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Subject: 90-516 -- OPINION, KAMEN v. KEMPER FINANCIAL SERVICES, INC.

NOTICE: This opinion is subject to formal revision before publication in
the preliminary print of the United States Reports.  Readers are requested
to notify the Reporter of Decisions, Supreme Court of the United States,
Washington, D. C. 20543, of any typographical or other formal errors, in
order that corrections may be made before the preliminary print goes to
press.
SUPREME COURT OF THE UNITED STATES


No. 90-516



JILL S. KAMEN, PETITIONER v. KEMPER FINANCIAL SERVICES, INC. et al.

on writ of certiorari to the united states court of appeals for the seventh
circuit

[May 20, 1991]



    Justice Marshall delivered the opinion of the Court.

    This case calls upon us to determine whether we should fashion a
federal common law rule obliging the representative shareholder in a
derivative action founded on the Investment Company Act of 1940, 54 Stat.
789, 15 U. S. C. MDRV 80a-1(a) et seq., to make a demand on the board of
directors even when such a demand would be excused as futile under state
law.  Because the scope of the demand requirement embodies the
incorporating State's allocation of governing powers within the
corporation, and because a futility exception to demand does not impede the
purposes of the Investment Company Act, we decline to displace state law
with a uniform rule abolishing the futility exception in federal derivative
actions.
I
    The Investment Company Act of 1940 (ICA or Act) es tablishes a scheme
designed to regulate one aspect of the management of investment companies
that provide so-called "mutual fund" services.  Mutual funds pool the
investment assets of individual shareholders.  Such funds typically are
organized and underwritten by the same firm that serves as the company's
"investment adviser."  The ICA seeks to arrest the potential conflicts of
interest inherent in such an arrangement.  See generally Daily Income Fund,
Inc. v. Fox, 464 U. S. 523, 536-541 (1984); Burks v. Lasker, 441 U. S. 471,
480-481 (1979).  The Act requires, inter alia, that at least 40% of the
investment company's directors be financially independent of the investment
adviser, 15 U. S. C. 15 80a-10(a), 80a-2(a)(19)(iii); that the contract
between the adviser and the company be approved by a majority of the
company's shareholders, MDRV 80a-15(a); and that the dealings of the
adviser with the company measure up to a fiduciary standard, the breach of
which gives rise to a cause of action by either the Securities and Exchange
Commission (SEC) or an individual shareholder on the company's behalf, MDRV
80a-35(b).
    Petitioner brought this suit to enforce MDRV 20(a) of the Act, 15 U. S.
C. MDRV 80a-20(a), which prohibits materially misleading proxy statements.
{1}  The complaint was styled as a shareholder derivative action brought on
behalf of respondent Cash Equivalent Fund, Inc. (Fund), a registered
investment company, against Kemper Financial Services, Inc. (KFS), the
Fund's investment adviser.  Petitioner alleged that KFS obtained
shareholder approval of the investment-adviser contract by causing the Fund
to issue a proxy statement that materially misrepresented the character of
KFS' fees.  See App. to Pet. for Cert. 90a-91a.  Petitioner also averred
that she made no precomplaint demand on the Fund's board of directors
because doing so would have been futile.  In support of this allegation,
the complaint stated that all of the directors were under the control of
KFS, that the board had voted unanimously to approve the offending proxy
statement, and that the board had subsequently evidenced its hostility to
petitioner's claim by moving to dismiss.  See id., at 92a-93a.  The
District Court granted KFS' motion to dismiss on the ground that petitioner
had failed to plead the facts excusing demand with sufficient particularity
for purposes of Federal Rule of Civil Procedure 23.1.  See 659 F. Supp.
1153, 1160-1163 (ND Ill. 1987).
    The Court of Appeals affirmed the dismissal of petitioner's MDRV 20(a)
claim.  See 908 F. 2d 1338 (CA7 1990).  Like the District Court, the Court
of Appeals concluded that petitioner's failure to make a precomplaint
demand was fatal to her case.  Drawing heavily on the American Law
Institute's Principles of Corporate Governance (Tent. Draft No. 8, Apr. 15,
1988), the Court of Appeals concluded that the futility exception does
little more than generate wasteful threshold litigation collateral to the
merits of the derivative shareholder's claim.  For that reason, the court
adopted as a rule of federal common law the ALI's so-called "universal
demand" rule, under which the futility exception is abolished.  See 908 F.
2d, at 1344; see also ALI, Principles of Corporate Governance, supra, 15
7.03(a)-(b), and comment a. {2}  The court acknowledged this Court's
precedents holding that courts should incorporate state law when fashioning
federal common law rules to fill the interstices of private causes of
action brought under federal securities laws.  See 908 F. 2d, at 1342.
Nonetheless, because petitioner had neglected until her reply brief to
advert to the established status of the futility exception under the law of
Maryland -- the State in which the Fund is incorporated -- the court held
that petitioner's challenge to the court's power to adopt the ALI's
universal-demand rule "c[ame] too late" to be considered.  Ibid. {3}
    We granted certiorari, 498 U. S. --- (1990), and now reverse.
II
    The derivative form of action permits an individual shareholder to
bring "suit to enforce a corporate cause of action against officers,
directors, and third parties."  Ross v. Bernhard, 396 U. S. 531, 534
(1970).  Devised as a suit in equity, the purpose of the derivative action
was to place in the hands of the individual shareholder a means to protect
the interests of the corporation from the misfeasance and malfeasance of
"faithless directors and managers."  Cohen v. Beneficial Loan Corp., 337 U.
S. 541, 548 (1949).  To prevent abuse of this remedy, however, equity
courts established as a "precondition for the suit" that the shareholder
demonstrate "that the corporation itself had refused to proceed after
suitable demand, unless excused by extraordinary conditions."  Ross v.
Bernhard, supra, at 534.  This requirement is accommodated by Federal Rule
of Civil Procedure 23.1, which states in pertinent part:

