SW Legal studies in Business

No Private Right to Sue to Enforce Investment Company Act

Appeals court held that the Investment Company Act may be enforced only by the Securities and Exchange Commission. The Act does not provide a right of action for a private party who claims a registered investment company failed to follow the investment strategy explained in the registration statement with the SEC.


Securities Law

Key Words

Investment Company Act; Investment Policy; Right to Sue

C A S E   S U M M A R Y

Northstar Financial manages accounts on behalf of its investors. It had funds invested with Schwab Total Bond Market Fund. The Fund was registered with the SEC under the Investment Company Act (ICA) which, as required, stated its investment policies in its registration statement. The statement said that it would diversify its portfolio and hold certain classes of indexed fixed-income funds. Northstar claimed that the Fund deviated from its registered strategy by investing significant amounts in mortgage-backed securities not backed by a federal agency. When that market imploded in 2007, the Fund collapsed in value, inflicting losses on Northstar and its investors. Northstar brought a class action on behalf of its investors against the Fund for violating the ICA by changing its investment strategy away from those spelled out in its registration statement. The Fund moved to dismiss the suit, but the district court rejected that motion. The Fund appealed.


Reversed and remanded. There is no private right of action to enforce the ICA provision requiring investment companies to obtain shareholder approval before changing away from the investment policies contained in the original registration statement filed with the SEC. The authority to enforce the ICA rests exclusively with the SEC. The statute is clear that private parties have no right to sue to enforce the statute.


Northstar Financial Advisors v. Schwab Investments, ---F.3d--- (2010 WL 3169400, 9th Cir., 2010)

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