This post comes to us from David Geffen. Mr. Geffen is counsel at Dechert LLP, focusing his practice on investment companies and advisers. This post is based on two articles by Mr. Geffen, Robert W. Helm, William K. Dodds, and Jeanette Wingler, which first appeared in The Investment Lawyer; those articles, including footnotes, can be found here and here.
Prior to the last decade, most litigation against funds (both open-and closed-end) and their advisers and directors involved claims of excessive fees pursuant to § 36(b) under the Investment Company Act of 1940 (ICA) and non-disclosure lawsuits under the Securities Act of 1933 (Securities Act). The collapse of the “dot com” bubble post-2001 left the mutual fund industry under stress, as assets under management for many managers had deflated materially. The aggressive quest for new assets to manage led some managers to adopt or expand marketing practices that became the focus of regulatory inquiries.
Beginning in 2003, the industry saw the beginning of several highly publicized regulatory investigations concerning market timing and improper revenue sharing arrangements. Scores of lawsuits were instigated against advisers, distributors, funds, and, in some cases, a fund’s independent directors. While independent directors were named defendants in prior lawsuits—for example, § 36(b) excessive fee lawsuits—the scope of litigation that followed 2003 was without precedent both in terms of the number of lawsuits and the number of those suits naming directors as defendants. Moreover, the lawsuits against fund directors coincided with an increase in suits against directors of companies outside of the fund industry. Both the number of lawsuits and the scope of litigation reflect the increased scrutiny to which the conduct of fund directors is subject.
