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Banking Law Keyed to Barr, 3rd Ed.
Moses v. Burgin
Citation:
445 F.2d 369 (1971)Facts
Fidelity Fund was an open-end mutual fund registered under the Investment Company Act. Its investment adviser, Fidelity Management and Research Company, directed the Fund’s portfolio transactions through independent broker-dealers. Due to the size of many mutual fund transactions, brokers were willing to give up a portion of their commissions. Fund directed these “give-ups” to brokers who sold Fund shares to the public, which benefited Management and Crosby by stimulating sales of Fund shares, thereby increasing Management’s advisory fee and Crosby’s sales commissions.
Beginning in 1965, SEC representatives suggested that Crosby, as an NASD member, could receive give-ups and apply them to reduce Management’s advisory fee, effectively recapturing these commissions for Fund’s benefit. Management did not disclose this possibility to the unaffiliated directors. In 1966, the SEC published a report explicitly stating that such recapture was possible, but Management again failed to inform the unaffiliated directors. Only after the plaintiff filed suit in December 1967 did the unaffiliated directors learn of and begin to investigate recapture possibilities. By 1968, Fund began “banking” give-ups on certain exchanges pending determination of recapture possibilities, and eventually voted to recapture them.
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