Full opinion text
OPINION WALKER, District Judge: Index to the Opinion Introduction. 475 I. Background. 476 A. The CMA Program. 476 B. Merrill Lynch & Co. and its Affiliates. 478 C. Fees Paid by the Fund and its Shareholders. 478 L The Service Fee.. 479 2. The Advisory Fee. 479 3. The 12b-l Payments. 479 D. The Trustees . 479 L Information Available to the Trustees. 479 2. Consideration of the Advisory Fee .... 481 E. The 12b-l Plan. 482 T. Adoption oI the Plan. 482 2. Continuation of ttuTPlan. 484 II. The Law. 485 III. Findings And Conclusions as to the § 36(b) Claims Introduction — The Fund as a Component of the CMA Program. 00 05 A. Nature and Quality of Services Provided to Shareholders. 00 05 L MLAM’s Services.. 00 -q 2. Shareholder Services. 00 00 B. Profitability to Merrill Lynch from the Fund. 05 00 L Financial Consultants and Rule 12b-l Payments. o 05 TP 2. Monthly Statement, New Account Processing arid Marketing Costs....... CO to 3. Float Costs, Systems Excess Capacity, Imputed Income and Wire and Order Costs.... <N 05 tP 4. Corporate Overhead ..... CO 05 ^ 5. Conclusion as to Profitability . tP 05 tP C. Fall-Out Benefits. ^ 05 tP 1. Primary Fall-Out Benefits. Tp 05 tP 2. Secondary Fall-Out Benefits. lo 05 tP D. Economies of Scale . CO 05 tP E. Comparative Expense Ratios and Advisory Fees. 05 1. Expense Ratio. 05 2. Advisory Fee.. 05 F. The $65 CMA Service Fee. t-05 G. Rule 12b-l Plan Fees. 00 05 H. The Trustees: Expertise, Knowledge, Care. I. Conclusion as to the § 36(b) Claim.... 7TT~.. IV. The Proxy Statement Claims. W O INTRODUCTION Plaintiff Jeffrey Krinsk brought this derivative action on behalf of the CMA Money Fund (“Fund”), under the Investment Company Act of 1940, as amended, 15 U.S. C. § 80a-l et seq. (the “Act”), to recoup allegedly excessive advisory fees paid by the Fund to its investment advisor. Defendants are Fund Asset Management, Inc. (“FAMI”), Merrill Lynch Asset Management Inc. (“MLAM”), Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”), Merrill Lynch & Co., Inc. (collectively, “Merrill Lynch”), and the Fund. At all times relevant to this action, plaintiff has been a shareholder of the Fund. Krinsk commenced this action on May 16, 1985, seeking initially to recover for the Fund all investment advisor compensation determined to be excessive for the period January 1, 1980 to May 16, 1985. On May 1, 1986, this Court held that the one year statute of limitations in § 36(b) of the Act restricts plaintiffs claim to recoupment of fees paid to the investment advisor after May 17, 1984. Krinsk v. Fund Asset Management, Inc., Slip Op. 85 Civ. 8428 (JMW), 1986 WL 205 (May 1, 1986). Plaintiffs first amended complaint alleged that the defendants had violated §§ 12(b), 15, 20 and 36(b) of the Act. On March 4, 1987, this Court dismissed the §§ 12(b) and 15 claims and struck plaintiffs demand for a jury trial. Krinsk v. Fund Asset Management, Inc., 654 F.Supp. 1227 (S.D.N.Y.1987). At the subsequent bench trial, beginning March 16, 1987, the Court heard evidence on plaintiff’s remaining claims: (1) that for the period May 17, 1984 to December 31, 1986, fees were paid to the investment advisor in violation of the advisor’s fiduciary duty under § 36(b); and (2) that the 1984 Fund proxy statement distributed to CMA Fund shareholders by the defendants contained materially misleading statements. The Court has carefully appraised the testimony of the witnesses in the context of their demeanor, interests and expertise, examined the numerous documents received in evidence and conducted a word-by-word review of the trial transcript. For the reasons stated below, the Court finds for defendants on both claims and dismisses the complaint. This opinion constitutes the Court’s findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52. I. Background A. The CMA Program The Fund is one component of a financial services package offered by Merrill Lynch called the Cash Management Account program (“CMA program”). Since, as all parties agree, the Fund must be considered in the context of the CMA program as a whole, it is necessary to explain that program and its operation in some detail. The CMA program links together (1) a traditional securities brokerage account (the “securities” or “margin” account); (2) a savings vehicle consisting of one of three money market funds (one of which is the Fund) or an insured savings account; (3) a VISA debit card; (4) check-writing privileges; and (5) a comprehensive monthly statement. Merrill Lynch requires each incoming CMA participant to invest $20,000 in cash and/or securities; however, the participant need not maintain a minimum balance. Merrill Lynch introduced the CMA program in 1977. From 1977 through 1986 the number of CMA participants grew from 34,792 to over one million. Although Merrill Lynch was the first to offer such a product, generically known as a central asset account, today many of the firm’s competitors offer similar products. The parties agree that the focal point of the CMA program is the securities account. T. 452 (Zeikel). Through it, CMA participants may purchase or sell securities on “margin” (credit) or with cash. Although Merrill Lynch offers no discount brokerage rates as part of the CMA program, individuals may negotiate with Merrill Lynch for reductions in the price of their transactions on the basis of the value of their securities business. T. 755-6 (Zeikel); 890-92 (Walsh). CMA participants are an important source of commission revenue to Merrill Lynch. CMA securities accounts generate an average of $1,200 in commissions per year, while other Merrill Lynch securities accounts produce on average only $400 in commissions per year. T. 990 (White); Px. 26. As of December 31, 1986, the CMA brokerage accounts constituted one-fourth of all Merrill Lynch brokerage accounts, yet produced approximately one-half of Merrill Lynch’s brokerage commission revenues. A significant component of the CMA program is the primary savings vehicle or money account. In selecting a savings vehicle, the CMA participant chooses either one of three money market funds — the CMA Money Fund, the CMA Government Securities Fund, the CMA Tax-Exempt Fund — or the Insured Savings Account, a money market deposit account opened by Merrill Lynch on behalf of the participant at one or more banks or savings and loan institutions. Px. 75c. A participant is free to switch his designation of the primary savings vehicle at any time, and at any time may hold shares in more than one CMA savings vehicle. The CMA program links the securities account to the primary savings vehicle through a “sweep” feature. Uninvested cash or “free credit balances” generated in the securities account through, for instance, payment of dividends or sale of securities, are swept automatically into the money account. Px. 2, 4, 6, 75a. When a participant’s free credit balance is $1,000 or more, it is swept that day for investment the following day. Balances less than $1,000 are swept weekly. The subject of this lawsuit, the CMA Money Fund, is a no-load, diversified, open-ended investment company registered under the Act. As of January 5, 1987, assets invested in the Fund exceeded $19 billion, making the Fund the largest money market mutual fund registered under the Act. T. 511 (Zeikel); Dx. A. Approximately 75% of Merrill Lynch’s CMA participants hold assets in the CMA Money Fund. The Fund seeks the current income and preservation of