                              In the
 United States Court of Appeals
                  For the Seventh Circuit
                          ____________

No. 01-3671
JACK GREEN, INDIVIDUALLY AND AS TRUSTEE, STANLEY
SIMON, TRUSTEE, AND NORMA EVANS,
                                            Plaintiffs-Appellants,
                                 v.

NUVEEN ADVISORY CORP.,
                                              Defendant-Appellee.
                          ____________
            Appeal from the United States District Court
       for the Northern District of Illinois, Eastern Division.
            No. 97 C 5255—Ronald A. Guzman, Judge.
                          ____________
       ARGUED MAY 15, 2002—DECIDED JULY 8, 2002
                    ____________


  Before FLAUM, Chief Judge, and BAUER and RIPPLE,
Circuit Judges.
  FLAUM, Chief Judge. The plaintiffs in this case are
common shareholders of six closed-end, tax-exempt munici-
pal bond funds. They allege that Nuveen, the funds’ invest-
ment adviser, breached its fiduciary duty under §36(b) of
the Investment Company Act of 1940 (“ICA” or “the Act”) by
receiving compensation based on a percentage of the daily
net assets of the funds. Such an arrangement, plaintiffs
contend, creates an inherent conflict of interest in violation
of the Act. The district court granted summary judgment in
2                                                     No. 01-3671

favor of the defendant, finding that the plaintiffs failed to
produce evidence establishing a breach of fiduciary duty
under §36(b). For the reasons stated herein, we affirm the
decision of the district court.


I. Background
  The six funds at issue are closed-end,1 tax-exempt, lev-
eraged2 companies that invest in tax-free municipal bonds.
The stated primary objective of the funds is to provide
shareholders current income exempt from regular federal
income tax. The stated secondary objective is to enhance
portfolio value relative to the municipal bond market
“through investments in tax-exempt Municipal Obligations
that, in the opinion of the adviser, are underrated or un-
dervalued or that represent municipal market sectors that
are undervalued.”



1
  A closed-end investment company, unlike a traditional open-end
mutual fund, has fixed capitalization and may sell only the num-
ber of shares of its own stock as originally authorized. It does not
redeem its securities at the option of the shareholder. Shares of a
closed-end fund are traded on a secondary market; that is, its
stock, like that of any publicly owned corporation, is usually listed
on a national exchange. The most pertinent difference between
open- and closed-end investment companies is that closed-end
funds are authorized under the ICA to use leverage to increase the
stream of current income through the sale of preferred stock so
long as there is 200% asset coverage for these securities. 15 U.S.C.
§80a-18(a)(2).
2
  Leverage exists “when an investor achieves the right to a return
on a capital base that exceeds the investment which he has per-
sonally contributed to the entity or instrument achieving a re-
turn.” Securities Trading Practices of Registered Investment Com-
panies, IC-10666 (Apr. 18, 1979).
No. 01-3671                                                      3

  Each of the funds uses leverage to increase the amount of
current income generated. That is, each of the funds issues
preferred stock, used as a leveraging tool, as well as com-
mon stock.3 The sale of common stock provides the majority
of the capital with which the funds purchase long-term
municipal bonds. The proceeds from the sale of preferred
stock, sold at a dividend rate that is based upon short-term
tax-exempt interest rates, are invested into additional long-
term municipal bonds that pay rates of return that exceed
the preferred-share dividend amount. The difference be-
tween the dividend paid to the preferred shareholders and
these long-term interest rates amounts to additional income
to common shareholders. So long as the long-term rates
exceed the short-term dividend rates, which they do under
normal market conditions, common shareholders receive
greater current income than they would if the identical fund
were not leveraged.4 It is undisputed in this case that the
long-term always exceeded the short-term rates. The Nu-
veen funds were leveraged for the entire time period in
question.
  Being a common shareholder of a leveraged investment
company is not without risks. The dividends and values of
preferred shares are set; the holders of preferred shares


3
  The six Nuveen funds are leveraged through the issuance of a
preferred class of stock. The Act also permits closed-end funds to
attain leverage by issuing debt securities so long as 300% asset
coverage exists. 15 U.S.C. §80a-18(a)(1). Debt-leveraged invest-
ment companies generally compute advisory compensation with-
out regard to leverage because debt is considered a liability under
Generally Accepted Accounting Principals (“GAAP”) and is sub-
tracted from gross assets when net assets—upon which the ad-
visers’ fees are based—are determined.
4
  The greater the difference between long-term and short-term
rates, the greater the increase in current income to the common
shareholders.
4                                                      No. 01-3671

always have a prior claim on the funds’ assets. Therefore,
a decrease in the value of those assets is borne only by the
holders of common shares. Generally, the more highly lev-
eraged the fund, the greater the risk of loss resulting from
decreased portfolio value. Each of the six funds’ prospec-
tuses informed its common shareholders that leverage cre-
ates increased volatility in the value of their shares.5
  Under the ICA, each investment company must have a
board of directors, at least 40% of which is disinterested
from the fund and its advisers. A majority of the directors
of each of the funds at issue in this case is unaffiliated with
Nuveen. The directors maintained ultimate control over the
extent of the funds’ leverage and the decisions as to wheth-
er to deleverage at a given time; they did, however, rely
upon Nuveen for recommendations on leverage decisions.



