9th Circuit Curbs the Rising Tide of Subprime Litigation and Rejects a Private Right of Action for Violation of Investment Objectives
By William F. Sullivan, Joshua G. Hamilton & Kathryn Wanner
In a case of first impression, on August 12, 2010 the Ninth Circuit overruled the Northern District Court of California, and found that there is no private right of action for investors to enforce Section 13(a) of the Investment Company Act of 1940 (the ICA or the 1940 Act). Section 13 (a) of the ICA compels an investment company to obtain shareholder approval before deviating from the investment policies in the companys registration statement filed with the Securities and Exchange Commission (the SEC). The district court had found that investors themselves could bring actions against mutual funds for any decisions that depart from stated investment policies. This decision could have opened the door to a new field of class actions requiring the courts to examine day-to-day fund management to determine whether the funds had departed from their stated fundamental investment policies. However, the Northern District Court recognized the possible impact of its holding and certified its decision for interlocutory appeal and subsequent Ninth Circuit review.