"The complaint [in a shareholder derivative action] shall . . . allege with
particularity the efforts, if any, made by the plaintiff to obtain the
action the plaintiff desires from the directors or comparable authority
and, if necessary, from the shareholders or members, and the reasons for
the plaintiff's failure to obtain the action or for not making the
effort."


    But although Rule 23.1 clearly contemplates both the demand requirement
and the possibility that demand may be excused, it does not create a demand
requirement of any particular dimension.  On its face, Rule 23.1 speaks
only to the adequacy of the shareholder representative's pleadings.
Indeed, as a rule of procedure issued pursuant to the Rules Enabling Act,
Rule 23.1 cannot be understood to "abridge, enlarge or modify any
substantive right."  28 U. S. C. MDRV 2072(b).  The purpose of the demand
requirement is to "affor[d] the directors an opportunity to exercise their
reasonable business judgment and `waive a legal right vested in the
corporation in the belief that its best interests will be promoted by not
insisting on such right.' "  Daily Income Fund, Inc. v. Fox, 464 U. S., at
533, quoting Corbus v. Alaska Treadwell Gold Mining Co., 187 U. S. 455, 463
(1903).  Ordinarily, it is only when demand is excused that the shareholder
enjoys the right to initiate "suit on behalf of his corporation in
disregard of the directors' wishes."  R. Clark, Corporate Law MDRV 15.2, p.
640 (1986).  In our view, the function of the demand doctrine in delimiting
the respective powers of the individual shareholder and of the directors to
control corporate litigation clearly is a matter of "substance," not
"procedure."  See Daily Income Fund, Inc. v. Fox, supra, at 543-544, and n.
2 (Stevens, J., concurring in judgment); cf. Cohen v. Beneficial Loan
Corp., supra, at 555-557 (state security-for-costs statute limits
shareholder's "substantive" right to maintain derivative action); Hanna v.
Plumer, 380 U. S. 460, 477 (1965) (Harlan, J., concurring) (rule is
"substantive" when it regulates derivative shareholder's primary conduct in
exercise of corporate managerial power).  Thus, in order to determine
whether the demand requirement may be excused by futility in a derivative
action founded on MDRV 20(a) of the ICA, {4} we must identify the source
and content of the substantive law that defines the demand requirement in
such a suit.
III


