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

Abstract

The recent mutual fund scandals in the United States have generated both public and private litigation, forcing renewed attention to the nature and scope of private remedies that seek compensation for fiduciary misbehavior. This paper analyzes the difficulties in pursuing such claims as derivative action, insofar as the courts have given the fund's independent directors considerable discretion to recommend the termination of such suits. It criticizes this move as a misapplication of corporate law theory generally, showing that corporate governance in mutual funds cannot be viewed through the same lens as with respect to other kinds of firms. It also argues that an ideology of consumer sovereignty displaces fiduciary responsibility with respect to many agency cost problems in the fund industry. To the extent that independent directors adopt that ideology (or are selected because they have already adopted it), they will be suboptimal shareholder representatives.