5
   This inherent risk that accompanies investing in closed-end
leveraged funds was disclosed to shareholders in other publica-
tions as well. For example, the April 30, 1995 semiannual report
for three of the funds states:
    This period of unusually high volatility and uncertainty has
    brought home a basic fact about fixed-income securities: in-
    terest rates are subject to change, and sometimes the changes
    can have dramatic effects on net asset values. At Nuveen, we
    believe that the best approach to tax-free investing . . . is to
    focus on quality and income dependability. By this stand-
    ard . . . your Fund continued to meet its objectives well,
    providing an attractive level of tax-free income while holding
    portfolio values well in light of market conditions. . . . The
    fact that your Fund is leveraged means that its net asset
    value per share will be somewhat more sensitive to interest
    rate changes . . . than unleveraged funds . . . . Through our
    value approach to investing . . . we will continue to pursue . . .
    attractive tax-free income and the enhancement of portfolio
    value relative to the municipal bond market.
No. 01-3671                                                          5

  Nuveen operates and manages the funds in question. Its
compensation is based on a percentage of the daily net
assets of the funds, including the value of assets attribut-
able to outstanding preferred shares.6 Thus, assuming the
number of outstanding common shares remains fixed, the
more highly leveraged the fund, the higher Nuveen’s com-
pensation. The six funds issued preferred shares equaling
approximately 35% of the funds’ total assets to create lev-
erage. Because an adviser’s services and costs increase, to
some extent, as its fund’s assets increase, almost all in-
vestment companies and 100% of the 202 current closed-
end, leveraged municipal bond funds, base adviser compen-
sation on net or total assets.


II. Discussion
  We review the district court’s grant of summary judgment
de novo, construing all of the facts and reasonable infer-
ences that can be drawn from those facts in favor of the
nonmoving party. See Central States, Southeast & South-
west Areas Pension Fund v. Fulkerson, 238 F.3d 891, 894
(7th Cir. 2001). A grant of summary judgment is appropri-
ate if the pleadings, affidavits, and other supporting ma-
terials leave no genuine issue of material fact, and the
moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(c).



6
   According to GAAP, net assets equal assets minus liabilities.
Equity, such as preferred stock, is not subtracted from assets in
this computation. To account for economies of scale, the percent-
age of the daily net asset value that Nuveen receives decreases as
that value increases. In 1995, Nuveen received .65 of 1% for the
first $125 million in net assets, .6375 for the next $125 million,
.625 for the next $250 million, .6125 for the next $500 million, .6
for the next billion dollars, and .5875 for net assets over $2 billion.
6                                                    No. 01-3671

  The logic of the plaintiffs’ underlying contention is easy to
understand, but their conclusion is ultimately false. With
the current compensation structure, the more highly lev-
eraged a closed-end fund, the more compensation its ad-
visers receive. A fund’s interests may not always be best
served by being highly leveraged.7 Therefore, the plaintiffs
conclude, assuming that the funds’ advisers are the decision
makers—an assumption that has proven incorrect in this
case, as will be discussed below—the advisers have a per-
sonal monetary incentive to act in a manner that may not
be best for the common shareholders of the funds, creating
an impermissible conflict of interest.
  This incentive alone, the plaintiffs argue, violates the ICA
§36(b). Under this provision, an investment company’s ad-
viser owes the shareholders a fiduciary duty “with respect
to the receipt of compensation for services.” 15 U.S.C. §80a-
35(b). Two primary issues arise with regard to this conten-
tion: first, does the alleged conflict of interest alone violate
§36(b) of the Act, and second, does such a conflict exist in
this case. The district court answered both questions in the
negative.
  Congress enacted the ICA in 1940 to provide a compre-
hensive federal program to address mismanagement and
abuse of investment companies that had become prevalent
in the depression era. William P. Rogers and James N.
Benedict, Money Market Fund Management Fees: How
Much is Too Much?, 57 NYU L. Rev. 1059 (Dec. 1982).
Because Congress recognized the potential for a fund’s
adviser to self-deal under a compensation scheme based on
a percentage of fund assets, it mandated that forty percent
of a fund’s board of directors be unaffiliated with the fund’s