A
    It is clear that the contours of the demand requirement in a derivative
action founded on the ICA are governed by federal law.  Because the ICA is
a federal statute, any common law rule necessary to effectuate a private
cause of action under that statute is necessarily federal in character.
See Burks v. Lasker, 441 U. S., at 476-477; Sola Electric Co. v. Jefferson
Electric Co., 317 U. S. 173, 176 (1942).
    It does not follow, however, that the content of such a rule must be
wholly the product of a federal court's own devising.  Our cases indicate
that a court should endeavor to fill the interstices of federal remedial
schemes with uniform federal rules only when the scheme in question
evidences a distinct need for nationwide legal standards, see, e. g.,
Clearfield Trust Co. v. United States, 318 U. S. 363, 366-367 (1943), or
when express provisions in analogous statutory schemes embody congressional
policy choices readily applicable to the matter at hand, see, e. g., Boyle
v. United Technologies Corp., 487 U. S. 500, 511-512 (1988); DelCostello v.
Teamsters, 462 U. S. 151, 169-172 (1983).  Otherwise, we have indicated
that federal courts should "incorporat[e] [state law] as the federal rule
of decision," unless "application of [the particular] state law [in
question] would frustrate specific objectives of the federal programs."
United States v. Kimbell Foods, Inc., 440 U. S. 715, 728 (1979).  The
presumption that state law should be incorporated into federal common law
is particularly strong in areas in which private parties have entered legal
relationships with the expectation that their rights and obligations would
be governed by state-law standards.  See id., at 728-729, 739-740
(commercial law); Reconstruction Finance Corp. v. Beaver County, 328 U. S.
204, 210 (1946) (property law); see also De Sylva v. Ballen tine, 351 U. S.
570, 580-581 (1956) (borrowing family law because of primary state
responsibility).
    Corporation law is one such area.  See Burks v. Lasker, supra.  The
issue in Burks was whether the disinterested directors of a registered
investment company possess the power to terminate a nonfrivolous derivative
action founded on the ICA and the Investment Advisers Act of 1940 (IAA).
We held that a federal court should look to state law to answer this
question.  See id., at 477-485.  " `Corporations,' " we emphasized, " `are
creatures of state law,' and it is state law which is the font of corporate
directors' powers."  Id., at 478, quoting Cort v. Ash, 422 U. S. 66, 84
(1975).  We discerned nothing in the limited regulatory objectives of the
ICA or IAA that evidenced a congressional intent that "federal courts . . .
fashion an entire body of federal corporate law out of whole cloth."  441
U. S., at 480.  Consequently, we concluded that gaps in these statutes
bearing on the allocation of governing power within the corporation should
be filled with state law "unless the state la[w] permit[s] action
prohibited by the Acts, or unless `[its] application would be inconsistent
with the federal policy underlying the cause of action . . . .' "  Id., at
479, quoting Johnson v. Railway Express Agency, Inc., 421 U. S. 454, 465
(1975).
    Defending the reasoning of the Court of Appeals, KFS argues that
petitioner waived her right to the application of anything other than a
uniform federal rule of demand because she failed to advert to state law
until her reply brief in the proceedings below.  We disagree.  When an
issue or claim is properly before the court, the court is not limited to
the particular legal theories advanced by the parties, but rather retains
the independent power to identify and apply the proper construction of
governing law.  See, e. g., Arcadia v. Ohio Power Co., 498 U. S. ---, ---
(1990).  It is not disputed that petitioner effectively invoked federal
common law as the basis of her right to forgo demand as futile.  Having
undertaken to decide this claim, the Court of Appeals was not free to
promulgate a federal common law demand rule without identifying the proper
source of federal common law in this area.  Cf. Lamar v. Micou, 114 U. S.
218, 223 (1885) ("The law of any State of the Union, whether depending upon
statutes or upon judicial opinions, is a matter of which the courts of the
United States are bound to take judicial notice, without plea or proof");
Bowen v. Johnston, 306 U. S. 19, 23 (1939) (same).  Indeed, we note that
the Court of Appeals viewed itself as free to adopt the American Law
Institute's universal-demand rule even though neither party addressed
whether the futility exception should be abolished as a matter of federal
common law. {5}
    The question, then, is whether the Court of Appeals drew its
universal-demand rule from an improper source when it disregarded state law
relating to the futility exception.  To answer that question, we must first
determine whether the demand requirement comes within the purview of Burks'
presumption of state-law incorporation, that is, whether the scope of the
