Federal Court Rules that Private Plaintiffs Can’t Sue Under Compliance Rule
The U.S. District Court for the Southern District of New York dismissed a lawsuit claiming violations of the Investment Company Act’s compliance rule (38a-1). The Court opined that Rule 38a-1, which requires the adoption and implementation of policies and procedures reasonably designed to prevent violation of the securities laws, does not contain a private right of action. The plaintiff had asserted violations of the Rule because the defendant (or its affiliates) allowed allegedly illegal 12b-1 payments. The Court also rejected private rights of action under Sections 36(a) and 47(b) of the Investment Company Act.
OUR TAKE: Fund companies and compliance officers should take comfort that class action firms and their litigious clients can’t use Rule 38a-1 as a club.