Full opinion text
OPINION ROBERT J. WARD, District Judge. This matter is before the Court for a decision on the merits following a two-week bench trial. Plaintiff, a shareholder in the Rowe Price Prime Reserve Fund, Inc. (“Prime Reserve Fund” or the “Fund”) brought this action pursuant to the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a-l et seg. (“ICA”), asserting three claims for relief. Count I, asserted against defendants T. Rowe Price Associates, Inc. (“Price Associates” or the “Adviser”), raises a claim for excessive fees under section 36(b) of the ICA. 15 U.S.C. § 80a-35(b). Count II, brought against all defendants, is based on diversity of citizenship and alleges breach of fiduciary duty under state law. Count III, also asserted against all defendants, alleges violations of section 20(a) of the ICA, 15 U.S.C. § 80a-20, and Rule 20a-l promulgated thereunder, 17 C.F.R. § 270.20a-l, in connection with a proxy statement disseminated to Fund shareholders to solicit their approval of a proposed investment advisory agreement for 1980 and 1981. After consideration of the testimony presented at trial, the evidence and exhibits introduced, the proposed findings of fact and conclusions of law of the parties, and the applicable law, the Court makes the following findings of fact and conclusions of law pursuant to Rule 52, Fed.R.Civ.P. BACKGROUND Plaintiff Gertrude Brooks Schuyt, a resident of the State of New York, became a shareholder of defendant Prime Reserve Fund on April 24, 1979 and has remained a shareholder at all relevant times. Defendant Prime Reserve Fund, a Maryland corporation, is an open-end, diversified management investment company registered under the ICA. The Fund, which continuously offers its shares of stock to the public, invests in prime money market instruments and is commonly known as a “money market fund.” During the relevant time period in this litigation, the fund grew in size from about $200 million in net assets to about $2 billion in net assets. During this time, the fees paid by the Fund to the investment adviser, which were based on a set percentage of the Fund’s net assets, correspondingly increased from $1,734,755 in 1979, to $4,331,360 in 1980, and to $8,362,250 in 1981. Defendant Price Associates, also a Maryland corporation, served during this time as the investment adviser to Prime Reserve Fund pursuant to Investment Advisory Agreements (“Agreement”) between the Adviser and the Fund. Defendant Carter O. Hoffman (“Hoffman”) was a director and Chairman of the Board of Prime Reserve Fund and the Senior Vice President, a shareholder, and a director of Price Asso-dates. Defendant Edward A. Taber (“Ta-ber”) was a director and President of Prime Reserve Fund. Taber also served as Chairman of the Advisory Committee of Prime Reserve Fund and was a Vice President and a shareholder of Price Associates. Defendant George J. Collins (“Collins”), presently the President and Chief Executive Officer of Price Associates, was the Vice President, a shareholder, a director, and head of the Fixed Income Division of Price Associates during the time at issue in this litigation. He was also a director and Vice President of Prime Reserve Fund. The composition of the Board of Directors of Prime Reserve Fund changed during the time period from the approval of the 1979 Agreement to the approval of the 1981 Agreement. On February 15, 1979, the date the 1979 Agreement was approved, the Board of Directors of the Fund consisted of three inside or interested directors, Hoffman, Taber, and Collins, and two outside or independent directors, Hubert P. Vos (“Vos”) and Lawrence P. Nay-lor, III (“Naylor”). On February 27,1980, the date the 1980 Agreement was approved, the directors of the Fund were Hoffman, Taber, Collins, Vos, and Anthony W. Deering (“Deering”). Deering had become an outside director in April 1979, replacing Naylor who had resigned. On February 25, 1981, the date the 1981 Agreement was approved, the directors of the Fund were Hoffman, Taber, Collins, Vos, Deering, and two new outside directors, Dr. Karen N. Horn (“Horn”) and F. Pierce Linaweaver (“Linaweaver”). During all relevant times, the independent directors of Prime Reserve Fund had their own counsel, Stanley J. Friedman (“Friedman”), a partner in the law firm of Shereff, Friedman, Hoffman & Goodman. Friedman had been counsel to Prime Reserve Fund since the Fund was organized in 1975. During 1979 through 1981, Friedman spoke weekly or biweekly with the outside directors. In addition, he furnished the directors with detailed written and oral advice regarding their duties, including their responsibilities in evaluating the Agreements between the Adviser and the Fund. Friedman apprised them, on a continuing basis, of pertinent legal developments relating to mutual funds, including their responsibilities under section 36(b) of the ICA. The Fixed Income Division of Price Associates was responsible for the credit and investment analysis for the nonequity mutual funds managed by the Adviser, including Prime Reserve Fund. This Division was directed by Collins, with Taber as Assistant Director. Both had extensive experience in the fixed income securities business. Approximately 24-26 individuals worked in the Fixed Income Division. With regard to the Fund, the specific function of the Fixed Income Division was to provide research and analysis at the weekly meeting of the Investment Advisory Committee. The directors of the Fund received periodic reports on the functioning and work of the Fixed Income Division. History of the Prime Reserve Fund The Prime Reserve Fund was organized on October 31, 1975. Price Associates was retained as the Fund’s investment adviser pursuant to an Investment Advisory Agreement between the Fund and the adviser dated January 28, 1976. In the early years of the Fund’s existence, the Adviser absorbed all of the Fund’s operating expenses and in 1976 voluntarily waived payment of the management fee in order to help the Fund maintain a competitive yield in the industry. As of December 31, 1976, the Fund had 590 shareholder accounts to service, with the account size averaging $86,000. From 1976 through the beginning of 1979, the Fund grew at a moderate pace. During this time, the Fund operated at a loss for the Adviser. However, by the end of 1979, yield rose to unprecedented levels and the Fund grew enormously. By December 31, 1979, the Fund had 57,343 shareholder accounts to service, with the account size averaging $12,494. Throughout this time, the Investment Advisory Agreement, which was extended for a year at the February 15, 1979 Board meeting, provided for a fee to the Adviser of .4% of the Fund’s average daily net assé’ts. Plaintiff Becomes a Shareholder On April 24, 1979, plaintiff became a shareholder of Prime Reserve Fund. At this time, the net assets of the Fund were approximately $300 million. Plaintiff conceded in her deposition that she believed the fee of .4% was fair and reasonable throughout 1979. Indeed, many comparable money market funds were charged .5% in 1979. The independent directors of the Fund met privately with their attorney Friedman on October 30, 1979, at Cross Keys Inn in Maryland to discuss the status of the Fund, its recent growth, and its expenses, including marketing expenses. As noted above, the sudden and historically unprecedented rise in interest rates during late 1979 and early 1980 led to an astonishing