demand requirement affects the allocation of governing power within the
corporation.  If so, we must then determine whether a futility exception to
the demand requirement impedes the policies underlying the ICA. {6}
B
    Because the contours of the demand requirement -- when it is required,
and when excused -- determine who has the power to control corporate
litigation, we have little trouble concluding that this aspect of state law
relates to the allocation of governing powers within the corporation.  The
purpose of requiring a precomplaint demand is to protect the directors'
prerogative to take over the litigation or to oppose it.  See, e. g.,
Spiegel v. Buntrock, 571 A. 2d 767, 773 (Del. 1990).  In most
jurisdictions, the board's decision to do the former ends the shareholder's
control of the suit, see R. Clark, Corporate Law MDRV 15.2, p. 640 (1986),
while its decision to do the latter is subject only to the deferential
"business judgment rule" standard of review, see, e. g., Zapata Corp. v.
Maldonado, 430 A. 2d 779, 784, and n. 10 (Del. 1981).  Thus, the demand
requirement implements "the basic principle of corporate governance that
the decisions of a corporation -- including the decision to initiate
litigation -- should be made by the board of directors or the majority of
shareholders."  Daily Income Fund, Inc. v. Fox, 464 U. S., at 530.
    To the extent that a jurisdiction recognizes the futility exception to
demand, the jurisdiction places a limit upon the directors' usual power to
control the initiation of corporate litigation.  Although "jurisdictions
differ widely in defining the circumstances under which demand on directors
will be excused," D. DeMott, Shareholder Derivative Actions MDRV 5:03, p.
35 (1987), demand typically is deemed to be futile when a majority of the
directors have participated in or approved the alleged wrongdoing, see, e.
g., Barr v. Wackman, 36 N. Y. 2d 371, 381, 329 N. E. 2d 180, 188 (1975), or
are otherwise financially interested in the challenged transactions, see,
e. g., Aronson v. Lewis, 473 A. 2d 805, 814 (Del. 1984). {7}  By permitting
the shareholder to circumvent the board's business judgment on the
desirability of corporate litigation, the "futility" exception defines the
circumstances in which the shareholder may exercise this particular
incident of managerial authority.  See, e. g., Zapata Corp. v. Maldonado,
supra, at 784.
    The futility exception to the demand requirement may also determine the
scope of the directors' power to terminate derivative litigation once
initiated -- the very aspect of state corporation law that we were
concerned with in Burks.  In many (but not all) States, the board may
delegate to a committee of disinterested directors the board's power to
control corporate litigation.  See generally R. Clark, supra, MDRV 15.2.3.
Some of these jurisdictions treat the decision of a special litigation
committee to terminate a derivative suit as automatically entitled to
deference under the "business judgment rule."  See, e. g., Auerbach v.
Bennett, 47 N. Y. 2d 619, 631-633, 393 N. E. 2d 994, 1001-1002 (1979).
Others, including Delaware, defer to the decision of a special litigation
committee only in a "demand required" case; in a "demand excused" case,
these States first require the court to confirm the "independence, good
faith and . . . reasonable investigat[ory]" efforts of the committee and
then authorize the court to exercise its "own independent business
judgment" in assessing whether to enforce the committee's recommendation,
Zapata Corp. v. Maldonado, supra, at 788789; see Spiegel v. Buntrock,
supra, at 778.  Thus, in these jurisdictions, "the entire question of
demand futility is inextricably bound to issues of business judgment and
the standards of that doctrine's applicability."  Aronson v. Lewis, supra,
at 812.
    Superimposing a rule of universal-demand over the corporate doctrine of
these States would clearly upset the balance that they have struck between
the power of the individual shareholder and the power of the directors to
control corporate litigation.  Under the law of Delaware and the States
that follow its lead, a shareholder who makes demand may not later assert
that demand was in fact excused as futile.  Spiegel v. Buntrock, 571 A. 2d,
at 775.  Once a demand has been made, the decision to block or to terminate
the litigation rests solely on the business judgment of the directors.  See
ibid.  Thus, by taking away the shareholder's right to withhold demand
under the circumstances where demand is deemed to be futile under state
law, a universal-demand rule, in direct contravention of the teachings of
Burks, would enlarge the power of directors to control corporate
litigation.  See 441 U. S., at 478-479.
    KFS contends that the scope of a federal common law demand requirement
need not be tied to the allocation of power to control corporate
litigation.  This is so, KFS suggests, because a court adjudicating a
derivative action based on federal law could sever the requirement of
shareholder demand from the standard used to review the directors' decision
