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Fiduciary Duty

Directors have a fiduciary duty to represent the interests of the fund’s shareholders and are subject to state law duties of loyalty and care.

boardroomThe duty of loyalty requires that directors use their positions of trust and confidence to further the interests of the fund and its shareholders ahead of their private interests. Fundamental to the duty of loyalty is the avoidance of self-dealing and of conflicts of interest that are detrimental to the fund. The duty of care requires directors to perform their duties in good faith, in a manner reasonably believed to be in the best interests of the fund, and with the degree of care that an ordinarily prudent person in a like position would exercise under similar circumstances. The duty of care also requires that directors be informed, apply their business judgment, and reach reasonable decisions.

When facing claims for breaches of fiduciary duties under state law, directors often rely on the “business judgment rule.” This rule provides considerable deference by courts to decisions of directors that have acted on an informed basis, in good faith, and in the honest belief that their decisions were made in the best interests of the fund and its shareholders. Directors can also face liability under federal laws (including civil liability for material omissions or misstatements in a fund prospectus), and the 1940 Act authorizes the SEC to bring an action against any director who, through personal misconduct, breaches his or her fiduciary duty.