rate of growth for the Fund. This extraordinary growth in asset levels, reaching approximately $700 million by the end of 1979, had not been anticipated by the directors or the Adviser. At this point in time, the directors and the Adviser became increasingly concerned about the volatility and the growth of the fund. With regard to volatility, they feared that fluctuations in interest rates and inflation might cause a sudden change in the level of the Fund’s net assets. With regard to growth, they believed that it was in the best interest of the Fund to increase as much as possible as such growth would permit the Fund to invest in larger, better quality instruments and would enhance the Fund’s reputation. Renewal Process for 1980 Investment Advisory Agreement In light of the significant growth of the Fund during the fall and winter of 1979, Calhoun, Vice President of Price Associates, suggested to the Executive Committee of Price Associates on January 4, 1980 that the Adviser recommend a reduction in its advisory fee to the Fund from the .4% to .35% when the net asset level reached $1 billion. On January 7, 1980, the Executive Committee discussed and approved the fee break recommendation. The Board of Directors of Price Associates, on January 10, 1980, also approved the fee break proposal. On January 15, 1980, Friedman sent to the directors of the Prime Reserve Fund his annual memorandum on the factors they should consider in evaluating the Investment Advisory Agreement. Friedman advised that the directors should consider the following: 1. The requirements of the Fund in the areas of investment supervisory and administrative services. 2. The quality of the services rendered and the results achieved by the investment advisor in the areas of investment supervisory and administrative services. 3. The size of the fees paid to the investment advisor measured in relationship to the extent and quality of services rendered to the Fund, and to the fees charged by other organizations providing comparable investment advisory services. 4. The organizational capabilities and financial condition of the investment ad-visor measured in terms of the needs of the Fund on a continuing basis. 5. The possibility that services of the type required by the Fund might be better obtained from other organizations. 6. Conditions and trends prevailing generally in the economy, the securities markets and the mutual fund industry. 7. The historical relationship between the Fund and the investment advisor. 8. Other factors that might appear to the directors to be relevant. Exhibit W, at 5. In this memorandum, Friedman also advised the directors that they might wish to consider, although they were not legally required to do so, “the range of profitability that can reasonably be expected to accrue to the advisor from the operation of the Fund.” Exhibit W, at 10. Prior to January 1980, Friedman did not advise the directors concerning the appropriateness of asking for information concerning profitability, It was only in January that Friedman first learned that Price Associates was maintaining product-line cost information. Senior management of Price Associates had been concerned about providing the product-line profitability data from the cost accounting system because this system had been created in 1966 to monitor counsel (as opposed to mutual fund) fees. Management considered this old system to be unreliable and outmoded since it allocated common expenses in an arbitrary way. They also feared that it might erroneously focus the directors on an inappropriate “cost plus” analysis which could have a negative impact on the ability of the Fund to obtain top quality employees. Notwithstanding the concerns of the Adviser, the Board of Directors of the Fund pressed their request for the data. On January 18, 1980, the Executive Committee of Price Associates decided to provide to the directors the product-line profitability data that its cost accounting system had generated. Calhoun supplied this information to the directors in a memorandum that explained that the system did not produce accurate data and was presently in the process of being improved. Calhoun indicated that the figures showed a pre-tax, pre-advertising operating margin of forty to sixty percent for the first nine months of 1979. A meeting of the Board of Directors of Prime Reserve Fund was held on January 23, 1980. At this meeting, the directors were given an extensive Agenda book containing detailed information about the fund and its most recent developments. Among the documents in the Agenda book was the proposed proxy statement to be mailed to shareholders of the Fund for their annual meeting, to be held on April 12, 1980. At this meeting, the directors approved the proposed statement. They also discussed the Calhoun memorandum recommending a fee break. In connection with the fee proposal, the directors requested further information from the Adviser on whether the advisory fee was competitive, whether there were economies of scale, and whether the Adviser’s profits were reasonable. The directors suggested limiting the Investment Advisory Agreement to one year, as opposed to two years, so that annual growth of the Fund could be taken into account. Following this Board meeting, Calhoun had an in-depth conversation with Vos in response to certain questions that Vos had raised at the meeting. Calhoun provided Vos with additional profitability data covering the inception of the Fund through the first nine months of 1979 and explained the reservations that' the Adviser had concerning the accuracy of figures generated by the internal cost accounting system. In response to inquiries by Deering during the January meeting, Calhoun met with Deer-ing and the Adviser provided all directors with information concerning the expense ratio of Prime Reserve Fund relative to other large money market funds. The data indicated that the expense ratio of the Fund was competitive with others in the industry. Finally, on February 20, 1980, the Adviser, following up on requests made at the January meeting, provided the directors with detailed data on the revenue, expenses, and profits of the six mutual funds it managed and its counsel division. This data indicated that the Adviser had a pre-tax profit margin on the Fund of approximately fifty-seven percent during the first nine months of 1979. The Adviser again cautioned the directors about the limited usefulness of the information. On February 26, 1980, the night before the February Board meeting, Friedman met with Vos and Deering over dinner to discuss the factors that should be considered in approving the 1980 Agreement. The Board meeting was held the following day with all directors attending. Prior to this meeting, the directors had been given additional information, including the proposed new Investment Advisory Agreement, a description of the functions of the Fixed Income Division, a summary of the allocation of expenses between the Fund and the Adviser, and a comparison of the Price Associate fee to fees of other advisers. At the meeting, the independent directors considered the proposed 1980 Agreement and discussed the Agreement in relation to the factors outlined by Friedman in his January memorandum. The directors were also aware that, even after the Agreement was approved, they had the right to terminate the 1980 Investment Advisory Agreement at any time. Following