to bar initiation of, or to terminate, the litigation.  Drawing on the
ALI's Principles of Corporate Governance, the Court of Appeals came to this
same conclusion.  See 908 F. 2d, at 1343-1344.  Freed from the question of
the directors' power to control the litigation, the universal-demand
requirement, KFS maintains, would force would-be derivative suit plaintiffs
to exhaust their intracorporate remedies before filing suit and would spare
both the courts and the parties the expense associated with the often
protracted threshold litigation that attends the collateral issue of demand
futility.
    We reject this analysis.  Whatever its merits as a matter of legal
reform, we believe that KFS' proposal to detach the demand standard from
the standard for reviewing board action would require a quantum of federal
common lawmaking that exceeds federal courts' interstitial mandate.  Under
state law, the determination whether a derivative representative can
initiate a suit without making demand typically is made at the outset of
the litigation and is based on the application of the State's futility
doctrine to circumstances as they then exist.  D. DeMott, supra, MDRV 5:03,
at 31.  Under KFS' proposal, federal courts would be obliged to develop a
body of principles that would replicate the substantive effect of the
State's demand futility doctrine but that would be applied after demand has
been made and refused.  The ALI, for example, has developed an elaborate
set of standards that calibrates the deference afforded the decision of the
directors to the character of the claim being asserted by the derivative
plaintiff.  See ALI, Principles of Corporate Governance MDRV 7.08 (Tent.
Draft No. 8, Apr. 15, 1988); id., MDRV 7.08, Comment c, p. 120 (noting that
Principles "dra[w] a basic distinction between the standard of review
applicable to actions that are founded on a breach of the duty of care and
the standard of review applicable to actions that are founded on a breach
of the duty of loyalty"). {8}  Whether a federal court adopts the ALI's
standards wholesale or instead attempts to devise postdemand review
standards more finely tuned to the distinctive allocation of managerial
decisionmaking power embodied in any given jurisdiction's demand futility
doctrine, KFS' suggestion would impose upon federal courts the very duty
"to fashion an entire body of federal corporate law" that Burks sought to
avoid.  441 U. S., at 480.
    Such a project, moreover, would necessarily infuse corporate
decisionmaking with uncertainty.  For example, insofar as Delaware law does
not permit a shareholder to make a demand and later to assert its futility,
receipt of demand makes it crystal clear to the directors of a Delaware
corporation that the decision whether to commit the corporation to
litigation lies solely in their discretion.  See Spiegel v. Buntrock,
supra, at 775.  Were we to impose a universal-demand rule, however, the
directors of such a corporation could draw no such inference from receipt
of demand by a shareholder con templating a federal derivative action.
Because the entitlement of the directors' decision to deference in such a
case would depend on the court's application of independent review
standards somewhere down the road, the directors could do no more than
speculate as to whether they should assess the merits of the demand
themselves or instead incur the time and expense associated with forming a
special litigation committee; indeed, at that stage, even the deference due
the decision of such a committee would be unclear.  The directors' dilemma
would be especially acute if the shareholder were proposing to join
state-law and federal claims, see RCM Securities Fund, Inc. v. Stanton, 928
F. 2d 1318, 1327-1328 (CA2 1991), a common form of action in federal
derivative practice, see D. DeMott, Shareholder Derivative Actions MDRV
4:08, 71 (1987). {9}  It is to avoid precisely this type of disruption to
the internal affairs of the corporation that Burks counsels against
establishing competing federal- and state-law principles on the allocation
of managerial prerogatives within the corporation.  See generally
Restatement (Second) of Conflict of Laws MDRV 302, Comment e, p. 309 (1971)
("Uniform treatment of directors, officers and shareholders is an important
objective which can only be attained by having the rights and liabilities
of those persons with respect to the corporation governed by a single
law").
    Finally, in our view, KFS overstates the likely judicial economies
associated with a federal universal-demand rule when coupled with
independent standards of review.  Requiring demand in all cases, it is
true, might marginally enhance the prospect that corporate disputes would
be resolved without resort to litigation; however, nothing disables the
directors from seeking an accommodation with a representative shareholder
even after the shareholder files his complaint in an action in which demand
is excused as futile.  At the same time, the rule proposed by KFS is