capital and liquidity available from investing in a diversified portfolio of short-term money market securities. Fund dividends are declared and reinvested daily in the form of additional shares, each worth about $1. The participant’s investment in the Fund is represented by the number of shares he holds. A shareholder may redeem or purchase additional shares in any amount without incurring a transaction charge. The VISA debit card and check-writing privileges are tied to the savings vehicle and securities account. These components of the CMA program provide Fund shareholders with immediate access to money deposited in the Fund and to margin credit. With each VISA card use, the shareholder’s account is debited immediately after the transaction clears. The time between the date of transaction and date of clearing is approximately five days, during which time the shareholder has interest-free use of his or her money. T. 889 (Walsh). VISA transactions are handled through the Merrill Lynch Bank and Trust Co., a banking subsidiary of Merrill Lynch. Since the CMA program links the VISA card to the securities account as well as to the primary money account, the VISA cards may be used for larger purchases on margin. The check-writing privileges are offered through Bank One, Columbus Ohio, which clears the checks and looks to MLPFS for payment. In 1986 MLPFS processed 54,-855,708 checks, an average of four per month per shareholder. Dx. C. These checks averaged $745 in amount. T. 69 (Livingstone). When a customer’s check or VISA transaction clears, Merrill Lynch pays the debt first out of any free credit balance, then out of the Fund or any other savings vehicle and, finally, from the available margin loan value of securities in the customer’s account, the total of these comprising the authorization limit for check or VISA transactions. Px. 75. Interest charged on margin loans is based upon the “broker call rate”, the rate at which brokers can borrow and lend. Merrill Lynch sends each CMA participant a comprehensive monthly statement, containing both a summary of the account balances, investment income earned, and account activity, and more detailed information about securities account holdings and CMA account activity during the month. Due to their length and detail, the monthly statements takes MLPFS one week to print. CMA participants also receive a year-end tax statement summarizing their taxable activities over the year. B. Merrill Lynch & Co. and its Affiliates MLAM and FAMI provide the management services and MLPFS provides the shareholder services necessary to support the CMA program. FAMI is a wholly-owned subsidiary of MLAM which in turn is a wholly-owned subsidiary of Merrill Lynch. Both FAMI and MLAM are registered as investment advisors under the Act. MLAM is investment advisor to between 40 and 50 mutual funds as well as institutional and individual investors. T. 450 (Zeikel). The Merrill Lynch Ready Assets Trust (“RAT”) is among the funds that receive investment advisory services from MLAM. MLAM manages approximately $82 billion, $32-$36 billion of which is held in money market accounts such as the RAT and the CMA Money Fund. MLAM’s management services to the Fund include: (1) general administrative services, such as supervision of financial and accounting matters and tax compliance; (2) fund organizational services such as preparation of materials for director and shareholder meetings; and (3) portfolio management in compliance with the Fund’s investment objectives and legal requirements. In managing the Fund’s portfolio, MLAM has access to the research work of the MLPFS Security Research Division and Merrill Lynch Economics, Inc. Dx. 18. MLPFS, a subsidiary of Merrill Lynch and the largest securities firm in the United States, services the individual CMA accounts. Id. MLPFS is responsible for processing new accounts, VISA and checking services, for printing and distributing the monthly statement, and for responding to customer inquiries. It also provides the sophisticated computer system linking the various components of the CMA program. The point of contact between MLPFS and the CMA program participant is the MLPFS account executive, denominated a “financial consultant,” of whom MLPFS has 11,000. Patrick Walsh, manager of the Merrill Lynch Asset Accumulation Group, described the financial consultant’s role at Merrill Lynch as “basically to satisfy the needs of his clients and to provide his clients with financial advice and information regarding trading and helping his client with his finances.” T. 869. From Merrill Lynch’s perspective, the financial consultant’s principal function is to effect securities transactions on which MLPFS earns commissions. In turn, MLPFS compensates the financial consultants by paying commissions on these transactions, whether for CMA customers or non-CMA customers. In addition, financial consultants receive .11% of the Fund Assets under their supervision, pursuant to a “12b-1” plan, discussed below. Financial consultants are assisted by sales assistants. C. Fees Paid by the Fund and its Shareholders As compensation for the services of MLAM and MLPFS, the Fund and its shareholders pay three fees: an annual service fee paid to MLPFS by all CMA program participants; the investment advisory fee paid by the Fund to MLAM; and payments made by the Fund to MLPFS pursuant to a 12b-l plan, nearly all of which is passed on to the financial consultants. 1. The Service Fee Merrill Lynch charges an annual fee to each CMA program participant, including those who have chosen savings vehicles other than the CMA Money Fund. The fee appears on the CMA program monthly statement and is paid on the anniversary of the participant’s entrance to the program by a cash debit or by selling fund shares. The fee rose from $20 at the program’s inception in 1977, to $50 in 1984, and then to $65 in December 1985, its current level. Walsh testified that the fee was raised to $65 upon his recommendation, and that he advocated the change because “with all the resources and all of the commitments we had made to the account, our account at that time was one of the lowest priced in the market place, and we just decided that we should get up to where everyone else was as far as the fees were concerned....” T. 948. The Fund’s Trustees played no role in the decision to raise the program fee in 1985. 2. The Advisory Fee The Fund pays a percentage of the total assets in the Fund as an advisory fee to its investment advisor, MLAM, according to the following schedule: .50% up to $500 million of average net assets (50 basis points); .425% in excess of $500 million but not exceeding $1 billion of average net assets (42.5 basis points); .875% in excess of $1 billion of average net assets (37.5 basis points). Amounts paid by the Fund under the advisory agreements for the years ending December 31, 1984-86 were: effective rate Fee Paid .38 1986 68,996,608 .38 1985 63,939,204 .38 1984 52,934,492 Dx. A. The Fund Trustees and Fund shareholders approve the fee on an annual basis. The fee scale has remained unchanged since October 11, 1979 when the Fund’s assets totalled $605 million. From June 1983, when the Fund stood at approximately $12 billion in assets, until March 1986, when the Fund was at about $18 billion, the effective fee rate decreased less than one-fourth of a basis point — .0023%. Px. 17. 