the extensive discussion at the February 1980 Board meeting, the directors of the Fund approved the 1980 Agreement. The Agreement, which was to run for a period of one year, contained a fee break at $1 billion which lowered the fee from .4% to .85%. In March, 1980, the Fund proxy statement that had been approved by the directors was mailed to the shareholders of the Fund, including plaintiff. At the annual meeting of the shareholders of the Fund on April 17, 1980, the shareholders overwhelmingly approved the 1980 Investment Advisory Agreement. Renewal Process for 1981 Investment Advisory Agreement Throughout 1980, the Fund continued to grow at a rapid pace, reaching a net asset level of $1.4 billion by December 31, 1980. During this time, the directors received monthly reports on the Fund’s growing net asset level. Upon request, the directors could receive asset level information at more frequent intervals. The directors of all funds managed by Price Associates met on October 31, 1980. In connection with this joint meeting, all of the directors were given an Agenda book containing information about fee arrangements within both Price Associates and the mutual fund industry, services rendered by Price Associates, and the Investment Advisory Agreements • between the various funds and the Adviser. The minutes of this joint meeting reflect that an extensive discussion occurred among all of the directors concerning industry practices with respect to advisory fees and services, the nature of advisory services, and the reason for different funds being charged different fees. The minutes also reflect .that the Prime Reserve Fund directors were interested in knowing whether profitability figures should be considered in determining the reasonableness of the Adviser’s fee. Friedman advised the directors that if they believed such information should be considered, they should request the information from the Adviser. Price Associates sent a memorandum to the Fund directors on January 13, 1981, proposing that a fee break be instituted in accordance with its historic policy of providing such breaks as funds grew. The proposal would reduce the fee from .35% to .30% when the net asset level reached $1.5 billion. This proposal was discussed in depth at the January 21, 1981 meeting of the Board of Directors of the Fund. In connection with this meeting, the directors were again given an Agenda book containing detailed information about the Fund’s performance and the advisory fee. Discussing the proposed fee break, the independent directors requested the PLPS data and were informed that such data would be made available at the February meeting. The directors agreed to postpone discussion of this topic until the February meeting and requested that prior to the meeting they be supplied with the following information: 1. the profitability data generated from the new PLPS; 2. the projected expenses at net asset levels of $1.5 billion, $2 billion, and $2.5 billion; 3. Price Associate’s recommendation regarding fee breaks at each of these net asset levels; 4. the December 31, 1980 Arthur Lipper & Associates’ report on money market funds; 5. Price Associate’s advertising budget; and 6. an endorsement from Price Waterhouse & Co. as to the utility of the PLPS data. At the January 1981 Board meeting, the directors also reviewed and approved for mailing the proposed proxy statement for the 1981 Prime Reserve Fund shareholders’ meeting. On February 11, 1981, Friedman sent the directors of the Fund his annual memorandum reviewing the factors to be considered prior to approving an advisory fee between the Adviser and the Fund. Friedman reported that the Securities and Exchange Commission had adopted Rule 12b-l on October 28, 1980, and advised the directors in detail about that rule and its impact upon their deliberations. Friedman told the directors that the rule did not bar them from reviewing and informing themselves about distribution expenses, but rather only barred them from allowing the advisory fee paid to the Adviser to include payment for those expenses. Price Associates, on February 12, 1981, sent to the directors of Prime Reserve Fund the long awaited PLPS data, together with a report from Price Waterhouse & Co. and additional commentary about the new accounting system. The PLPS showed profitability data for 1980 on a product-line basis. Subsequently, the independent directors of the Fund requested that they see the data both with and without distribution expenses. At around this time, the Adviser reviewed public data regarding the profitability of other mutual fund advisers to determine if a typical pre-marketing/pre-tax margin or a typical after-market/pre-tax margin existed in the industry. The Adviser concluded that its overall profit margin was comparable to, indeed lower than, others similarly situated in the industry. At the request of the independent directors, the Adviser, on February 17, 1981, supplied the directors with a break-down of its distribution expenses by product line. Two days later, the independent directors were also given a pro forma profitability analysis for 1981 that had been requested at the January 1981 meeting. On February 25, 1981, a meeting of the Board of Directors of the Prime Reserve Fund was held. In connection with this meeting, the directors of the Fund were given an extensive Agenda Book containing detailed information about the Fixed Income Division, the proposed Investment Advisory Agreement, the allocation of expenses between the Fund and the Adviser, the non-advisory services provided by the Adviser, the expense ration of the Adviser, and a comparison of the performance and advisory fee charged to the fund and those of other funds in the industry and those managed by the Adviser. At the meeting, following a presentation by the Adviser of its fee proposal, the directors reviewed the materials given to them and a discussion of the 1981 Agreement ensued. The directors discussed the PLPS data, Fund expenses, the reasons for the differences between the fee paid by the Fund and other funds, the growing net asset level of the Fund, and the nature and extent of economies of scale due to this growth. Near the end of the meeting, the independent directors decided to meet privately to confer with their counsel. After a discussion lasting approximately half an hour, the independent directors decided to make a counter proposal to the Adviser. The Adviser, after hearing the independent director’s proposal, countered with another proposal that was lower than its original proposal. After further discussion by the full Board of Directors, this revised proposal was a'dopted by the Board on the condition that the term of the 1981 Investment Advisory Agreement would only be for one year. The fee schedule agreed to was .4% on net assets up to $1 billion, .35% on net assets up to $1.5 billion, .275% on net assets up to $2 billion, and .25% on net assets over $2 billion. On March 6, 1981, the Prime Reserve Fund proxy statement with the new Investment Advisory Agreement was mailed to shareholders of the Fund. At the annual meeting of the shareholders, held April 14, 1981, the shareholders overwhelmingly approved the 1981 Investment Advisory Agreement. During 1981, Prime Reserve Fund continued to grow at a rapid pace. By December 31, 1981, the net asset level in the fund had reached over $3.1 billion. DISCUSSION I. Claims for Excessive Fees under Section 36(b) of the ICA A. The State of the Law Section 36(b) of the Investment Company Act of 1940 provides that: the investment adviser ... shall be deemed to have a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, paid by such registered investment company, or by the security holders thereof, to such investment adviser or any affiliated person of such investment adviser. 