Alert July 13, 2010

Congress Clarifies that Section 13(c) of the Investment Company Act of 1940 Does Not Imply or Create a Private Right of Action under Section 13(a)

The recently enacted Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (the “Iran Sanctions Act”) adds a rule of construction (the “Rule of Construction”) to Section 13(c) of the Investment Company Act of 1940, as amended (the “Act”), that clarifies that the text of Section 13(c) (which was added to the Act in 2007 in connection with earlier divestment legislation relating to Sudan) does not imply or create a private right of action under Section 13(a) of the Act, which prohibits a registered investment company (a “fund”) from changing its policies with respect to certain practices, including industry concentration, without shareholder approval, or any other provision of the Act.  Section 13(c) prohibits any person from bringing an action against a registered investment company, or employee, officer, director or investment adviser to a registered investment company, based solely upon the investment company’s divestment from, or avoidance of investments in, securities of issuers determined to conduct or have direct investments in business operations in Sudan.

The Rule of Construction is designed to address a decision last year by a California federal district court finding a private right of action under Section 13(a) of the 1940 Act in a suit where shareholders alleged that a fund had violated Section 13(a) by improperly changing its concentration policy of investing no more than 25% in any industry so that the fund could invest more than 25% of its total assets in US agency and non-agency mortgage-backed securities.  The judge in that case reasoned that if there were no private right of action under Section 13(a), Congress would not have needed to restrict the actions that could be filed under Section 13 by adding Section 13(c) (see the March 10, 2009 Alert for a detailed discussion of the 2009 decision).