unlikely to avoid the high collateral litigation costs associated with the
demand futility doctrine.  So long as a federal court endeavors to
reproduce through independent review standards the allocation of managerial
power embodied in the demand futility doctrine, KFS' universal-demand rule
will merely shift the focus of threshold litigation from the question
whether demand is excused to the question whether the directors' decision
to terminate the suit is entitled to deference under federal standards.
Under these circumstances, we do not view the advantages associated with
KFS' proposal to be sufficiently apparent to justify replacing "the entire
corpus of state corporation law" relating to demand futility.  See Burks v.
Lasker, 441 U. S., at 478.
C
    We would nonetheless be constrained to displace state law in this area
were we to conclude that the futility exception to the demand requirement
is inconsistent with the policies underlying the ICA.  See id., at 479-480.
KFS contends that the futility exception does impede the regulatory
objectives of the statute.  As KFS notes, the requirement that at least 40%
of the board of directors be financially independent of the investment
adviser constitutes "[t]he cornerstone of the ICA's effort to control
conflicts of interest within mutual funds."  Id., at 482.  KFS argues that
the futility exception undermines the "watchdog" role assigned to the
independent directors, see id., at 484-485, because empowering a
shareholder to institute corporate litigation without the permission of the
board allows the shareholder to "usurp" the independent directors'
managerial oversight responsibility.  See Brief for Respondent KFS 40.
    We disagree.  KFS' argument misconceives the means by which Congress
intended independent directors to exercise their oversight function under
the ICA.  As we emphasized in Burks, the ICA embodies a congressional
expectation that the independent directors would "loo[k] after the
interests of the [investment company]" by "exercising the authority granted
to them by state law."  441 U. S., at 485 (emphasis added).  Indeed, we
specifically noted in Burks that "[t]he ICA does not purport to be the
source of authority for managerial power; rather the Act functions
primarily to `impos[e] controls and restrictions on the internal management
of investment companies.' "  Id., at 478, quoting United States v. National
Assn. of Securities Dealers, Inc., 422 U. S. 694, 705 n. 13 (1975)
(emphasis added by Burks Court).  We thus discern no policy in the Act that
would require us to give the independent directors, or the boards of
investment companies as a whole, greater power to block shareholder
derivative litigation than these actors possess under the law of the State
of incorporation.
    KFS also ignores the role that the ICA clearly envisions for
shareholders in protecting investment companies from conflicts of interest.
As we have pointed out, MDRV 36(b) of the ICA expressly provides that an
individual shareholder may bring an action on behalf of the investment
company for breach of the investment adviser's fiduciary duty.  15 U. S. C.
MDRV 80a-35(b).  Congress added MDRV 36(b) to the ICA in 1970 because it
concluded that the shareholders should not have to "rely solely on the
fund's directors to assure reasonable adviser fees, notwithstanding the
increased disinterestedness of the board."  Daily Income Fund, Inc. v. Fox,
464 U. S., at 540.  This legislative background informed our conclusion in
Fox that a shareholder action "on behalf of" the company under MDRV 36(b)
is direct rather than derivative and can therefore be maintained without
any precomplaint demand on the directors.  Under these circumstances, it
can hardly be maintained that a shareholder's exercise of his state-created
prerogative to initiate a derivative suit without the consent of the
directors frustrates the broader policy objectives of the ICA.
IV
    We reaffirm the basic teaching of Burks v. Lasker, supra: where a gap
in the federal securities laws must be bridged by a rule that bears on the
allocation of governing powers within the corporation, federal courts
should incorporate state law into federal common law unless the particular
state law in question is inconsistent with the policies underlying the
federal statute.  The scope of the demand requirement under state law
clearly regulates the allocation of corporate governing powers between the
directors and individual shareholders.  Because a futility exception to
demand does not impede the regulatory objectives of the ICA, a court that
is entertaining a derivative action under that statute must apply the
demand futility exception as it is defined by the law of the State of
incorporation.  The Court of Appeals thus erred by fashioning a uniform
federal common law rule abolishing the futility exception in derivative
actions founded on the ICA. {10}   Accordingly, the judgment of the Court
of Appeals is reversed, and the case is remanded for further proceedings
consistent with this opinion.