7
  As discussed above, plaintiffs have produced no evidence that,
in this case, the funds’ objectives actually would have been better
served by deleveraging.
No. 01-3671                                                  7

adviser. Id.; 15 U.S.C. §80a-10(a). These independent direc-
tors were directly accountable to shareholders and were,
among other duties, responsible for determining adviser
compensation and approving, by majority, all agreements
with advisers. 15 U.S.C. §80a-15(c). In 1970, recognizing
that the potential for abuse called for greater and more
easily enforced protection for investors, Congress amended
the Act. Green v. Fund Asset Management, L.P., No. 01-
2736, 2002 WL 596827 (3d Cir. Apr. 18, 2002). The ICA, as
amended, included §36(b) which created a statutorily im-
posed fiduciary duty upon advisers regarding their compen-
sation.
  Plaintiffs argue that this provision prohibits a closed-end
fund’s adviser from receiving fees that are based upon a
percentage of the fund’s assets because the inherent conflict
of interest in such an arrangement breaches its fiduciary
duty. Nuveen had a duty, they contend, to avoid a fee struc-
ture that creates an incentive to consider its own interests
when making leverage decisions for the funds. We disagree.
First, while an abuse of this inherent conflict may violate
§36(b), its mere existence does not. This holding comports
with congressional intent as well as the case law that has
developed interpreting the Act. Second, the evidence shows
that Nuveen did not have the authority to make final lev-
eraging decisions for the funds.
  Although §36(b) does not explain the term “fiduciary du-
ty,” the legislative history surrounding the ICA’s 1970
amendment makes clear that the enactment of the provi-
sion was not “intended to provide a basis . . . to undertake
a general revision of the practices or structures of the in-
vestment company industry.” H.R. Rep. No. 91-1382 (1970).
Congress was well aware, when it amended the Act, that
the most common investment company adviser compensa-
tion scheme was based on a percentage of assets. “[Advis-
ers’] fees are usually calculated at a percentage of the funds’
8                                                       No. 01-3671

net assets and fluctuate with the value of the funds’ portfo-
lio.” S. Rep. No. 91-184 (1969). The very awareness of this
structure, and the potential for abuse carried with it by
creating various monetary incentives for advisers, prompted
Congress to impose a fiduciary duty. By passing §36(b), it
attempted to diminish the risk of adviser self-dealing under
the predominant industry practice, not to fundamentally re-
vise the system itself. See Fund Asset Mgmt., L.P., 2002 WL
596827 at *2. Moreover, Congress has amended the Act,
including §36(b), several times, never indicating that the fee
structure as applied to leveraged, closed-end funds was im-
permissible. The existence of a compensation scheme that
could create an incentive for advisers to keep an investment
fund leveraged to an extent that may not be best for the
fund’s common shareholders does not, by itself, create a
breach of fiduciary duty under ICA §36(b).8 Congress en-


8
   We note that although two of our sister circuits have held that
§36(b) is limited to allegations of excessive fees relative to services
provided, Migdal v. Rowe Price-Fleming Int’l, Inc., 248 F.3d 321
(4th Cir. 2001); Gartenberg v. Merrill Lynch Asset Mgmt., 694 F.2d
923 (2d Cir. 1982), we, like the Third Circuit, see Green v. Fund
Asset Mgmt., 2002 WL 596827, view the provision slightly more
broadly. For example, in the improbable case that: 1) the adviser
to a closed-end, equity-leveraged fund with an asset-based com-
pensation scheme received additional fees by increasing or main-
taining leverage when it predicted that short-term interest rates
would exceed long-term rates for a protracted period of time,
causing the common shareholders to lose current income; and 2)
the adviser, not the board of directors, made final leveraging de-
cisions, a common shareholder’s §36(b) claim might survive sum-
mary judgment.
  Even in that case, it is important to remember, the receipt of
fees and the compensation structure, not the leveraging decision,
would be at issue, and damages would be limited to the amount of
compensation received. 15 U.S.C. §80a-35(b); see also, e.g., In re
                                                   (continued...)
No. 01-3671                                                        9

acted §36(b) to provide a narrow federal remedy that “is
significantly more circumscribed than common law fidu-
ciary duty doctrines . . . .” Id. at *2. For example, a share-
holder may sue only the recipient of the fees in question
and has the burden of proving the breach of duty; recovery
is limited to actual damages; and damages are recoverable
only for the one-year period before the filing of the action.
15 U.S.C. §80b. Although the existence of a potential con-
flict like the one plaintiffs assert may create a valid breach
of fiduciary duty claim under the common law standard—
a question we do not entertain—it does not violate ICA
§36(b).
  Moreover, §205 of the Investment Advisers Act (“IAA”), a
companion statute to the ICA, expressly approves of in-
vestment compensation contracts which, like this one, are
“based upon the total value of a fund over a definite period.”
15 U.S.C. §80b-5. The plaintiffs argue that in 1970, closed-
end, tax-exempt leveraged funds like the ones in question
did not exist so the IAA’s sanction of asset-based compensa-
tion does not apply. Shareholders of funds with investment
advisers subject to the IAA, they contend, are free to switch
advisers and to make his or her own decision to borrow
money to buy stock. This argument must fail. The IAA
clearly applies to advisers such as Nuveen. See Zinn v.