15 U.S.C. § 80a-35(b). The statute specifically states that in an action brought under this section, “plaintiff shall have the burden of proving a breach of fiduciary duty.” Id. The legislative history of the Act clearly indicates that it is not the role of the Court “to substitute its business judgment for that of the mutual fund's board of directors in the area of management fees.” S.Rep. No. 184, 91st Cong., 1st Sess., reprinted in 1970 U.S.Code Cong. & Ad. News 4902 [hereinafter “Senate Report”]. Rather, the Court is charged with determining whether the adviser has “committed a breach of fiduciary duty in determining or receiving the fee.” Id. The Senate Report also indicates that the investment adviser is entitled to make a profit and that the bill neither requires a “cost-plus” advisory agreement nor general concepts of rate regulation, such as those applicable to public utilities. Id. On the other hand, the Report also notes that a “corporate waste” standard would be “unduly restrictive” in light of the absence of the usual arms-length bargaining between the adviser and the fund. Id. at 4901. The primary authority in this Circuit for the interpretation of section 36(b) is Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923 (2d Cir.1982). As set forth by the court in Gartenberg, the test is “essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in the light of all of the surrounding circumstances.” Id. at 928. In other words, to be guilty of a section 36(b) violation, “the adviser-manager must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.” Id. As noted by the court in Gartenberg, the legislative history of section 36(b) clearly establishes that Congress intended that the court look at all the facts in connection with the determination and receipt of such compensation, including all services rendered to the fund or its shareholders and all compensation and payments received, in order to reach a decision as to whether the adviser has properly acted as a fiduciary in relation to such compensation. Id. at 930 (quoting Senate Report, at 4910). While all pertinent facts must be weighed in the determination of whether a fee is so excessive as to constitute a breach of fiduciary duty, the Second Circuit listed a number of factors that it considered to be of particular importance. These factors include: 1. the nature and quality of the service provided; 2. the adviser's cost in providing the service; 3. the extent to which the adviser realizes economies of scale as the fund grows larger; 4. the expertise of the independent trustees of a fund, whether they are fully informed about all facts bearing on the adviser’s fee, and the extent of care and conscientiousness with which they perform their duties; and 5. the volume of orders that must be processed by the manager. B. Application of the Legal Standards Application of the foregoing standards to this case confirms that plaintiff has failed to meet her burden of proving that the fees charged by Price Associates were so excessive as to amount to a breach of fiduciary duty within the meaning of § 36(b). In reaching this conclusion, the Court has given little weight to the testimony of Professor Bicksler and Mr. Silver, in that their views regarding the excessiveness of the fees paid by the Fund were based on factors different from those the Garten-berg court emphasized. Similarly, the Court has given little weight to the testimony of Professor Baumol, finding his testimony regarding competition in the market for advisory services to be directly contradicted by the views of the Second Circuit in Gartenberg, Having found the testimony of the experts presented by both sides to be unavailing, in that all of the experts failed to address the relevant legal as opposed to economic implications of this case, the Court itself now must apply the analysis required in this Circuit. Although the Court considered all relevant facts in connection with the determination and receipt of the fees, the Court accorded the greatest weight to the testimony and documentary evidence which shed light on factors stressed by the Second Circuit: the nature and quality of the services rendered, the cost of these services, the sharing of economies of scale as the Fund increased in size, and the qualifications and performance of the independent directors. 1. Nature and Quality of Services With regard to the nature of the services performed by the Adviser, the Court found the testimony of Mr. Taber, the president of the Fund and assistant director of the Adviser’s Fixed Income Division, to be very credible. As explained by Mr. Taber, the nature of Price Associate’s services for Prime Reserve Fund during the time at issue in the litigation fell basically into two categories: investment services and nonin-vestment advisory services. Investment services consist of four basic types of activity: research, portfolio management, trading, and administration and control. Research services are broken down into economic research and analysis, credit analysis, and relative value analysis. Monetary economic research and analysis involves looking at trends in the economy as a whole. Specifically it involves activities such as forecasting interest rates and expectations, studying monetary aggregates and Federal Reserve policy, analyzing fiscal policy and short-term credit demands, and monitoring the Euro-bond and Euro-currency markets. Credit analysis consists of developing internal ratings for hundreds of corporations, as opposed to relying on outside credit rating services. The end product is an approved list of securities that the Fund purchases. Credit analysis also includes establishing direct contact between the credit analysts of the Adviser and the financial management of the world-wide organizations in which they invest. In addition, credit analysis also involves making comprehensive cash flow analyses, and developing ratios for liquidity, capitalization and profitability assessments. Value analysis is the act of identifying opportunities for active repositioning along the yield curve. Specifically, it involves swapping, repositioning and insuring that investors get the best yield for their money. Value analysis also encompasses monitoring yield differentials among different sectors and also as between and among different securities within a sector. Finally, it includes employing the original credit analysis to identify securities that are overvalued and undervalued and acting accordingly. Value analysis involves a significant amount of computer and data processing time. Portfolio management, which is handled by the Investment Advisory Committee at their weekly meetings, was described by Taber as the “bringing together of the findings of our research in the economic, credit and value areas, so that we could create a proper portfolio structure we felt appropriate for the environment and within the terms and restrictions of the prospectus.” Trial Transcript (“Tr.”) at 866. Ta-ber indicated that he devoted a significant