Implied Right of Action under 36(a) of the 1940 Act?

In an amicus brief, the SEC says yes

By John M. Baker, Esq.

The SEC has filed a brief amicus curiae in which it took the position that an implied private right of action exists under section 36(a) of the 1940 Act for investment companies as well as individual shareholders.

Brief of the Securities and Exchange Commission, Amicus Curiae, in Support of Appellees on the Issue Addressed, Marquit v. Williams, No. 00-7085(L) (2d Cir. May 2000).

Section 36(a) by its terms authorizes the SEC to bring an action alleging that an investment company insider has engaged or is about to engage in a breach of fiduciary duty. However, some courts have ruled that there is an implied private right of action in cases where shareholders asserted claims derivatively.

The issue addressed by the SEC brief is not directly in question in the case. Instead, the district court ruled that the claims asserted by a shareholder in three closed-end investment companies were derivative of claims of the companies, rather than direct claims of the shareholder, and therefore that the shareholder was required to make demand on the funds’ directors before bringing suit.

Plaintiff appealed, arguing that there is an implied private right of action under section 36(a) that can be asserted by shareholders and that her claims are not derivative. The SEC argues that an investment company itself, and not just its shareholders, has an implied private right of action under section 36(a).

The relevance to the issue on appeal is that, if investment companies cannot sue under section 36(a), then it follows that the plaintiff shareholder’s claims cannot be derivative under state law and the district court’s ruling that they are would be incorrect.

The SEC’s brief nominally takes no position whether the plaintiff’s claims are properly characterized as derivative (and therefore subject to the requirement that, before bringing suit, a shareholder make demand on the board of directors to bring suit), but its brief obviously is helpful to the defendant insiders rather than to the plaintiff shareholder.

Copyright 2000, John M. Baker, Esq., Stradley, Ronon, Stevens & Young, LLP, 1220 19th Street, N.W., Suite 700, Washington, DC 20036 – (202) 822-9611- Fax (202) 822-0140 This article was originally posted to the FundLaw List, To subscribe to FundLaw, send a blank e-mail to

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.