It is so ordered.








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1
    Section 20(a) states:
    "It shall be unlawful for any person, by use of the mails or any means
or instrumentality of interstate commerce or otherwise, to solicit or to
permit the use of his name to solicit any proxy or consent or authorization
in respect of any security of which a registered investment company is the
issuer in contravention of such rules and regulations as the [SEC] may
prescribe as necessary or appropriate in the public interest or for the
protection of investors."  15 U. S. C. MDRV 80a-20(a).

SEC regulations require proxy statements issued by a registered in vestment
company to comply with the proxy statement rules promulgated under the
Securities Exchange Act of 1934.  See 17 CFR MDRV 270.20a-1(a) (1990).  The
latter rules prohibit materially misleading statements.  See MDRV
240.14a-9.

2
    The ALI's proposal would excuse demand "only when the plaintiff makes a
specific showing that irreparable injury to the corporation would otherwise
result."  Principles of Corporate Governance MDRV 7.03(b).  The Court of
Appeals did not specifically address this aspect of the ALI's proposal,
although the court did reject the possibility that "exigencies of time"
would warrant dispensing with demand.  908 F. 2d, at 1344.

3
    The Court of Appeals also reversed the District Court's conclusion that
petitioner could not sue under MDRV 36(b) of the Act, 15 U. S. C. MDRV
80a35(b), because she was not an adequate shareholder representative under
Rule 23.1.  See 908 F. 2d, at 1347-1349.  After holding that petitioner was
not entitled to a jury trial, the Court of Appeals remanded for further
proceedings on petitioner's MDRV 36(b) claim.  See id., at 1350-1351.  No
aspect of the Court of Appeals' disposition of petitioner's MDRV 36(b)
claim is before this Court.

4
    We have never addressed the question whether MDRV 20(a) creates a
shareholder cause of action, either direct or derivative.  The SEC, as
amicus curiae, urges us to hold that a shareholder may bring suit under
MDRV 20(a) but only on his own behalf.  The parties did not litigate this
question in the Court of Appeals, and because that court disposed of
petitioner's claim on different grounds, it declined to address whether
MDRV 20(a) creates a derivative action.  See 908 F. 2d 1338, 1341 (CA7
1990).  The petition for certiorari likewise did not raise this issue in
the questions presented.  Because the question whether MDRV 20(a) supports
a derivative action is not jurisdictional, see Burks v. Lasker, 441 U. S.
471, 476, n. 5 (1979), and because we do not ordinarily address issues
raised only by amici, see, e. g., United Parcel Service, Inc. v. Mitchell,
451 U. S. 56, 60, n. 2 (1981), we leave this question for another day.  See
Burks v. Lasker, supra, at 475-476 (assuming existence of derivative action
under ICA for purposes of determining power of independent directors to
terminate suit).

5
    We do not mean to suggest that a court of appeals should not treat an
unasserted claim as waived or that the court has no discretion to deny a
party the benefit of favorable legal authorities when the party fails to
comply with reasonable local rules on the timely presentation of arguments.
See generally Singleton v. Wulff, 428 U. S. 106, 121 (1976).  Nonetheless,
if a court undertakes to sanction a litigant by deciding an effectively
raised claim according to a truncated body of law, the court should refrain
from issuing an opinion that could reasonably be understood by lower courts
and nonparties to establish binding circuit precedent on the issue
decided.

