Defendant investment advisors moved to dismiss cause of action for disgorgement brought by plaintiff Fund under Section 36(b) of the Investment Company Act of 1940. The Fund alleged that the investment adviser benefited from a redemption fee received by the Fund. According to the Fund, the defendants benefited from the redemption fees because they reduced the Fund’s annual operating expenses, which, in turn, reduced the defendant investment advisors’ annual reimbursement obligation to the Fund.
After noting that Section 36(b) narrowly limits the class of potential defendants in actions involving investment advisory services to direct recipients of compensation or fees (or to affiliates, if funds in their possession are “directly trace[able]” to such compensation or fees), the Court dismissed the claim, ruling that “indirect approaches to establishing the receipt of compensation [such as the one alleged by the plaintiff Fund] are clearly beyond Section 36(b)’s purview.” (Reaves v. Federated Investors, Inc. et al., 2007 WL 709327 (March 5, 2007 W.D. Pa.))