## Facts

- A shareholder’s custodian sued a money market mutual fund, its investment adviser (Centennial), the adviser’s owners (including Oppenheimer entities and broker-dealers), and related parties under the Investment Company Act of 1940.
- The fund primarily served as an investment vehicle for broker-dealers’ customers; the advisory fee was based on fund assets, and broker-dealers and their customers held most fund shares.
- After SEC Rule 12b-1 permitted funds to use fund assets to pay distribution expenses, certain broker-dealers threatened to withdraw client assets unless the fund adopted a Rule 12b-1 distribution plan paying them distribution fees comparable to competing funds.
- The fund’s directors authorized a proxy solicitation, and shareholders approved the Rule 12b-1 plan.
- Around the same period, Oppenheimer decided to sell its majority ownership interest in Centennial to a third party; this decision was made without the knowledge of the fund’s directors or Centennial’s directors.
- Because a change in “control” of an adviser required a new advisory contract, the fund’s board later approved a new advisory agreement reflecting Centennial’s new ownership.
- The plaintiff alleged: (1) proxy materials were misleading for not disclosing the sale negotiations; (2) the sale plus the 12b-1 plan imposed an “unfair burden” under § 15(f); (3) the advisory and 12b-1 fees were excessive under § 36(b); and (4) the 12b-1 plan violated a prior settlement that limited increases in the advisory fee for a specified period.

## Issues

1. Whether omission of preliminary negotiations and the sale of the adviser-owner’s interest was material to shareholder approval of the Rule 12b-1 plan, rendering the proxy statement misleading under the 1940 Act.
2. Whether adoption of the Rule 12b-1 plan in temporal proximity to the adviser-ownership sale imposed an “unfair burden” on the fund in violation of § 15(f).
3. Whether the advisory fee and Rule 12b-1 distribution fee, separately or together, were so disproportionate to services rendered as to violate § 36(b).
4. Whether the Rule 12b-1 plan breached a prior settlement limiting increases in the advisory fee.

## Decision

- The Second Circuit affirmed judgment for defendants on all claims.
- The court held the adviser-ownership sale negotiations and sale were not material facts requiring disclosure in the proxy for the Rule 12b-1 plan.
- The court held § 15(f) was not violated because the Rule 12b-1 plan was not imposed as a condition or consequence of the sale and was adopted to address competitive pressures and preserve fund assets.
- The court held § 36(b) was not violated because the advisory and distribution fees, evaluated in relation to the services provided, were not excessive.
- The court held the Rule 12b-1 plan did not violate the prior settlement because the settlement constrained only advisory fees and did not bar a separate distribution fee.

## Legal Principles

- Proxy disclosure under the 1940 Act turns on materiality: an omitted fact must be one a reasonable shareholder would view as significantly altering the information mix for the vote at issue.
- A prospective or completed sale of an ownership interest in an investment adviser is not automatically material to approval of a Rule 12b-1 plan when the plan is independently justified by the fund’s business needs and not tied to facilitating the sale.
- Section 15(f) prohibits an “unfair burden” on a fund arising from a sale of an advisory business; a distribution plan adopted for competitive necessity, rather than as a condition or product of the sale that benefits the seller at the fund’s expense, does not violate § 15(f).
- Section 36(b) imposes liability only for fees so disproportionately large that they bear no reasonable relationship to services rendered and could not result from arm’s-length bargaining; advisory and distribution fees may be assessed in relation to the distinct services each covers.
- A settlement limiting advisory-fee increases does not bar later adoption of a Rule 12b-1 distribution fee when the settlement’s terms are confined to advisory charges and do not regulate distribution compensation.

## Conclusion

The court upheld the fund’s Rule 12b-1 plan and related fee arrangements, finding no material proxy omission regarding the adviser-ownership sale, no § 15(f) unfair burden connected to the sale, no § 36(b) excessive fees, and no violation of an earlier settlement that restricted only advisory-fee increases.


Meyer v. Oppenheimer Mgmt. Corp., 895 F.2d 861 (2d Cir. 1990)