amount of time to this difficult function. Tr. at 1009. Trading is closely related to Portfolio management. Once a portfolio structure is selected, the adviser buys, sells, and swaps individual securities to create that structure. Price Associates also performs this back office trading activity for the Prime Reserve Fund. This activity consists of making the trade and following through on whether the trade settled, whether there was a fail, and whether there was back value that had to be corrected. In making a trade, the trader needs to be aware of guidelines set by the Investment Advisory Committee as well as intersecting regulatory limitations and restrictions. The Adviser has the resources available to coordinate all aspects of this complex trading function. Administration and control is a service that occurs alongside the trading activity. The individuals in the Fixed Income Division involved in this activity control, reconcile and administer the paperwork created by the trading transactions. Noninvestment advisory services provided by the Adviser fall into four categories: shareholder services; fund accounting; meeting legal and regulatory requirements; and marketing. Shareholder services provided by Price Associates fall into two categories: services to existing shareholders and services to prospective investors. The Adviser is responsible for fielding questions on performance, taxes, retirement plans, yield and dividends, fielding complaints about the transfer agent, fielding requests for literature, confirming monthly dividends for quarterly statements and policing enforcement of the Fund’s thirty day policy on withdrawals of funds. The evidence indicates that Price Associates handled 360,000 inquiries in 1980 and 760,000 inquiries in 1981 relating solely to the Prime Reserve Fund. Although there is no evidence as to how many of these calls were answered by an answering machine, it is clear that many Adviser employees were required to deal with these phone calls. Taber testified that it took between thirty and forty employees to perform this function in 1980 and well over sixty in 1981. Fund accounting is the actual establishment of a daily net asset value and yield. As an open-ended mutual fund, Prime Reserve Fund has to have a net asset value determined each day. The Adviser’s fund accounting group in Baltimore prices each Fund issue with a maturity over sixty days and comes up with an overall net asset value per share. The Adviser also is responsible for meeting a myriad of legal and regulatory requirements. These requirements included registering the fund with the Securities and Exchange Commission and preparing the necessary filings to be registered in all fifty states. Marketing services involve the formulation and implementation of an advertising strategy as well as the handling of resulting inquiries from prospective shareholders. Both the Adviser and Directors believe that significant marketing efforts are crucial to the success of the fund. During the time at issue in this litigation, the inquiries about the Fund increased as the Fund grew in size. Not only did the Adviser perform this wide range of services for the Fund, but it also performed them well. The undisputed evidence in the record establishes that Prime Reserve Fund was one of the best performers with respect to yield in the money market industry. The Lipper annual rankings rated Prime Reserve Fund eight of forty funds in 1978, ten of fifty-three funds in 1979, and eight of sixty-seven funds in 1980. Lipper three-year trailing rankings rate the fund three of forty-one funds from 1978-80, six of fifty funds from 1979-81, and nine of sixty-six funds from 1980-82. The Fund also had a well above average performance in the Dono-ghue rankings. Prime Reserve Fund was ranked fourteen of forty-four funds in 1978, nineteen of sixty-three funds in 1979, and six of sixty-four funds in 1980. In no ranking was Prime Reserve Fund ever below the top twenty percent in performance during the time at issue in this litigation. These statistics clearly speak for themselves with respect to the quality of service provided by the Adviser. Further indications of the Adviser’s above average performance are the significant increase in the size of the Fund and the Fund's overall gain in market share of assets going into retail taxable money market funds. As independent director Horn correctly observed, “the performance of Price Associates ... was among the best in the business.” Tr. at 1112. 2. Cost of Providing Service By far the most difficult factor to analyze in this case is the Adviser’s cost of providing advisory services to the Fund. Of the two primary methods of calculating cost and profitability, the full-cost method and the incremental-cost method, the Court finds neither method completely satisfactory. However, while the Court will consider the results of both methods in its determination of whether the fees charged by the Adviser were excessive under section 36(b) of the ICA, it will give greater weight to the results of the full-cost method, which the Court feels presents a more accurate picture of the actual costs incurred by the Adviser. The incremental-cost method attempts to calculate the addition to a firm’s total cost that results from its provision of a particular product or service. In other words, it is the difference between the total cost when a product or service is provided at a certain level and the total cost the firm would incur if it ceased to provide that product or service. Although no incremental cost study was available at the time the directors in this case approved the 1980 and 1981 Agreements, such a study was prepared by the defendants during preparation for this trial. This incremental-cost study indicated that during 1980, the incremental costs of managing the Fund were $200,000 while the fees received by the Adviser totaled $4,331,360. For 1981, the incremental costs were calculated at $868,000 while the fees received rose to $8,362,250. Plaintiff asserts that this study indicates that the Adviser had a ninety to ninety-five percent profit margin in servicing the Fund. Although the difference between the fees earned and the incremental costs appears significant on its face, the Court feels that these figures vastly underestimate the actual cost to the Adviser of servicing the Fund. Because incremental costs are those costs which are specifically and one hundred percent dedicated to providing a particular service, incremental-cost accounting does not take into account the common costs that are incurred on behalf of more than one service. These common costs, however, are quite tangible and must be taken into account. Hence, in a multi-product business, such as that run by Price Associates, where many, if not most, costs are common costs, the Court finds an incremental-cost test is not a particularly reliable way to assess the real costs of supplying one product. The full-cost method of calculating costs takes the entire cost of running an operation and attempts to allocate it in some rational way among all of the services or products of that operation. As previously discussed, the Adviser changed its method of allocating costs during the time at issue in this litigation. The old full-cost accounting system produced data indicating that the Adviser earned a pre-tax profit margin of approximately fifty-eight percent during the first nine