3.The 12b-l Payments Since September 1, 1983, the Fund has paid .125% of the Fund’s assets (12.5 basis points) to MLPFS for distributing Fund shares. These 12b-l payments are remitted to MLPFS pursuant to a Distribution Agreement and a Shareholder Servicing and Distribution Plan (“12b-l plan”). As noted above, under the 12b-l plan MLPFS passes through 11 basis points to the financial consultants. MLPFS pays 1 basis point to sales management, and up to .50 of a basis point is kept by MLPFS to offset administrative costs of the program. T. 602-03 (Zeikel); White Dep. 52-53. D. The Trustees 1. Information Available to the Trustees The Fund is governed formally by a Board of Trustees (the “Board” or the “Trustees”) consisting of Messrs. Zeikel, Colgan, Forbes, White, O’Reilly, Lenagh, and West, of whom only Zeikel is formally affiliated with Merrill Lynch, as a vice-president. The unaffiliated Trustees, who have their own, separate counsel, comprise the Fund’s Audit Committee and Nominating Committee. T. 1334 (West). The Board’s principal responsibility is to evaluate the advisory fee annually and the 12b-l plan quarterly in light of the interests of the shareholders. The Board also oversees the investments and administration of the Fund. T. 515 (Zeikel). The Board meets regularly four times a year and at special meetings. Id. at 516. The day-to-day management of the Fund is left to MLAM. In Audit Committee meetings, held immediately prior to full Board meetings, the unaffiliated Trustees review matters relevant to Fund administration, such as the 12b-l plan and the fund’s portfolio management. Zeikel, the only affiliated Trustee, is occasionally invited to attend or make presentations at Audit Committee meetings, as are other Merrill Lynch personnel. See T. 1336-37 (West). All six unaffiliated Trustees joined the Board at Merrill Lynch’s invitation. All serve on other Merrill Lynch fund boards. Each receives total compensation from Merrill Lynch in a range from $50,000-86,-000 annually for board service. See e.g., T. 404 (Colgan); T. 1332 (West); T. 1489 (Forbes). In order to aid the Trustees in their deliberations, the Merrill Lynch organization provides them with extensive information, including memoranda relevant to the advisory and distribution agreements. In 1984, for example, the unaffiliated Trustees received a “Green Book”, Px. 15, which discussed, inter alia, the role of the unaffiliated Trustees, litigation affecting the Money Fund, FAMI and MLPFS management and distribution proposals and alternatives to those proposals, and a legal analysis of the reasonableness of management compensation, with discussion of both Gartenberg I and Gartenberg II. The 1984 Green Book also included lengthy memoranda on the advisory agreement and the 12b-l plan. In 1985 and 1986, the Trustees received Green Books with even more detailed information. Px. 16, 17. All three Green Books contained informational exhibits relevant to Trustee deliberations. See T. 1340 (West). In 1985 and 1986, counsel to Merrill Lynch prepared a Directors Manual and sent it to all Merrill Lynch fund trustees, including the Trustees of the Fund. Px. 18, 19. Each Manual included an exhaustive memorandum describing the factors to be considered by the Trustees in evaluating investment advisory fees, an extensive presentation of the legal requirements of Rule 12b-l and information concerning 12b-l plans adopted by the MLAM-sponsored funds. It also included the trial and appellate court opinions in the Gartenberg litigation. Additionally, the Manual informed the Trustees about the structure of the MLAM organization and MLAM’s services to Merrill Lynch money market fund shareholders, as well as other Trustee responsibilities such as selection of independent accountants. Prior to each full Board meeting, the Trustees also received from Merrill Lynch a “preliminary agenda” for the full meeting which frequently contained additional information relevant to Trustee consideration of the investment advisory fee and 12b-l plan. See e.g. Dx. BF. The Trustees received other periodic memoranda from the Fund and Merrill Lynch counsel updating them on legal developments in the investment company field. T. 1346 (West); Dx. BJ. The Trustees also received the proxy material for their review prior to its distribution to shareholders. T. 1362 (West). The parties do not dispute, and the Court finds, that the Trustees were fully informed throughout the relevant period as to all matters relevant to any determination for which they were responsible. 2. Consideration of the Advisory Fee In this case, the Trustees reviewed the materials received with regard to the advisory fee in light of the various Gartenberg I factors, discussed in detail below. Trustee White credibly explained that the material distributed to the Trustees included “a sort of tick-off sheet of various factors we have to follow.” Dep. 17. He remarked that: “[gjenerally what we do in the group is go down those, some we can handle reasonably rapidly, some we spend more time discussing, but before we renew the agreement we’ve gone though every one of those factors.” Id. The factors reviewed by the Trustees included: (1) the nature and quality of services rendered to the shareholders by the Merrill Lynch organization; (2) the fees paid by the Fund and payable at projected asset levels, expense ratio and performance of the CMA fund; (3) comparative data on fees, expense ratios and performance of other funds; (4) advisory fees negotiated in the settlement of litigation under § 36(b); (5) the profits to Merrill Lynch directly attributable to the CMA Fund; (6) the wisdom and practicability of assessing “fall-out” benefits to Merrill Lynch and the hypothetical impact of these fall-outs on Merrill Lynch’s profitability; (7) possible economies of scale realized in managing such a large fund; and (8) the entrepreneurial risk to Merrill Lynch and losses incurred on the CMA program during the program’s early years. The Trustees assessed the advisory fee’s fairness in relation to the CMA program as a whole rather than in relation to the Fund in isolation. Trustee West testified that, the trustees talked at some length among ourselves and with others about what did it mean to talk about profitability, and the more we talked, the more convinced we all became that it really had to be looked at in the context of the profitability of this thing called the CMA program or product, that trying to pull out a piece of it and look at it as though it were a stand-alone piece, was trying to unscramble an omelet. T. 1350; see also Lenagh Dep. 63. West explained that the service fee and advisory fees offset the costs of the program as a whole and “if you can tell me exactly what is paying for what, you’re a better man than I.” T. 1460. Thus, the Trustees evaluated the fairness of the advisory fee in light of costs and benefits of the CMA program as a whole, not simply MLAM’s management of the Fund. The unaffiliated Trustees concluded throughout the period at issue here that the advisory fee required no “fine-tuning.” Px. 10 at 9. On June 13, 1984, June 12, 1985 and June 11, 1986, the Trustees voted unanimously to approve renewals of the investment advisory fee challenged in this action. Dx. AN, Px. 11, Px. 13. In 1984 the Audit Committee concluded that (1) the comparative information “confirmed the general appropriateness of the current fee schedule;” (2) the Peat Mar-wick & Mitchell (“PMM”) full-cost