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Private Litigation to Enforce Fiduciary Duties in Mutual Funds: Derivative Suits, Disinterested Directors and the Ideology of Investor Sovereignty

By Donald C. Langevoort

Abstract

This article focuses on independent directors and the processes of mutual fund corporate governance. To be clear, I believe (and research shows) that disinterested directors do add value as a form of shareholder protection, and this fact justifies the SEC\u27s efforts to strengthen their role. But they are far from a panacea. While that point alone is almost trite, exploring some of the unique features of mutual fund governance shows why judges and policymakers should not even try to reason by analogy to governance in other kinds of corporations. Yet that is exactly what Burks and its progeny have done. Even more interesting is considering the governance consequences of the primary distinction between mutual funds and business corporations: the convergence of the capital and product markets that occurs when the products being sold by the mutual fund are its own securities. Here, the ideology of consumer sovereignty easily crowds out a strong norm of fiduciary responsibility. \u22Disinterested\u22 directors see little need to measure the behavior of the fund\u27s advisor by reference to anything other than marketplace success - and indeed can be chosen precisely because they embrace the ideology of the markets and see the law\u27s assignment to them of strong fiduciary responsibilities as something of an exercise in formalism. If this happens, as I suspect is commonplace, then their checking power will be moderate at best, and the case law\u27s assumption of more, the basis for the decreasing judicial oversight we have seen over the last twenty-five years, misplaced

Topics: mutual funds, corporate governance, securities, Business Organizations Law, Securities Law
Publisher: Scholarship @ GEORGETOWN LAW
Year: 2005
OAI identifier: oai:scholarship.law.georgetown.edu:facpub-1140
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