SEC/DOJ Argue that Fund Sponsors are Liable for Prospectus Statements
In an amicus curiae brief to the Supreme Court, the SEC and the Justice Department argue that a mutual fund investment adviser has primary securities fraud liability under Section 10(b) and Rule 10b-5 with respect to statements made in a fund prospectus. The brief argues that a fund’s investment adviser is more than a secondary actor: “An investment adviser’s managerial role makes it essentially a corporate insider, and distinguishes it from a true secondary actor like an accountant, lawyer, or bank.” Consequently, investment advisers should be subject to both criminal and administrative prosecutions for misleading statements in fund prospectuses. The brief rejects the argument that the Board insulates the adviser from primary liability: “The board’s oversight role does not change the fact that the adviser continues to provide the management.” The case involves a class action against the parent company of a fund adviser who allegedly made false prospectus statements about preventing market timing.
OUR TAKE: We would be surprised if fund sponsors believed that they were not liable for statements made in the prospectus, regardless of the underlying legal technicalities. Nevertheless, we will not try to predict whether the always unpredictable Supreme Court will specifically extend Section 10(b) and Rule 10b-5 to fund sponsors. Also at issue in this case is whether the class plaintiffs actually relied on the misleading mutual fund statements when they purchased stock of the parent company.
Posted by Todd Cipperman at 11/8/2010 7:11 AM 
Categories: Funds
Tags: anti-fraud 10b-5 fund sponsors primary liability prospectus
Categories: Funds
Tags: anti-fraud 10b-5 fund sponsors primary liability prospectus
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