profitability study, which showed overall direct losses for Merrill Lynch on the CMA Fund for the years 1982 and 1983, was the most accurate profitability study to date and provided no current basis for adjustment of the fee; and (3) a causal problem existed in assessing the benefit to Merrill Lynch of fall-out benefits from the Fund. Dx. AM. Despite this last conclusion, committee members were nonetheless furnished with information on all profits earned from securities transactions in CMA securities accounts. The Audit Committee reached similar conclusions in 1985 and 1986. In 1985, [mjembers of the committee concluded that the absence of evidence indicating that substantial economies of scale were realizable in the operation of the CMA program, coupled with the highly variable nature of the CMA program profitability, would make it problematic to attempt a “fine-tuning” of the Fund’s established advisory compensation arrangements from year to year in a reaction to the CMA Program profitability estimates. Px. 10. In June 1986, the Audit Committee reviewed a profitability study presented by Alan White, a Merrill Lynch employee, and the next day the full Board approved the advisory agreement. Px. 13. E. The 12b-l Plan 1. Adoption of the Plan In March 1983, concerned by the erosion of Fund assets, T. 1446-47 (West), T. 409 (Colgan), MLAM suggested the adoption of a 12b-l plan to implement a sales incentive program, and provided the Trustees with a memorandum, prepared jointly by counsel for MLAM and the Fund, explaining Rule 12b-l and the legal and financial considerations to be taken into account before adopting a 12b-l plan. Dx. AW, AX. The Trustees rejected at least two 12b-l plan proposals. On May 9, 1983, the Trustees received the 1983 Green Book which set forth information relevant to a decision whether to adopt the proposal in effect today. Px. 14. This 12b-l plan obligates the Fund to pay MLPFS .125% of its assets and requires MLPFS to channel the money to the financial consultants and managerial staff, as compensation “for selling [Fund shares] and for providing direct personal services to shareholders, including furnishing information as to the status of Fund accounts and handling purchase and redemption orders for Fund shares.” Px. 17 at 523. The plan, one of the least expensive 12b-l plans in effect, prohibits the use of the distribution fee to pay for other expenditures of MLPFS related to the Fund, such as sales contests, special seminars, or media advertising, provides for quarterly reports to the Trustees, requires annual approval by both the full Board and the unaffiliated Trustees and is terminable at any time by a majority vote of the unaffiliated Trustees. Dx. AY at 10-11; Px. 17 at 523-6. Approval of the plan followed formal Trustee consideration of the factors listed in SEC Investment Company Act Release No. 11,414 and was based on practical concerns, such as, with the substantial recent erosion of Fund assets, that the Trustees and Merrill Lynch wanted financial consultants to induce CMA customers to place increased cash deposits in the Fund. The 12b-l plan was an incentive program designed both to halt the outflow of Fund assets and to increase the size of the Fund. T. 1246 (West); T. 595-97 (Zeikel); T. 409 (Colgan); T. 920 (Walsh). The Trustees were especially concerned with promoting the CMA program as a whole. Trustee Lenagh frankly stated: “I am more concerned about the CMA program than I am about the CMA money fund, in that the account executives are stimulated to sign up, maintain and service the CMA program and not the money fund per se.” Dep. 34. Formal minutes of the Audit Committee also reflect a concern for the entire program. See Dx. AM. In addition to their concern for the entire program, the Trustees believed that a larger Fund has advantages over smaller funds in the marketplace. The Trustees believed that bigger funds generally produce higher rates of return and that a decline in fund assets inhibits fund performance since a manager must then focus on liquidity needed to satisfy redemptions, rather than on investments that can increase yield. Zeikel explained, “[i]f one has a fully invested position and a new opportunity arises, then one can take advantage of it with the cash flow. If there is negative cash flow, one has to reduce the portfolio commitment to pay off the cash flow and then reduce it again to take advantage of the new commitment.” T. 705. See also T. 1428-29 (West). A secondary goal of the 12b-l plan was to improve financial consultant services to shareholders. Barely mentioned at the time of the plan’s adoption, this purpose assumed greater importance in the Trustees’ subsequent deliberations. In 1983, the Trustees engaged no expert in connection with their consideration of adoption of the 12b-l plan. In concluding that a large and growing fund was desirable, they relied upon the “casual empiricism” available to them as trustees of a very big fund and upon conversations with Merrill Lynch portfolio managers. See T. 1428 (West); White Dep. 30; Lenagh Dep. 26. While the Trustees may have considered other methods of encouraging Fund growth and halting the exit of Fund assets than through a 12b-l plan, see Px. 8 at 4, Trustee discussion centered upon “alternatives in the sense of variations on the plan.” T. 1424 (West). The Trustees also considered such possible intangible benefits to Merrill Lynch as a lower turnover rate for financial consultants. T. 1425-26 (West). All these deliberations led the Trustees to favor adoption of a 12b-l plan. The Audit Committee believed the Plan could reduce redemptions and retain fund assets “in the face of competition from banks and other money funds.” Px. 8. Despite the difficulties in assessing sales incentive programs, the Trustees believed that “failure to meet the[se] competitive threats [posed by other funds with 12b-l plans] could result in substantial diminution of the Fund assets with concomitant increase in the expense ratio.” Id. The effect of the plan on expense ratio and yield caused them no concern and they agreed that the pass-through feature of the plan meant Merrill Lynch profitability was not increased by the plan. They concluded “that the plan offered a reasonable prospect of significant benefits to the Fund and its shareholders and that the costs of the plan in relation to such benefits appeared reasonable.” Id. At the full Board meeting on May 19, 1983, the Trustees adopted the plan. Px. 9. On June 10, 1983, Merrill Lynch described the 12b-l plan approved by the Trustees in a proxy statement to shareholders. Dx. AY. The statement explained the terms of the plan, set out the Trustees’ considerations, and included information on the effect of the plan on the expense ratio and yield, and information on comparative expense ratios and yields. The plan, approved by a majority of shareholders on July 26, 1983, went into effect on September 1, 1983. 