Vanderbilt Law Review


Lyman Johnson

First Page



Today, the concept of the "independent" director is widely, if not universally, regarded as critical to the healthy governance of public corporations.' The concept remains fiercely contested, however, in the governance of investment companies, including mutual funds. This resistance appears on two fronts, one of which is quite visible, while the other is often overlooked. The more obvious battle over director independence has occurred in response to the Securities and Exchange Commission's ("SEC's") rulemaking effort to alter the standard for granting certain regulatory privileges under the Investment Company Act (the "Act").' The SEC, among its other reforms, sought to limit privileges under the Act to companies where at least seventy-five percent of the directors and the board chairman are independent. Those rulemaking efforts have been struck down twice on procedural grounds. In late 2006, the SEC resolicited public comment on two studies addressing the costs and benefits of the proposals.

Mutual fund fee litigation is the second area in investment company governance where, in striking contrast to the trend in corporate governance generally, the concept of director independence remains undeveloped. Section 36(b) of the Act deems an investment adviser of an investment company to owe a fiduciary duty with respect to the receipt of compensation for advisory services (i.e., management compensation). That section also creates an express, private right of action permitting a security holder, acting on behalf of the investment company, to sue the investment adviser or its affiliates for breach of that duty. The seminal section 36(b) case, decided twenty-five years ago, is Gartenberg v. Merrill Lynch Asset Management, Inc. The Second Circuit affirmed the district court's dismissal of the complaint and articulated six factors ("Gartenberg factors") to guide the determination whether an investment adviser's fee is excessive."