bargaining, and concluding that the challenged fees did not meet that threshold.


Gartenberg v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982)