Fund Distributor Has Responsibility for Prospectus Disclosure
The US Court of Appeals for the First Circuit, in reversing a lower court’s decision, has ruled that executives of a mutual fund distributor can be held primarily liable for securities law violations because an underwriter has an affirmative duty to confirm the accuracy and completeness of the prospectuses it distributes. The case involved market timing arrangements allegedly approved by the executives but which were contrary to statements made in the funds’ prospectuses. The Court explained that under Section 17(a)(2) of the 1934 Act, a defendant need not make an untrue statement; instead, liability attaches if the statement is used to obtain money or property including commissions.
OUR TAKE: The Court is making clear that the liability of a mutual fund distributor is the same as an underwriter of an operating company, where the SEC has always imposed a due diligence obligation with respect to disclosure documents. This case will likely raise the price charged by shingle or medallion distributors, who, based on this case, assume significant liability.