months of 1979 and sixty-four percent during the last three months of that year. As calculated under the new full-cost PLPS, the Advisor had a pre-tax profit margin of 66.8% on the Prime Reserve Fund in 1980. The problem with relying on full-cost accounting data is that the results received largely depend on the assumptions underlying the allocation system. There are many acceptable ways to allocate common costs, each of which leads to significantly different results. Even plaintiffs economic expert Professor Bicksler observed that full-cost accounting does not give an objectively accurate picture of the profitability of one product line in a multiproduct firm. Tr. at 245. This Court agrees and in so doing acknowledges that it is left in this case with the problem of uncertain profitability. Notwithstanding the virtually impossible task of calculating Price Associate's exact cost of servicing Prime Reserve Fund, the Court has examined the assumptions underlying the Adviser’s PLPS and has found them basically reasonable. Having no better alternative, the Court is prepared to accept the PLPS 66.8% profit margin figure for 1980. With respect to the profit margins in 1979 and 1981, the Court is willing for the purpose of argument to accept the profitability figures calculated by plaintiffs expert Mr. Silver, a 59.1% profit margin in 1979 and a 77.3% profit margin in 1981. Tr. at 715-16, 1226. Applying the stipulated tax rate of approximately fifty percent, the Court calculates the profitability margin of the Adviser as being close to 29.5% in 1979, 33.4% in 1980, and 38.6% in 1981. 3. Economies of Scale Another factor in assessing the fairness of the Advisory Agreement is whether Price Associates has taken account of any economies of scale in the management of Prime Reserve Fund in setting the advisory fee. As previously noted, with respect to this factor, it is appropriate to consider fee schedules in the money market industry. An analysis of the advisory fee schedule of Price Associates clearly indicates that the Adviser has taken economies of scale into account in setting the Prime Reserve Fund fee. From the outset and during the entire time at issue in this litigation, the Adviser has had one of the very lowest fee schedules in the industry. In 1979, the Adviser’s fee level was set at .4%. As indicated in a January 1980 memorandum from Colhoun to the directors of the Fund, forty-nine of sixty-eight money market funds, approximately seventy-two percent, began their advisory fee at .5%. These funds had to introduce fee breaks at higher asset levels just to get their fees down to the Adviser’s fee. During 1979, at an asset level of one billion dollars, the Fund’s fee level of .4% was below all but six of the twenty-two largest funds that had assets of over $250 million. As the Fund grew, the Adviser became increasingly concerned with economies of scale and keeping its fees at a reasonable level. In Calhoun’s January 4, 1980 memorandum to the Executive Committee of Price Associates recommending a fee break to .35% at $1 billion, he informed the committee that while the Fund’s management fee was not currently out of line with its competition it would become less competitive if the Fund continued to grow. Following the Executive Committee’s approval of his recommendation, Calhoun sent a memorandum to the directors of the Fund seeking their approval and explaining the reason for the fee break. The memorandum explained that “[i]t has been a historic practice of the Adviser to recommend fee breaks in Fund Advisory Agreements as the Funds become larger in size. The purpose of the fee break is to share the economies of scale with the shareholders.” Throughout the entire period, the directors had been informed by their counsel Friedman about the concept of economies of scale. Tr. at 519. Director Deering testified that the fee break proposal was evaluated by the directors in terms of whether there was adequate sharing of economies of scale. Tr. at 1137. The Board of Directors subsequently approved the fee break proposal. In January 1981, the Adviser proposed an additional fee break. Because the directors were concerned that the Fund might grow even larger and wished to ensure an adequate sharing of economies of scale if that occurred, the directors presented a proposal that extended fee breaks up to and including an asset level of $2.5 billion. Although the fee break ultimately negotiated differed somewhat from the director’s counterproposal, Director Horn testified that the breakpoints which had been agreed to involved a sharing of economies of scale. Tr. at 1112. Evidence presented to the Court indicated that had the Adviser not instituted break-points, but rather maintained its .4% fee structure for 1980 and 1981, Price Associates would have earned an additional $2,375,000 at the $3 billion asset level. Thus, the Court finds that the Adviser’s realization of economies of scale and its corresponding institution of break-points resulted in substantial savings to the Fund. 4. Role of the Independent Directors As pointed out by the Second Circuit, the expertise of the independent trustees of a fund, whether they are fully informed about all facts bearing on the adviser-manager’s service and fee, and the extent of care and conscientiousness with which they perform their duties are important factors to be considered in deciding whether they and the adviser-manager are guilty of a breach of fiduciary duty in violation of § 36(b). Gartenberg v. Merrill Lynch Asset Management, Inc., supra, 694 F.2d at 930. Evaluating the background, knowledge, and behavior of the independent directors, the Court finds: 1. that the directors are an exceptionally well-qualified group of individuals; 2. that they were kept fully informed about the factors necessary to set the Adviser’s fee; and 3. that the directors were extremely conscientious with respect to their responsibilities and their role in approving the fee schedule. a. Expertise There is no question that the four independent directors of Prime Reserve Fund are well-educated and well-regarded members of the financial community. Throughout their careers, the directors have belonged to numerous professional societies and have received a number of professional honors and awards. Director Horn received a B.A. from Pomona College in 1965 and a Ph.D. in economics from Johns Hopkins. She taught at John Hopkins while she was getting her degree and subsequently, taught part-time at Simmons College, Williams College and the Wharton School of the University of Pennsylvania. Horn was the first female president of the Federal Reserve Bank of Cleveland; indeed the first female president ever of a Federal Reserve Bank. Director Deering received a B.A. from Drexel University in 1969. He was valedictorian of his class. Subsequently, he received an M.B.A. from the Wharton School of the University of Pennsylvania and engaged in graduate study at the University of Exeter in Devon, England. Deering is the senior vice-president and chief financial officer of the Rouse Company, a large publicly owned real estate development and investment company. Director Vos received a Bachelor’s degree in international affairs from the University of Paris in France. He received a Masters degree in public and international affairs from Princeton University. Vos also pursued some graduate study at the graduate school of business at Northwestern