At the outset, the Supreme Court's latest ruling against the Securities and Exchange Commission-that there is a five-year limit on bringing fraud claims- may sound like a victory for mutual funds and their advisors.

But fund executives should watch out for the unintended consequence of that decision. The ruling may force regulators, for instance, to bring cases to court before they are fully fleshed out.

The Supreme Court ruled that as a government agency complete with a wide array of resources, the SEC's mandate of protecting investors from fraud holds it to a higher measure of awareness compared to individual investors when it comes to fraud. Also, the court ruled that the agency should be able to file claims against traders who engage in short-term, "in and out" trading of mutual fund shares, dubbed market timing, within five years of the actual trading, not after it has discovered the trading occurred.

Robert Skinner, a partner based in the Boston office of Ropes & Gray, lauds the court for its enforcement of the five-year statute of limitation. "The SEC is often very slow to act so, as a result, the uncertainty of knowing when an SEC action could come leaves mutual funds and their advisors guessing for years," he said.

Skinner, a litigator for firms such as State Street Global Advisors and Allianz Global Advisors, says the mutual funds and their advisors can now rest easier with the court's ruling.

"The court's decision strikes a very nice balance between providing funds and their advisors with an appropriate level of closure and repose while at the same time still providing the regulators with ample time to do a fair investigation of any issue," he said.

The ruling made on Feb. 27 stems from a 2008 case involving alleged market timing. In that case, the SEC brought its civil enforcement case against Gabelli Funds and Bruce Alpert, Gabelli Funds' chief operating officer, and Marc Gabelli formerly GGGF's portfolio manager.

According to the complaint, from 1999 until 2002 Alpert and Gabelli allowed an investor-Headstart Advisers-to exploit the time delay in mutual funds' daily valuation system by trading in and out of the fund on a daily basis.

The defendants moved to dismiss the claim, arguing in part that a civil penalty claim brought in 2008 was not timely. They invoked a five-year statute of limitations, pointing out that the SEC's claim was for the period up until August 2002 but that the regulator did not file its claim until April 2008.

The District Court agreed and dismissed the civil penalty claim but Second Circuit reversed the District Court's decision, accepting the SEC's argument that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud.

However, on Feb. 27, Chief Justice John Roberts of the Supreme Court ruled against the Second Circuit's discovery argument. According to Chief Justice Roberts, the discovery rule exists, in part, to preserve the claims of victims who do not know they are injured and who "do not typically spend our days looking for evidence that we were lied to or defrauded."

"Most of us do not live in a state of constant investigation; absent any reason to think we have been injured. And the law does not require that we do so. Instead, courts have developed the discovery rule, providing that the statute of limitations in fraud cases should typically begin to run only when the injury is or reasonably could have been discovered," wrote Chief Justice Roberts.

However, Chief Justice Roberts argued that the SEC is not like an individual victim who only discovers fraud after being defrauded. "Rather, a central 'mission' of the Commission is to "investigat[e] potential violations of the federal securities laws. Unlike the private party who has no reason to suspect fraud, the SEC's very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit. It can demand that securities brokers and dealers submit detailed trading information. It can require investment advisers to turn over their comprehensive books and records at any time. And, even without filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation. Charged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect," he wrote.

Skinner added that the ruling provides closure that every company needs in assessing its risk. "That said, I don't think any mutual fund or advisor are clicking their heels because they think they're going to avoid trouble by this decision. The SEC is a very active regulator and five years is still a long time," he said.

The Supreme Court's five-year limit on bringing a case is fine, said Todd Cipperman, principal of Cipperman Compliance Services, which provides compliance services to funds and registered advisors, said. However, Cipperman said the court's decision may result in more fraud claims against mutual funds.

"If I am a litigator in the enforcement division at the SEC, I would be more likely to file a court action sooner rather than later whether or not I really have a basis for the claim, and figure it out later just so the statue doesn't run on me," he said.

Skinner contends that five years is enough time for the SEC to be able to make its claims. "In those rare instances where five years is not enough time, they can arrange for an extension of that time through a tolling agreement in which they can go to the regulated entity and get an agreement that they need more time and they do that," he said.

For its part, the SEC is taking the Supreme Court's decision in stride. "This ruling pertains only to penalties and does not restrict our ability to strip violators of their unlawful financial gains or bar them from the securities industry when necessary to protect investors," said spokesman John Nester.

"The court also left open whether the SEC can pursue financial penalties after five years when violators have taken steps to conceal their illegal conduct, such as submitting false information in a commission filing,'' he said. "While we always prioritize our investigative workload to meet the five-year deadline, where circumstances warrant we also obtain agreements from individuals and entities under investigation to waive the deadline in financial crisis cases and other investigations."