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Citing Express and Pervasive SEC Enforcement Powers, Ninth Circuit Rejects Implied Private Right of Action for Sec. 13(a) of Investment Company Act

By Jim Hamilton

A Ninth Circuit panel ruled that there is no implied private cause of action to enforce the provisions of Section 13(a) of the Investment Company Act, which requires an investment company to obtain shareholder approval before deviating from the investment policies contained in the company?s SEC-filed registration statement. Neither the language of Section 13(a) nor its legislative history, nor the structure of the Investment Company Act of 1940 reflect any congressional intent to either create or recognize a previously established private right of action under the statute. Rather, the panel emphasized that the job of enforcement remains exclusively with the SEC by express command of the 1940 Act itself. The appeals court followed the modern trend in the federal courts of denying the existence of implied private rights of action under the 1940 Act. (Northstar Financial Advisors, Inc. v. Schwab Investments, CA-9, No. 09-16347, Aug. 12, 2010).

The action involved claims by investors that a large investment trust operating a series of mutual funds deviated from the investment policies set forth in its registration statement to the detriment of the fund?s shareholders and in violation of Section 13(a). The court first analyzed whether Section13(a)?s language and structure contains an implied private right of action. The panel concluded that there is no language in 13(a) that would imply Congress intended to allow private enforcement of the statute?s requirements. There is no ?rights-creating language.?

More broadly, the panel next held that the structure of the 1940 Act suggests no congressional intent to allow private enforcement. The Act specifically authorizes SEC enforcement of the 1940 Act, said the court, and Congress created an express private right of action against investment advisors for breach of certain fiduciary duties in § 36(b). The panel said that Congress did not intend to imply a private right to enforce other sections of the 1940 Act because the very structure of the Act does not indicate that Congress intended to create an implied private right to enforce the individual provisions of the Act.

Congress expressly authorized the SEC to enforce all of the provisions of the Act by granting the Commission broad authority to investigate suspected violations; initiate actions in federal court for injunctive relief or civil penalties; and create exemptions from compliance with any ICA provision, consistent with the statutory purpose and the public interest. In the panel?s view, this thorough delegation of authority to the SEC to enforce the ICA strongly suggests Congress intended to preclude other methods of enforcement.

Because the statutory scheme of the 1940 Act provides for thorough SEC enforcement of the Act?s provisions, including Section 13(a), reasoned the panel, it is highly improbable that Congress absentmindedly forgot to mention an intended private action. Moreover, it is evident from the text of the 1940 Act that Congress knew how to create a private right of action to enforce a particular section of the Act when it wished to do so. In Section 30(f) of the original 1940 Act (now codified at 15 U.S.C. § 80a-29(h), Congress expressly authorized private suits for damages against insiders of closed-end investment companies who make short-swing profits.

Congress created a second express private right of action in 1970 when it added Section 36(b) to the ICA, which allows shareholders to sue an investment company?s advisor and its affiliates for breach of certain fiduciary duties relating to management fees. According to the court, Congress?s enactment of these two express private rights of action elsewhere in the ICA, without the enactment of a corresponding express private right of action to enforce Section 13(a), indicates that Congress did not, by its silence, intend a private right of action to enforce Section 13(a).

Full post as published by Jim Hamilton's World of Securities Regulation on August 17, 2010 (boomark / email).