University. Vos is an international businessman with an extensive career in international business in South America, Australia, New Zealand, England, and the United States. He has held high level positions with a number of companies including Smith, Klein, Inc., Commercial Credit Company, and Norton Simon, Inc. Director Linaweaver received a B.S. degree in engineering in 1955 and a Ph.D. in sanitary engineering and water resources in 1965 from Johns Hopkins University. Linaweaver has served on the faculty of Johns Hopkins. He also served as a White House fellow and assistant to the Secretary of the Interior under President Johnson. Linaweaver worked for over six years as the director of public works for the City of Baltimore and more recently has been in the practice of consulting engineering. b. Information The evidence is undisputed that the Adviser made every effort to keep the independent directors fully informed about the nature of their responsibilities as directors and the factors affecting the approval of a fee schedule. All of the directors testified that Price Associates supplied them with an abundance of information about the Fund on a regular basis. In addition, it is clear that the Adviser never declined to give the directors any information that they requested when they were deliberating on the investment advisory contracts. According to independent director Horn, the Adviser provided the directors at any point with whatever information they needed: “We were always provided — in any situation that I know where a request was made for information it was always provided, regardless of how sensitive or confidential to the Associates the information might have been. They were always forthcoming with whatever information we asked for.” Tr. at 1085. Commenting on the Adviser’s behavior with respect to furnishing information, Friedman opined that “Price Associates was a model in the furnishing of information. They not only gave the directors what the directors asked but they attempted to keep the directors currently apprised on developments in the industry and developments and practices within the organization.” Tr. at 586. Friedman also explained that the Adviser invited the directors to major conferences on issues affecting the mutual fund industry and arranged a number of field trips, including one to the transfer agent State Street Bank. Tr. at 587. The record indicates that the independent directors of Prime Reserve Fund had access to a wide variety of information and informational resources. While the Court finds it unnecessary to recite in detail each and every document the directors received, the Court will now briefly review the more significant information that they had available. The directors testified that each year before the negotiations for the advisory agreement began, they were sent a “volume of information” in agenda books. Tr. at 1141. Another important resource was Stanley Friedman, the directors’ separate and independent legal counsel. Friedman spoke to the outside directors at least every other week and kept them fully informed about all relevant legal documents, including the effect of Rule 12b-l. In addition, each year at the annual contract renewal meeting, Collins, Taber and Calhoun made presentations to the directors about the nature and quality of the services performed by the Adviser, emphasizing the functions of the Fixed Income Division and the Investment Advisory Committee. Included every year in the information made available to the directors were figures on the overall profitability and expense ratio of the Adviser. According to director Horn, the directors commonly requested and received additional information regarding projected expenses of the Fund at various levels, asset levels, and recommendations regarding fee breaks at various levels. Tr. at 1061. Commencing in 1980, the profitability of the Adviser on a product-line basis was also made known to the directors upon request. To avoid misleading the directors, the Adviser carefully explained the reservations it had regarding the reliability of the data produced by the old cost accounting system. Tr. at 1272. The PLPS results for 1980 were provided to the directors in February 1981 along with a letter from Price Waterhouse verifying the results based on the given assumptions. This data was supplied initially without marketing statistics and later, upon the request of the directors, with such statistics included. Plaintiff argues that the information given to the directors was both incomplete and misleading. Initially, plaintiff contends that neither Friedman nor the directors was made aware until 1980 that the Adviser maintained product-line profitability reports that were internally generated on a quarterly basis. Moreover, when these reports were finally given to the directors in 1980, they were only provided with profitability data for the first nine months of 1979. Plaintiff argues that the reason the directors did not get to see the data is because the last three months of 1979 were the most profitable months and the Adviser wanted to hide this fact from the directors. Plaintiff also asserts that the directors were never provided with incremental-cost studies (which the Adviser did not have prepared until preparation for trial), relevant fee schedules from the competitive market or an available study commissioned by the Adviser comparing the fees of the counsel division and the mutual fund division. Finally, plaintiff maintains that in approving the 1980 advisory fee, the directors were mislead in a subtle manner because the Adviser presented them with profitability information that included information about the Adviser’s marketing expenses. The Court finds that the independent directors were neither inadequately informed nor mislead. With respect to product line profitability for 1979, the undisputed evidence is that Friedman only learned that product line profitability studies were available in 1980. He testified that prior to that time he did not think that section 36(b) required the directors to consider the profits of the adviser. Friedman’s memorandum to the directors reflected his belief that the law was uncertain in that he stated it was “not inappropriate” for the directors to request profitability information. Once this information was requested by the independent directors, the Adviser immediately supplied them with all of the known profitability data it had available. The Adviser could not provide them with the data for the last three months of 1979 in February 1980 because the company’s books were not yet closed out so the figures had not yet been calculated. Tr. at 1271. There is no evidence that the Adviser was deliberately trying to hide information. When this data finally became available, the directors did not ask for it. According to Taber, this data was not supplied because it was derived from an inaccurate system and the Adviser was in the process of converting to the new cost accounting system. During this time, Taber stated that the Adviser was devoting all of its work and energy to obtaining 1980 product-line profitability results by February 1981. Tr. at 1005 The Court finds that the information generated by the old cost accounting system was not particularly reliable and there was no reason for the Adviser to supply the directors with the information generated concerning the last three months of 