Financial Services Alert - August 30, 2011

Development of Note

Federal District Court Dismisses Direct Claims by Mutual Fund Investors Alleging Deviation from Fund's Investment Objective Other Items of Note

SEC Open Meeting to Address Derivatives Use by Registered Funds, Investment Company Exclusion for ABS Issuers and Status of Companies that Acquire Mortgages and Mortgage-Related Instruments CFTC Issues Final Whistleblower Rules DEVELOPMENT OF NOTE

Federal District Court Dismisses Direct Claims by Mutual Fund Investors Alleging Deviation from Fund's Investment Objective

The U.S. District Court for the Northern District of California (the "District Court") (Judge Koh presiding) issued an order (the "Order") that dismissed with prejudice the final remaining claims in an investor class action suit against a bond index fund (the "Fund"), its trustees, the Fund's adviser (the "Adviser") and related entities, alleging losses incurred as a result of investments in mortgage-related securities that were inconsistent with the Fund's investment objective and violated its industry concentration policy. This suit, which was filed by a financial advisor that had invested its clients' assets in the Fund, had already been the subject of a series of decisions addressing the sufficiency of its claims.

Prior Decisions. In its initial complaint, the plaintiff alleged violations of Section 13(a) of the Investment Company Act of 1940 (the "1940 Act"), breach of fiduciary duty, breach of contract based on representations contained in the Fund's registration statement and other filings, breach of the covenant of good faith and fair dealing, and a breach of contract claim based on third party beneficiary status under the Fund's investment advisory agreement with the Adviser (the "Advisory Agreement"). Ruling on a motion to dismiss the complaint, the District Court (Judge Illston presiding) found that there was an implied private right of action under Section 13(a) of the 1940 Act. In relevant part, Section 13(a) prohibits a registered investment company from deviating from certain investment policies absent shareholder approval, among those policies being (1) a fund's policy regarding industry concentration recited in the fund's registration statement and (2) any policy designated as fundamental in the fund's registration statement, which in the Fund's case included its investment objective of tracking a designated bond index. (This 2009 decision by the District Court is discussed in greater detail in the...