2. Continuation of the Plan The Trustees have reviewed the plan each quarter since it went into effect. As required by Rule 12b-l, Merrill Lynch relayed pertinent information to the Trustees, in the form of a 12b-l report, prior to Audit Committee meetings. The annual Green Book contained additional data. In their review, the Trustees also discussed the plan with Fund portfolio managers, who described to the Trustees the advantages of managing a large and growing fund. T. 1429-30 (West). Patrick Walsh ordinarily presented the 12b-l report to the Audit Committee and added “anecdotal” information on the financial consultant response to the 12b-l plan and the quality of service provided by the financial consultants to the shareholders. T. 1494 (Forbes). He opined, based on conversations with regional branch personnel, that “the 12b-l plan was having a highly salutary effect in improving service provided to CMA shareholders and in providing a more positive attitude on the part of account executives with respect to the CMA program,” Dx. AM., and that “12b-l compensation made the financial consultants more receptive to dealing with Fund shareholder inquiries.” Px. 12. Although as of the trial there had been little research on the desirability of a growing fund, and none of it conclusive, the Trustees’ belief therein had been strengthened, in part, by the views of portfolio managers, by enthusiastic financial consultants, and by the Fund’s strong yield. The Trustees are convinced that the 12b-l plan will keep the Fund growing and healthy. They view payments to the financial consultants as an effective means to encourage a strong financial consultant-CMA client relationship, an important concern given their perception of increasing competition in the money market and central asset account markets. Trustee Col-gan stated that if the plan were to be discontinued “it would result in a diminution of interest on the part of the account executives and salesmen.” Dep. 418. Such diminution of interest would derogate from Merrill Lynch’s ultimate goal of “keeping [its] clients in a positive frame of mind as far as the CMA Money Trust is concerned.” T. 919 (Walsh). However, although they view the plan as a success, the Trustees are aware that it is impossible to be certain how well the plan is actually working. See e.g. T. 1435 (West). Following quarterly reviews of the factors listed in Investment Company Act Release No. 11,414, the Trustees have repeatedly approved the plan’s continuation. II. The Law Section 36(b) of the Investment Company Act of 1940 places a “fiduciary duty” on an investment advisor with respect to receipt of payments from a registered investment company. This standard was fully explicated by Judge Mansfield in Gartenberg I, 694 F.2d at 923, 927-928. While a plaintiff bears the burden of proving a breach of the investment ad-visor’s fiduciary duty under § 36(b), a plaintiff is not required to show personal misconduct on the part of the advisor, nor must the plaintiff meet the standard required to hold a fiduciary liable for corporate waste. Id. However, a district court is not empowered “to substitute its business judgment for that of a mutual fund’s board of directors in the area of management fees.” Id. at 928, quoting S.Rep. No. 91-184, 91st Cong., 1st Sess., reprinted in [1970] U.S.Code Cong. & Ad. News 4897, 4902-03 [hereinafter, the “Senate Report”]. Further, the legislative history to § 36(b) makes clear that the advisor is entitled to earn a profit from his services and that his fees need not be determined by “general concepts of rate regulation, such as those applicable to public utilities.” Senate Report at 4902; Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F.Supp. 962, 972 (S.D.N.Y.1980), aff'd 835 F.2d 45 (2d Cir.1987), cert. denied, — U.S. -, 108 S.Ct. 1594, 99 L.Ed.2d 908 56 U.S.L.W. 3753 (May 2, 1988). Gartenberg I capsulized as follows the test for determining whether an advisor has breached its fiduciary duty: “essentially whether the fee schedule represents a charge within the range of what would have been negotiated at arm’s-length in light of all the surrounding circumstances” and not “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.” 694 F.2d at 928. In determining the reasonableness of the advisory fee, 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, its shareholders and all compensation and payments received....” Senate Report at 4910, quoted in Gartenberg I, 694 F.2d at 930. In particular, the court in Gartenberg I suggested the importance of such factors as (1) “the expertise of the individual trustees of a fund, whether they are fully informed about all facts bearing on the adviser-manager’s services and fee, and the extent of care and conscientiousness with which they perform their duties;” (2) the nature and quality of services provided to fund shareholders; (3) the advisor’s cost in providing these services; (4) economies of scale realized by the advisor as the fund grows larger; and (5) the volume of orders that must be processed by the fund’s advisor. Gartenberg I, 694 F.2d at 930; Schuyt, 663 F.Supp. at 972-973. The Gar-tenberg I court also suggested that, while comparisons with other industry advisory fees may be helpful, since competition among advisors for fund business “is virtually nonexistent, ... [r]eliance on prevailing industry advisory fees will not satisfy § 36(b).” 694 F.2d at 929. This suit differs from those brought in this Court under § 36(b) on prior occasions. For the first time, the Court is presented with a challenge to fees paid by a fund embedded in a central asset account. As noted earlier, all parties agree that the Fund cannot be viewed separately from the other program components. While the Court agrees with this view, it is also mindful that the issue before it is whether Merrill Lynch, and specifically MLAM, breached its fiduciary duty to the Fund alone in its receipt of the advisory fee. The Court concludes that the location of the Fund within the CMA program is a “surrounding circumstance” which would pervade all aspects of a hypothetical arm’s-length negotiation over the Fund’s advisory fee. This fact is relevant to important considerations such as costs and benefits of the Fund to Merrill Lynch and services received and costs incurred by Fund shareholders. III. Findings and Conclusions as to the § 36(b) Claims Introduction — The Fund as a Component of the CMA Program The CMA program, of which the Fund is a major component, provides advantages both to Merrill Lynch and to the shareholders. The shareholders benefit from the automatic sweep, the associated VISA debit card and check writing privileges and the comprehensive statement. Merrill Lynch benefits by maintaining under its roof and within the control of each financial consultant a greater share of the client’s total assets. The uninvested portion of these assets is close at hand, available for investment. Thus the Court is not surprised that CMA participants generate three times the commission revenue of the non-CMA brokerage customer and that financial consultants are encouraged to prospect among Fund shareholders for commis-sionable transactions. The degree to which the Fund’s presence within the CMA program enhances Merrill Lynch’s profitability from retail securities transactions was not established at trial. That some profit results seems self-evident and the Court has no hesitation in so finding. With this as background, the Court examines each of the factors set forth in Gartenberg I to evaluate the reasonableness of the compensation to the advisor and its affiliates in light of the fiduciary standards articulated in that decision. A. Nature and Quality of Services Provided to Shareholders Services to the Fund are provided by MLAM and MLPFS. MLAM’s management services include portfolio management and general administrative and organizational services. MLPFS provides shareholder-related services for both the Fund and the CMA program. 