8
   (...continued)
Nuveen Fund Litig., 1996 WL 328006 (June 11, 1996) (“While
§36(b) may regulate more than the mere terms of the fee arrange-
ment between the investment adviser and the investment com-
pany, the court does not believe that it regulates the propriety of
the transactions for which fees are paid. Rather, §36(b) only im-
poses a direct fiduciary duty on the investment adviser with
‘respect to the receipt of compensation or payment for services.’ ”).
Because the question raised by the hypothetical case above is not
before us today, however, we decline to address the merits of the
issue.
10                                               No. 01-3671

Parrish, 644 F.2d 360, 364 (7th Cir. 1981) (IAA covers any
entity that receives compensation for giving investment
advice.) Congress has amended the IAA several times since
the appearance of funds like Nuveen’s, and has not limited
or shown any intent to restrict the application of §205.
  The plaintiffs in this case produce no evidence showing
that Nuveen actually abused its position, thus breaching its
§36(b) fiduciary duty. Although they attempt in a secondary
argument to show an actual conflict resulting from a lev-
eraging decision in 1994, this time period was before they
were shareholders, and before the Act’s recoverable one-
year period began. This contention, therefore, carries no
weight. Moreover, even if these procedural bars were ig-
nored, plaintiffs fail to show that an actual conflict existed.
They assert that the advisers received compensation in
breach of their fiduciary duty by maintaining preferred-
share leverage to increase their fees, resulting in a decrease
in portfolio value. They do not dispute, however, that any
loss was unrealized, offset by leveraged-enhanced gains the
following year, that they would have sacrificed additional
income had the funds been deleveraged, that even in the
year they reference, the funds outperformed taxable bond
funds that did reduce leverage, and that the funds’ prospec-
tuses adequately informed them that the funds use leverage
which creates increased volatility in portfolio value. The
funds each have a secondary objective of enhancing portfolio
value through investing in underrated or undervalued mu-
nicipal bonds, not through leverage decisions. Moreover, the
plaintiffs fail to show that Nuveen predicted the interest
rate changes when the funds decided to maintain leverage
in 1994; therefore, its argument that the advisers made a
decision that negatively impacted the common shareholders
in order to increase compensation must fail. If the plaintiffs’
real complaint is that the advisers (or the directors) made
such poor leveraging decisions that a loss to common share-
holders resulted, they need to seek recourse “under other
No. 01-3671                                                   11

sections of the ICA, or alternatively under state law.”
Migdal, 248 F.3d at 328.9 Plaintiffs alleged an ICA §36(a)
violation which the district court dismissed for failure to
bring derivatively. The have neither appealed that ruling
nor attempted to bring a derivative action.
  Throughout this litigation, the plaintiffs have maintained
that if the advisers controlled the use of leverage, the fee
structure itself would violate ICA §36(b) because of the
impermissible incentive it creates. Even if we agreed with
this contention, the undisputed facts show that it was not
Nuveen who controlled the use of leverage, but the funds’
directors. The allegedly improper incentive, therefore, is
minimal. The plaintiffs do not dispute the fact that the
board of directors, the majority of whom were unaffiliated
with Nuveen, had ultimate control over the extent of the
funds’ leverage; they contend only that the directors relied
on Nuveen’s recommendations. Assuming that this is true,
however, it remains undisputed that Nuveen did not have
the authority to increase or decrease leverage—that power
lay only with the independent board of directors. Summary
judgment was appropriate based on this reason alone.
  Finally, for each applicable year, the disinterested direc-
tors for each of the funds approved the advisory compensa-
tion agreements at issue. Because Congress expressly or-
dered that we give board of director approval “such consid-
eration . . . as is deemed appropriate under all the circum-
stances,” 15 U.S.C. §80a-35(b)(2), we find that this factor,
too, supports the district court’s summary judgment ruling.


9
  ICA §36(a) creates a fiduciary duty involving directors’ or ad-
visers’ personal misconduct. It is unclear whether individual
shareholders have an implied right of action under §36(a) to bring
a derivative suit. Boland v. Engle, 113 F.3d 706 (7th Cir. 1997).
We do not suggest that they do or do not; we merely state that
fund mismanagement issues are within the purview of §36(a), not
§36(b).
12                                           No. 01-3671

  For the reasons stated herein, we AFFIRM the decision of
the district court.

A true Copy:
      Teste:

                       ________________________________
                       Clerk of the United States Court of
                         Appeals for the Seventh Circuit




                   USCA-97-C-006—7-8-02