6
    KFS argues that Burks is not controlling because this Court established
a uniform, federal common law demand requirement in Hawes v. Oakland, 104
U. S. 450 (1882).  This contention is unpersuasive.  In Hawes, this Court
articulated a demand requirement (along with a futility exception) to
protect the managerial prerogatives of the corporate directors and to
prevent the collusive manufacture of diversity jurisdiction.  See id., at
460-461.  The latter objective, which is clearly a proper aim of federal
law, is now governed not by a federal common law doctrine of demand but
rather by the express terms of Federal Rule of Civil Procedure 23.1, which
requires the plaintiff to allege that "the action is not a collusive one to
confer jurisdiction on a court of the United States."  See also Smith v.
Sperling, 354 U. S. 91, 95-98 (1957) (district court should look to "face
of the pleadings and [to] nature of the controversy" to resolve
jurisdictional issues in derivative action founded on diversity).  Insofar
as Hawes aspired to regulate the substantive managerial prerogatives of
directors in a derivative action founded on diversity of citizenship, the
demand rule established in that case does not survive Erie R. Co. v.
Tompkins, 304 U. S. 64 (1938).  Cf. Cohen v. Beneficial Loan Corp., 337 U.
S. 541, 555-557 (1949) (federal court sitting in diversity must apply state
security-for-costs statute in derivative action).  Of course, the
principles recognized in Erie place no limit on a federal court's power to
fashion federal common law rules necessary to effectuate a derivative
remedy founded on federal law.  See Burks v. Lasker, 441 U. S., at 476.
But in this respect, whatever philosophy of federal common lawmaking can be
gleaned from Hawes has been eclipsed by the philosophy of Burks.  In sum,
Hawes is irrelevant to our disposition of this case.

7
    All States require that a shareholder make a precomplaint demand on the
directors.  See D. DeMott, Shareholder Derivative Actions MDRV 5:03, p. 23
(1987); id., at 65, n. 1 (Supp. 1990).  Only a few States, however, have
adopted a universal-demand rule.  See Fla. Stat. Ann. MDRV 607.07401(2)
(Supp. 1991); Ga. Code Ann. MDRV 14-2-742 (1989); Mich. Comp. Laws Ann.
MDRV 450.1493a(a) (1990).

8
    The American Bar Association's Model Business Corporation Act likewise
abolishes the futility exception to demand.  See Model Business Corporation
Act MDRV 7.42(1), reprinted in 45 Bus. Law. 1241, 1244 (1990).  And like
the ALI's Principles of Corporate Governance, the Model Business
Corporation Act spells out a detailed set of principles for identifying the
circumstances in which the decision of the directors is entitled to
deference.  Model Business Corporation Act MDRV 7.44, reprinted in 45 Bus.
Law., at 1246-1247.  The official commentary acknowledges that these review
standards "diffe[r] in certain . . . respects from the law as it has
developed in Delaware and been followed in a number of other states."  MDRV
7.44, Official Comment, reprinted in 45 Bus. Law., at 1250.

9
    Indeed, because "[i]n most instances, the shareholder need not specify
his legal theory" in his demand, Allison v. General Motors Corp., 604 F.
Supp. 1106, 1117 (Del. 1985), aff'd, 782 F. 2d 1026 (CA3 1985), the
directors frequently will not be able to tell whether the underlying claim
is founded on state law or on federal law.  This uncertainty will further
complicate managerial decisionmaking.

10
    KFS maintains that we should nonetheless affirm the dismissal of
petitioner's cause of action because petitioner did not plead the grounds
excusing demand with sufficient particularity for purposes of Federal Rule
of Civil Procedure 23.1.  Because the Court of Appeals applied a
universaldemand rule, it never addressed the sufficiency of petitioner's
complaint with reference to the futility exception as defined by the law of
Maryland, the State in which the Fund is incorporated.  Rather than take
the issue up for the first time ourselves, we leave for the Court of
Appeals on remand the question whether petitioner adequately pleaded excuse
of demand for purposes of Rule 23.1.