On March 30, 2010, a district court judge in the Northern District of California granted the shareholder plaintiffs’ motion for summary judgment in a case involving the concentration policy of the Schwab YieldPlus Fund. The fund had a fundamental policy not to concentrate (i.e., invest more than 25% of its assets) in any industry. In 2001, the fund began classifying non-agency mortgage-backed securities (“MBS”) as a separate industry for concentration purposes and disclosed this in its SAI as a non-fundamental policy. Subsequently, in 2006, the fund identified non-agency MBS as not being part of any industry for purposes of its concentration policy and disclosed this fact in its SAI. The plaintiffs alleged that, by the end of February 2008, the fund had slightly more than 50% of its assets in MBS. The judge ruled that the fund violated the 1940 Act in not submitting these changes in industry classification to shareholders for approval. According to court documents, a settlement conference is scheduled for April 15, 2010.
The ICI filed an amicus brief endorsing the fund’s defense and argued that fund boards have discretion to change non-fundamental industry classification policies without shareholder approval. The SEC, on the other hand, filed an amicus brief supporting the plaintiffs’ position and argued that the fund’s concentration policy and industry classification policy were part of the same fundamental policy, which the board could not change without shareholder approval.