Daily Income Fund, Inc. v. Fox

Background

Respondent is a shareholder in Daily Income Fund, a mutual fund that hired Reich & Tang as its investment adviser for a fee of one-half of one percent of net assets. The Fund's assets grew from about $75 million to $775 million between 1978 and 1981, which raised payments to the adviser substantially. The shareholder sued under section 36(b) of the Investment Company Act, alleging those fees were unreasonable, and named both the Fund and the adviser. Petitioners moved to dismiss, arguing Federal Rule of Civil Procedure 23.1 requires the shareholder to make a demand on the fund's board before suing.

Reasoning

The Court examined Rule 23.1 and section 36(b) and concluded Rule 23.1 governs only suits the corporation itself could have brought. The statute's text and legislative history showed Congress intended enforcement by the Securities and Exchange Commission or by security holders, not by the investment company. Because the Fund could not itself enforce the statutory right, the Court held Rule 23.1's demand requirement does not apply to shareholder suits under section 36(b) and affirmed the Second Circuit. The Court left open whether the Fund itself has an implied right to sue under the statute.

Real world impact

Investors who believe a mutual fund adviser charged excessive fees under section 36(b) may sue without first asking the fund's directors to act. That lowers a procedural hurdle and can speed fee challenges, important because recoverable damages are limited to the year before suit. The ruling does not decide whether any particular fee is unreasonable; that will be decided later.

Dissents or concurrances

Justice Stevens concurred, stressing that Rule 23.1 is a pleading rule and that Congress rejected a demand requirement in section 36(b), which would often be futile.