The United State Supreme Court, in a divided 5-4 decision, ruled that an investment adviser cannot be sued by a private plaintiff for statements made in a mutual fund prospectus. The Court reasoned that the fund is a separate legal entity with an independent board of directors. Consequently, the fund, and not the adviser, makes the statements in the prospectus. The Court likened the investment adviser to a speechwriter who prepares the speech but does not “make” it. The underlying facts involved a lawsuit pursuant to Section 10(b) and Rule 10b-5 for misleading statements about preventing market timing. 

OUR TAKE: This case essentially forecloses private rights of action against the mutual fund industry. The Supreme Court has previously precluded private rights of action against third party aiders and abettors. Now, the Court has ruled that even the investment adviser cannot be considered a primary violator. However, the Court does note that the SEC still has the regulatory power to pursue the investment adviser and other service providers.