1. MLAM’S Services Plaintiff does not dispute the high quality of the general administrative and organizational services MLAM provides to the Fund. No evidence was presented indicating that such services, including legal compliance with regulatory requirements, management of relationships with auditors and bank custodian and transfer agents, provision of office space, equipment and personnel and preparation of materials for Trustee and shareholder review, were other than fully satisfactory. With regard to the quality of MLAM’s portfolio management services, the parties are in sharp dispute. Merrill Lynch points to the fact that, under MLAM’s stewardship, the Fund’s yield has consistently performed at or near the top of money market funds, whether or not such funds are part of central asset accounts. Plaintiff challenges these results by contending that the Fund’s performance is below average when measured on a “risk-adjusted” basis. Plaintiff’s expert Dr. Larry Selden compared mean return with weekly yield fluctuations of 104 money market funds. He found that the Fund had a higher degree of volatility or “risk” than the average fund and that once the return was adjusted downward to reflect the higher risk, the Fund’s performance was below average. Tr. 284-301; Px. 67A, 67B, 68A, 68B, 68C. Selden admitted that neither the SEC nor the money market industry has adopted “risk adjusted performance” as an industry standard. T. 388. See also T. 567 (Zeikel). The Court is unwilling to impose on defendants a performance standard yet to be accepted by the regulatory authority overseeing investment company practices and thus rejects the concept of “risk-adjusted” return as a standard of fund performance measurement in this case. Further, the yield fluctuations may be explained, at least in part, by the accounting method the Fund uses to report yield. The Fund “marks to market” all securities with a maturity of more than 60 days, meaning that the Fund’s accounts reflect the current market value of these securities, a number which fluctuates daily according to the factors driving the market. Other funds use a variety of accounting methods: many amortize the difference between present value and value at maturity of an instrument over the life of the investment; others mark-to-market all or part of their fees. In short, the variety of accounting methods used, together with the varying effect of these methods on weekly yield fluctuations, tends to undermine Selden’s comparisons of risk-adjusted performance. Defendants do not argue that risk-adjusted performance, properly calculated to account for the different accounting methods, would be irrelevant to future Trustee deliberation over the Fund's fee and the Court does not so find. If a portfolio with greater volatility should be expected to earn a greater return to justify the investor’s bearing that risk, then risk adjustment to the return would be appropriate. It appears possible to perform the appropriate calculations and the Trustees may wish to consider doing so to aid in future deliberations over the Fund’s advisory fee. The Court is satisfied that to the extent the Fund has enjoyed yield results superior to those of other funds, it is not happenstance. The portfolio manager Joseph Mo-nagle was provided with the extensive research facilities of MLPFS which assess both the economy as a whole and individual securities. The Court credits Monagle’s testimony that he trades aggressively with a view to maximizing yield after closely monitoring a host of relevant market factors such as interest rates, Federal Reserve statements and indices, government releases on the economy, fiscal and monetary policy, prices of gold and oil, relative strength of the dollar and market-affecting remarks by government and business leaders. T. 816-17. In addition to market factors, Monagle’s testimony clearly evidenced portfolio manager consideration of the credit risk of securities being considered for purchase, the average maturity of Fund investments and projected levels of purchases and redemptions by Fund shareholders. In sum, the Court concludes that the Fund’s performance has been superior and, while it is proper for the Trustees to consider performance on a risk-adjusted basis, plaintiff has failed to establish the Fund’s inferior performance, given the Fund’s use of the “mark-to-market” accounting method and the lack of acceptance in the industry of risk-adjusted return as a measure of performance. Moreover, the Court finds no fault in MLAM’s portfolio management strategy and methods. 2. Shareholder Services Fund shareholders are provided with an array of superior services and benefits by MLPFS, derived from MLPFS’s field force of 11,000 financial consultants and sales assistants, and its extensive computer capability. MLPFS supplies the services linking the Fund to the rest of the program. The MLPFS computer system processes and records all financial activity in program accounts, including securities transactions, Fund purchases and redemptions, VISA and check transactions, and account openings and closings, and processes and prints the CMA monthly statement that MLPFS mails to participants. Shareholders receive personal customer service through MLPFS’s network of financial consultants, one of whom is assigned to each customer opening a CMA account. Aided by sales assistants, the financial consultants provide investment advice and respond to customer queries on all aspects of the CMA program, including the Fund. The Court concludes that MLPFS provides CMA Money Fund shareholders with a broad range of high-quality services. Shareholders reap benefits from MLPFS directly, as members in the Fund, and indirectly, because the Fund is part of the CMA Program. Direct benefits include personal attention to customer inquiries regarding the Fund, and VISA and checking services. Indirect benefits include the sweep feature that ensures that cash does not remain idle, association of the Fund with the margin account, which enables shareholders to make purchases on margin with their VISA cards and checks, the monthly statement, which simplifies record keeping, and additional attention paid to shareholders by financial consultants because they are members of a program which generates substantial commission revenue. In sum, the Court finds the nature and quality of services received by Fund shareholders to be of the highest order. B. Profitability to Merrill Lynch from the Fund Gartenberg I mandates consideration of the Fund’s profitability to Merrill Lynch, a task made more formidable by the Fund’s location within the CMA program. Defendants contend that Merrill Lynch loses money on the Fund, while plaintiff claims that the Fund, in the context of the CMA program, is highly profitable to Merrill Lynch. To differentiate between the Fund and the rest of the program, the parties have drawn a distinction, adopted by the Court, between “fee based” and “non-fee based” costs and revenues. The fee based side of the CMA program includes the Fund, the VISA card and the checking privileges. T. 1054 (Peppet). The non-fee based side consists of the securities and margin accounts. The principle accounting disputes arise over the proper allocation of costs between the fee based and non-fee based sides. Of course, to the extent that greater costs are allocated to the fee based