The U.S. Court of Appeals for the Second Circuit affirmed the dismissal of a putative class action brought by mutual fund investors for alleged violations of Sections 34(b), 36(a) and 48(a) of the Investment Company Act (ICA). The Complaint asserted that defendants siphoned funds from the mutual funds to pay kickbacks to brokers who agreed to promote the sale of fund shares.
Plaintiffs alleged that the resulting expansion of fund assets increased advisory fees disproportionate to the value of services provided to a level that exceeded what would have been negotiated in arm’s length transactions. The complaint alleged that in furtherance of the alleged scheme (i) defendants made misrepresentations and omissions of material fact in registration statements in violation of § 34(b); (ii) defendants breached their fiduciary duties under § 36(a); and (iii) certain defendants caused other defendants to violate the ICA, resulting in control person liability under § 48(a).
Affirming the District Court’s dismissal, the Second Circuit held that no private right of action existed under any of the aforementioned sections of the ICA. After noting that Congressional intent is the “keystone” as to whether a private right of action under a federal statute exists, the Court found ample support for its decision that no such right supported the plaintiffs’ claims, including (i) the express provision in § 42 of the ICA providing the Securities and Exchange Commission with authority to enforce all ICA provisions, which suggests that Congress’s failure to similarly provide an express private right of action was intentional; (ii) the express provision of a private right of action to investors in § 35(b), which suggests that Congress’s omission of such a right in the sections plaintiffs sued under was intentional; and (iii) Congress’s focus in sections 34(b), 36(a) and 48(a) on the persons and entities regulated, rather than on the persons protected, which suggested that Congress intended these sections to “regulate” rather than create new “rights.” (Bellikoff v. Eaton Vance Corp., No. 05-6957-cv, 2007 WL 766209 (2d Cir. Mar. 15, 2007))