January 03, 2014 Articles

The Ambiguity of the Investment Company Act Section 36(b)

The language has been called "a lesson in the art of studied ambiguity in drafting of statutes"

By Matthew Bowie

The language of Investment Company Act section 36(b), 15 U.S.C. § 80a-35(b), has been called “a lesson in the art of studied ambiguity in drafting of statutes.” Fogel v. Chestnutt, 668 F.2d 100, 112 (2d Cir. 1981) (quotations omitted). Nowhere is this more true, perhaps, than in section 36(b)’s marked absence of textual clues concerning the requirements private plaintiffs must meet to bring derivative claims for violations of the provision’s terms.

Compounding this problem is the fact that section 36(b) claims are not governed by Federal Rule of Civil Procedure 23.1, which establishes, for most other derivative claims, who may sue and how they may do so. Courts have necessarily filled this void. This article discusses the development of this authority and explores how the law governing section 36(b) suits might be further developed in the years to come. In particular, it describes a recent Third Circuit case establishing that section 36(b) claims—because of their derivative nature—may be maintained only by plaintiffs who continue to own securities during the case, and it explains why courts should establish a separate rule barring section 36(b) claims for conduct predating the time when the plaintiff became a security holder.

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