The Investment Company Institute is throwing its support behind new legislation to improve the ability of federal courts to curb “frivolous” lawsuits against mutual fund advisors.
The Mutual Fund Litigation Reform Act, H.R. 8188, would amend Section 36(b) of the Investment Company Act of 1940, which allows the Securities and Exchange Commission and fund shareholders to sue a mutual fund advisor on the grounds that advisory fees are excessive and constitute a breach of the advisor’s fiduciary duty.
The bill, introduced Tuesday by Rep. Tom Emmer, R-Minn., “will help federal courts to terminate before trial abusive lawsuits against mutual fund advisors, while preserving the right of shareholders to bring meritorious actions,” Paul Schott Stevens, ICI’s president and CEO, said in a Wednesday statement. “None of the lawsuits brought since Congress added Section 36(b) in 1970 has resulted in a final judgment against the defendant adviser, evidence that these suits waste adviser resources without any benefit for the shareholders that plaintiff lawyers say they’re helping.”
Stevens explained the bill would “discourage plaintiffs’ attorneys from bringing non-meritorious lawsuits by allowing judges to dismiss those suits at an earlier stage,” and the bill also “require plaintiffs to meet a standard of ‘clear and convincing evidence,’ showing that it is ‘substantially more likely than not’ that their claims are true.”
This is the standard required for lawsuits under the Employee Retirement Income Security Act, various federal whistleblower statutes (e.g., the Sarbanes-Oxley Act), patent law and several other federal statutes, ICI said.