side of the program, the Fund’s profitability to Merrill Lynch is reduced. At the outset, the Court recognizes the impossibility of arriving at an exact profitability figure. Cf. Schuyt, 663 F.Supp. at 978 wherein this Court “acknowledge[d] that it is left in this case with the problem of uncertain profitability.” Calculation and allocation of costs against different product lines or, in this case, among different segments of the same product, is an art rather than a science. Little certainty exists in this field where different, albeit rational, methodologies lead to widely disparate results. See Id. at 977-78. Hence, the Court must be satisfied with a common sense range of figures within which the Fund’s profitability to Merrill Lynch most likely falls. Three profitability studies are before the Court. In 1986, H. Allan White, director of finance for Merrill Lynch’s consumer market sector, conducted an internal study of CMA program profitability for 1985. A year later, at Merrill Lynch’s request and in preparation for this litigation, Peat Mar-wick & Mitchell (“PMM”) completed a study for the years 1984-1986. PMM partner Russell F. Peppet directed the effort and testified at trial for the defendants. Finally, at plaintiff’s request, Professor John Wesley Livingstone of Babson College analyzed the White and PMM studies and drew his own conclusions as to profitability. These three studies, each with its own weaknesses and strengths, estimated fee based pre-tax profits or losses (and profitability as a percent of total fee revenues) as follows (numbers are in thousands): June 1986 1985 1984 Livingstone 55,474 (50%) 72,033 (37%) 47,531 (28.5%) White N/A 19,823 (10.8%) N/A PMM (16,243) (-17.5%) (49,719) (-30.1%) (77,741) (-55.8%) See Px. 77B, 77A, AT. If adjustments to the PMM figures are made to remove the hotly disputed costs of financial consultants and sales assistants from the fee based side of the program, PMM’s numbers are: June 1986 1985 1984 PMM 22,606 (24.3%) 4,966 (3.1%) (26,548) (-19.1%) Although the nature of profitability analysis renders an exact computation of Merrill Lynch profits impossible, it is safe to say that fee based profits fall somewhere in the range between the Livingstone and PMM positions. This range is susceptible of further narrowing after a critical examination of the cost allocations made by PMM and Livingstone. In considering profitability, the Court is mindful that the Fund’s presence in the integrated CMA program enhances Merrill Lynch’s ability to garner commission revenue. Fund assets are a pool of liquid assets available for investment in securities, and financial consultants target their securities sales pitches to Fund participants. Costs within the CMA program must be properly allocated in any profitability study lest the Fund subsidize the costs of Merrill Lynch’s commission-generating activities. To avoid this clearly improper result, costs attributable to the program as a whole (which may arise from more than one aspect of the program, including the Fund) must be allocated between the fee based and non-fee based sides of the program on some rational basis. With a view to better defining the range of probable profitability figures, the Court turns now to a closer examination of particular cost allocations advocated by the parties at trial. 1. Financial Consultants and Rule 12b-l Payments Financial consultants receive compensation from two sources for their services to the CMA program: commissions from Merrill Lynch for effecting securities transactions for CMA customers, and 12b-l payments amounting to .11% of the CMA Money Fund assets under their control. Plaintiff argues that 12b-l payments are fee based revenues to Merrill Lynch, but that the costs of both 12b-l payments and financial consultants are allocable to the securities or non-fee based side of the CMA program. This treatment, of course, has the effect of greatly enlarging fee based profitability. Not surprisingly, defendants disagree with this accounting approach. The Court agrees with defendants that 12b-l payments are neither a revenue nor an expense to Merrill Lynch. Through Merrill Lynch, the Fund pays these monies to the financial consultants for services to shareholders and for selling Fund shares. MLPFS performs a purely administrative function in receiving and dispensing the payments, for which it is reimbursed 1.5 basis points out of the 12.5 basis point 12b-l fee. The 12b-l payments do not appear on any of Merrill Lynch’s consolidated financial statements, nor on MLPFS’s own statements. T. 1070 (Pep-pet). The Court accepts Peppet’s view that 12b-l payments have no place in a study of profitability to Merrill Lynch. Defendants argue that general costs to Merrill Lynch for financial consultant and sales assistant work on the Fund should be partially attributed to the fee based side of the program. The Court agrees that in theory costs to Merrill Lynch of financial consultant and sales assistant time devoted to fee based activities, net of 12b-l payments so as to avoid double counting, should be allocated against the fee based side of the CMA program. Although Merrill Lynch pays its financial consultants on the basis of the securities transactions they effect, this does not mean that the time they spend on Fund matters is of no cost to Merrill Lynch or of no benefit to the Fund. Any such costs, net of 12b-l payments, may be attributable to the fee based side. The Court finds, however, that there is a failure of proof as to the quantity of financial consultant and sales assistant costs properly attributable to the Fund. In an effort to quantify the financial consultant costs to the CMA Money Fund, PMM conducted a time study in October 1986 to determine the percentage of financial consultant time spent on fee based activity. See T. 1122-40. PMM then allocated this percentage of the entire financial consultant cost pool to the fee based side of the program. PMM studied 35 out of 480 branch offices, chosen on the basis of size and geographical dispersion. Two PMM representatives spent two or three days at each of the 35 offices observing the financial consultants. During this time, PMM representatives periodically asked the financial consultants and sales assistants what they were doing. If the financial consultant or sales assistant was on the phone, the representative would present him with a placard listing various activities. The sales person then pointed to the activity in which he was engaged. The placard listed: CMA (fee based activities and CMA account openings); CMA combined (both fee based and non-fee based activities; such as a securities transaction performed with Fund assets); Other Product/Account; Personal; and General Office Administration. In calculating time spent by financial consultants on the Fund, PMM considered only time spent on CMA fee based activities. PMM concluded that during the two or three days of the study, the financial consultants observed spent approximately 5.9% of their time on CMA fee based activities and account openings. PMM then applied 5.9% against the financial consultant cost pools for 1984, 1985 and 1986, subtracted the amount of the 12b-l payments and arrived at what Peppet believed to be a conservative figure for financial consultant cost. The Court finds the PMM time study to be of little probative value in assigning costs. As Livingstone credibly testified, “the study assumes