## Facts

- Shareholders sued investment advisers and related entities associated with several closed-end municipal bond funds.
- The funds sought higher yields by using leverage: issuing preferred stock and investing proceeds in additional long-term, tax-exempt municipal bonds.
- Advisory fees were calculated as a percentage of the funds’ net assets, including assets acquired through leverage, so increased leverage increased advisers’ compensation.
- Plaintiffs alleged the fee formula created an incentive to maximize leverage, allegedly contrary to common shareholders’ interests.
- Plaintiffs asserted federal claims under § 36(b) of the Investment Company Act of 1940 and parallel state-law fiduciary-duty claims based on the same leverage-and-fee structure.
- The district court granted summary judgment for defendants on all claims; plaintiffs appealed.

## Issues

1. Whether an advisory fee arrangement that increases compensation as leverage increases constitutes a per se breach of fiduciary duty under § 36(b) of the Investment Company Act.
2. Whether plaintiffs produced evidence of specific conduct amounting to a breach of fiduciary duty under § 36(b) or under New Jersey fiduciary-duty law.

## Decision

- The Third Circuit affirmed summary judgment for defendants.
- The court held that a leverage-linked fee arrangement is not, by itself, a per se breach of fiduciary duty under § 36(b).
- The court concluded plaintiffs failed to identify concrete adviser conduct—such as excessive fees relative to services, improper leverage decisions, or other wrongdoing—sufficient to establish a fiduciary breach.
- Because the state-law fiduciary claims relied on the same structural-incentive theory without specific misconduct, they failed for the same reason.

## Legal Principles

- Section 36(b) imposes a fiduciary duty on investment advisers regarding the receipt of compensation, but liability requires proof of an actual breach tied to compensation, not merely a theoretical conflict created by incentives.
- An incentive embedded in a disclosed fee structure, without evidence of self-interested conduct or excessive compensation, does not establish a § 36(b) violation.
- Parallel state fiduciary-duty claims premised on the same alleged structural conflict require identifiable wrongful conduct, not speculative harm.

## Conclusion

A disclosed advisory fee formula that increases with fund leverage does not alone violate § 36(b) or state fiduciary law; plaintiffs must show specific misconduct or excessive compensation connected to the adviser’s fiduciary duties, and the absence of such evidence supports summary judgment for defendants.


Green v. Fund Asset Mgmt., L.P., 286 F.3d 682 (3d Cir. 2002)