1979. Moreover, the directors never requested this information. The Court is confident that, had such data been requested, the Adviser would have given it to the directors. The Court has similar views about the other studies the plaintiff feels the directors should have been given. As noted above, the directors were an extremely bright and articulate group of individuals. Had they felt that incremental cost studies would aid them in approving the fee, they surely would have asked the Adviser to do such studies. Apparently, these studies were neither asked for nor made. As for the study comparing the fees of the counsel and mutual fund division, the Court has previously noted that the Adviser provides different services to its different divisions so such a study would not appear to be particularly relevant or useful to the directors in setting fees. Thus, since the directors already had ample information before them, there was no reason to show the directors another study. Moreover, due to the unique nature of the services provided by money market advisers and the industry, the Court finds there were no fee schedules from the competitive market that could have appropriately guided the directors. Plaintiff also presented no evidence that providing fee schedules for other industries is either required by law or a general industry practice. Accordingly, the Court is unprepared to hold that this type of information must be provided to the directors for them to be fully informed. With respect to plaintiffs claim that the directors were mislead in 1980 by being shown distribution expenses along with the 1979 profitability figures, the Court finds that, as financially astute individuals, the directors were unlikely to be confused concerning marketing. By January 1980, Friedman had already sent the directors copies of the proposed Rule 12b-l and had discussed it individually with Vos and Deer-ing. jn fac^ even though Rule 12b-l was not yet in effect at the time, Calhoun explained to the directors when he provided them with the product-line profitability memorandum that profitability should first be determined without consideration of the sales and promotional expenses. After having discussed the subject in greater detail with independent director Vos, Calhoun reported in a February 13, 1980 memorandum that when Vos reviewed the profitability figures and found them acceptable, Vos took note of the Adviser’s profit margin both with and without new business expenses. Horn testified that the directors had discussed the proposed rule and the director’s role under it. Inasmuch as the directors were provided with complete and accurate information concerning marketing in 1980 and were fully capable of understanding the information presented to them, the Court finds no evidence that the independent directors were mislead when they approved the 1980 Agreement. c. Care and Conscientiousness It is undisputed that the independent directors took their responsibilities with great seriousness and accordingly, performed their duties as directors carefully and conscientiously. The evidence indicates that the independent directors not only carefully analyzed and debated the information they were given, but also actively questioned the Adviser and requested additional information when they needed it. The minutes of the January 18, 1980 director’s meeting indicate that the directors did not unquestioningly accept the Adviser’s suggestions. Vos, for example, raised a number of questions with respect to the proposed fee break, including: 1. Is the advisory fee competitive?; 2. Are there economies of scale?; and 3. Is the profitability of the Adviser reasonable? At trial, Deering described the interchange between the directors and the Adviser that occurred during the 1980 renewal process: So during the January meeting we had a number of discussion about [the Adviser’s compensation system] and asked for information on profitability, discussed the fee break and what was also happening in the world of interest rates and the rest at that time, which was very volatile. They then supplied us with some additional information on the funds and their profitability. [Vos] and I felt very concerned about understanding this completely, so he and I had dinner the night before the next board meeting with Stanley Friedman, who was the outside general counsel for the funds, to really discuss the profitability information, was it adequate, how should we consider the profitability information, how to analyze it, and could we make the judgment therefore that the fees were appropriate, competitive and, in our judgment, a fair deal for the shareholders. And then in the February meeting we actually went through all the materials in the profitability analysis and came to the conclusion that yes, we were comfortable with it but that the profitability material that had been presented was, as described by T. Rowe Price Associates, inadequate for the complexity of the funds that were then [emerging] in the firm. Tr. at 1038-39. At this point, the minutes of the February 27, 1980 board meeting reflect that the directors would approve the 1980 Agreement if the Adviser agreed to supply them with new profitability figures generated by a revised cost-accounting system, a system that would be reviewed by an independent accounting firm to confirm its reliability. After the Board of Directors of the Adviser met, it agreed to the independent director’s request to provide such cost accounting data the following year. In the Court’s view, the discussion and information requests that ensued during the contract renewal process clearly indicate that the directors were conscientious, well-informed, and assertive individuals, who looked at all the relevant facts prior to approving the 1980 Agreement. Similarly, throughout the 1981 renewal process, the independent directors continued to request information and actively debate with the Adviser. At the January 21, 1981 Board of Directors meeting, the minutes reflect a discussion that occurred concerning the setting of an additional break-point. Because the directors did not yet have the profitability data from the PLPS at this time, the directors decided to postpone additional discussion until the following meeting. The directors requested that additional information be provided to them prior to that meeting, including: 1. profitability data; 2. projected expenses at various asset levels; 3. recommendations regarding fee breaks at various asset level; 4. Lipper data; 5. projected advertising budgets; and 6. an endorsement from Price Waterhouse & Co. as to the reliability of the profitability data produced by the PLPS. This data was provided to them prior to the February meeting. The events of the February 25, 1981 meeting further indicate the seriousness with which the independent directors viewed their role in the fee negotiations. At this meeting, following the annual presentation on the Adviser’s services, Price Associates proposed an additional fee break at a certain level. The minutes reflect that the independent directors did not simply approve the Adviser’s suggestion, but rather had a private meeting with Friedman. Following this meeting, the independent directors expressed certain concerns about the original proposal and introduced an alternative fee schedule. The Adviser discussed this proposal with the independent directors and suggested an altern