that conditions in the second half of October, 1986 will prevail throughout the first 6 months of 1986, throughout all of 1985, and all of 1984 ... a very slender foundation on which to base such a sweeping assumption.” T. 96. Moreover, PMM workpapers showed that time spent by financial consultants on CMA fee based activities varied in some offices by as much as 33% within the two days of observation. The Court credits Livingstone’s testimony that Peppet’s results were speculative. Indeed, Peppet himself conceded that “we can only say ... that these statistical results relate to the 2 weeks under observation during our sample.” T. 1139. Accordingly, the Court finds the PMM study to be so seriously flawed, both as to method and as to the speculation of its conclusions, as to be an inappropriate basis upon which to apportion financial consultant and sales assistant costs against the Fund. While the Court must eliminate the amount of these costs from its calculation of a profitability range, the Court makes no finding that assigning some such costs always would be inappropriate, merely that the PMM time study does not permit it in this case. 2. Monthly Statement, New Account Processing and Marketing Costs Briefly reviewing other aspects of the PMM study, the Court finds that PMM charged costs incurred by Merrill Lynch in running the CMA program solely against the Fund, instead of allocating these costs between the fee based and non-fee based sides of the program. For instance, PMM assessed all costs of CMA new account processing, monthly statements and CMA program marketing against the fee based side of the program. The Court perceives no basis for allocating all of these costs against the Fund. On the other hand, a discernible portion of these costs is directly related to the Fund and may be so allocated. While the Court is quite certain that the PMM study over-estimates the amount of these costs attributable to the Fund, plaintiff has failed to demonstrate the extent of such over-estimation. 3. Float Costs, Systems Excess Capacity, Imputed Income and Wire and Order Costs Profitability analysis flaws are not confined to the PMM study. Livingstone’s study is also flawed. Livingstone contended at trial that Merrill Lynch incurs float costs as a result of delays in charging VISA and check transactions in excess of available funds (so-called declines and overrides). He argued that delays occur due to Merrill Lynch’s “extraordinary forebearance” when CMA customers write checks or incur VISA charges in excess of available funds. T. 60-64. Specifically, Livingstone testified that, in some cases, a CMA customer’s refusal to pay “simply stands and Merrill Lynch doesn’t do anything about it,” and in others the customer is given time to meet his overdraft. T. 62. Livingstone stated that this procedure is consistent “with treating the customer so well in order to pursue the major business of the CMA program, which is securities.” T. 63. Thus, Livingstone argued, float costs should be charged against the non-fee based side of the program. The Court rejects this argument as speculative. Since decline/override float costs are incurred in the administration of the fee based VISA debit and check-writing components of the CMA program, the Court finds that these costs are appropriately charged against fee based revenues. Plaintiff also challenges PMM’s inclusion in fee based computer systems costs of the cost of excess computer capacity required for the securities business. Livingstone, after noting a memorandum in the PMM workpapers indicating that one of the two computer facilities used to service CMA operations has an excess capacity of 64%, assumed the existence of excess capacity at the other facility. T. 80-88. Livingstone attributed the need for this excess capacity to the securities business. Id. at 83-84. The Court concludes that plaintiff has failed to show that these facilities have significant excess capacity which has been allocated improperly to the fee based side of the program. First, there is no eviden-tiary basis for Livingstone’s assumption that excess capacity exists at the second facility. White and Peppet credibly testified that no such excess capacity exists. T. 1004-06 (White); T. 1109-10 (Peppet). Second, the Court accepts White’s testimony that any excess capacity at the second facility is necessitated by CMA fee based transactions. Plaintiff also claims that PMM erroneously excluded from its profitability study $1,750,000 per year of “fringe benefit” income earned by Merrill Lynch. According to Livingstone, the fact that Merrill Lynch waives the annual $65 CMA program fee for its employees means that the employees who participate in the Fund receive a fringe benefit from the Fund on behalf of Merrill Lynch. Livingstone testified that the amount of this fringe benefit should be included as a revenue to Merrill Lynch. T. 46-47. Peppet and White agreed with Livingstone that it would be appropriate to impute foregone service fees as fringe benefit revenue to Merrill Lynch, but testified that this would require a corresponding allocation of costs to Merrill Lynch for fringe benefits received by CMA program employees. T. 1067-69 (Peppet); T. 978-79 (White). Livingstone agreed that this too would be appropriate. White testified that he made a rough computation of fringe benefit cost and concluded that fringe benefit cost exceeds fringe benefit revenue to Merrill Lynch. T. 977-81. He excluded both these costs and revenues from his profitability study. The Court finds White’s testimony credible and his approach towards fringe benefit costs and revenues reasonable. Given Livingstone’s concurrence that inclusion of fringe benefit costs for CMA program employees is appropriate, the Court excludes from both costs and revenues to Merrill Lynch, Merrill Lynch employee fringe benefits from the CMA program. Plaintiff further claims that Wire and Order costs are more closely related to the securities side of the CMA program and, therefore, should be costed against the non-fee based side of the program. The Court finds that plaintiff has failed to substantiate this claim. White credibly testified that wire and order services are similar to those provided by an internal telex system and are used by the CMA program for manual subscriptions and redemptions from the Fund. T. 1010. The Court finds that such services are appropriately costed to the fee based side of the program. 4. Corporate Overhead The method of allocating a portion of Merrill Lynch’s indirect overhead costs to the fee based side of the program was hotly disputed at trial. Prior to 1985, Merrill Lynch had not even attempted any such allocation. In 1985, White merely assigned the same percentage of Merrill Lynch’s total overhead to total corporate costs— 4.2% — to the costs of the fee based side of the CMA program. T. 1014. The PMM study attempted a much more complex allocation by designating general cost pools relating to capital markets and consumer markets (the CMA program falling into the latter) and attempting to allocate general overhead costs, if possible, wholly to one or the other or, if not, in part to one or the other. Once a pool of general overhead costs was allocated broadly to consumer markets, it was further allocated to specific categories of consumer markets — the CMA program, securities, real estate, insurance and commodities. Both the White and PMM approaches to