The popularity and growth of mutual funds have made it an over $16 trillion industry, a fact not lost on the federal securities plaintiffs' bar.1 But bringing class actions on behalf of mutual fund investors is not without significant obstacles. The primary federal statute governing mutual funds, the Investment Company Act of 1940 (the "ICA"), provides only a single, express, private right of action. That right of action under Section 36(b) of the ICA limits recovery to the amount of fees charged by a mutual fund's investment adviser , and the statute provides significant procedural safeguards for defendants.2 Mutual funds are also subject to the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), the traditional vehicles of choice for securities class action plaintiffs' lawyers. But those statutes present unique issues when mutual funds are involved, and impose additional hurdles for plaintiffs that are more challenging than those plaintiffs face in a traditional securities class action against a corporate issuer of securities.

At the time the Securities Act and Exchange Act were enacted, mutual funds obviously were not in the forefront of the drafters' minds. In the wake of the Great Depression, Congress was focused on enacting legislation aimed at traditional corporate issuers and protecting shareholders of those types of securities (e.g., shares of common stock). Moreover, almost all of the last 80 years of caselaw interpreting the relevant provisions of the Securities Act and Exchange Act has involved claims brought by shareholders of corporate issuers, not mutual funds. Only more recently have courts begun to address how these statutes apply to funds. The result has been a revelation that the unique legal and structural characteristics of mutual funds, and their very nature as pooled investment vehicles that hold a basket of many underlying investments, makes them fundamentally different from the individual securities that are the subject of traditional securities class actions. Because of these fundamental differences, many standard concepts of liability under the securities laws do not fit mutual funds as naturally as they do individual securities, and the result is often confusion and uncertainty.3

Securities Act and Exchange Act claims involving mutual funds are typically filed as class action lawsuits by fund shareholders under Sections 11, 12(a)(2), and 15 of the Securities Act and Section l0(b), Rule lOb-5, and Section 20 of the Exchange Act. Plaintiffs typically name as defendants the mutual funds themselves, the funds' investment adviser, parent companies of the funds and investment adviser, officers of any of the aforementioned entities, and the funds' directors. Plaintiffs have targeted a wide range of conduct, including mutual fund market-timing and late-trading arrangements, mutual fund fee practices including revenue sharing and directed brokerage, sales practices with respect to different share classes, failure to adhere to a fund's stated investment objective, omission of relevant risks, and inaccurate valuation of the fund's assets. Plaintiffs most frequently allege misrepresentations and omissions in the fund's registration statement. The securities class action caselaw concerning mutual funds is relatively sparse and often divergent.

In this article, we examine the different approaches courts and litigants have taken with regard to three well­ known concepts under the Securities Act and Exchange Act: (1) loss causation; (2) control person liability; and (3) reliance. In our view, the caselaw reflects both the difficulties of applying the securities laws to products for which they were not originally intended, and the judicial philosophies that are employed when attempting to adapt precedent to these products.

Footnotes

1 Investment Company Institute, 2017 Investment Company Fact Book: A Review of Trends and Activities in the Investment Company Industry (57th Ed.) at 9.

2 Investment Company Act of 1940, § 36(b), 15 U.S.C.A. § 80A-35(B); Jones v. Harris Assocs. L.P., 559 U.S. 335, 340 (2010).

3 Tannenbaum v. Zeller, 552 F.2d 402, 405-07 (2d Cir. 1977).

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