The Ninth Circuit Court of Appeals has determined that mutual fund shareholders do not have a private right to enforce section 13(a) of the Investment Company Act of 1940 (1940 Act), which requires an investment company to obtain shareholder approval before deviating from fundamental investment policies. In so doing, the Court of Appeals emphasized that its holding squared with Second Circuit precedent and the modern trend, which has been to deny private enforcement of the 1940 Act.
In Northstar Financial Advisors v. Schwab Investments, Schwab moved the district court to dismiss a shareholder class action suit filed by Northstar, asserting that section 13(a) contains no implied private right of action. The court disagreed, reading into the provision Congressional intent to provide a private right of action based on the enactment of the Sudan Accountability and Divestment Act of 2007 (the SADA Amendments), which added to the 1940 Act, as section 13(c), a provision barring suits against investment companies for divesting from Sudanese-based investments.
In reversing the district court’s decision on interlocutory appeal, the Court of Appeals noted that (1) section 13(a) focuses squarely on the party to be regulated, not on those protected; (2) the 1940 Act thoroughly delegates enforcement authority to the SEC; and (3) Congress had created private rights of action for certain specific provisions of the 1940 Act, but declined to create a corresponding right for section 13(a).
The Ninth Circuit found that the legislative history did not evince intent to create a private right of action. Among other things, it found the SADA Amendments were intended to provide a “safe harbor” for compliance with SADA and noted that recent amendments to section 13(c) expressly state that it does not create or affect the existence of private enforcement of section 13(a).