PHOENIX - It might sound elementary but legal eagles from some of the country’s biggest law firms convened today at the Investment Company Institute's Mutual Funds and Investment Management Conference to drive home the importance of disclosure when it comes to mutual fund registration.

According to Robert Skinner, a partner in the Boston office of Ropes & Gray, shareholder allegations over the last few years have been focused on the nature of holdings in funds and that the risks in those funds were not properly disclosed to let “reasonable” investors.

“In practice, much of the fund-related litigation under the 1933 and 1934 Acts arguably consists of plaintiffs who are disappointed with under-performance in their funds attempting ‘dress up’ what is in fact a non-actionable mismanagement claim to look like an actionable disclosure claim,” he said.

Skinner noted a potentially watershed decision from the Southern District of New York in Yu v. State Street Corp., that if it were to be followed by other courts, could dramatically limit the ability of plaintiffs to assert these claims against mutual funds, advisers and trustees.

In the Yu case, shareholders in a bond mutual fund alleged that the fund’s prospectus misleadingly misstated the fund’s investment objectives and the amount of exposure the fund would have to subprime mortgage-backed securities, exposure that allegedly caused the share price of the fund to decline in 2007-2008.

The court for the Southern District of New York dismissed the complaint with prejudice on March 31, 2011 because plaintiffs could not establish causation.

However, Skinner noted other federal district courts recently addressing the same issue before and after Yu have declined to follow the reasoning in the case. For example, in Rafton v. Rydex Series Funds, issued by the district court for the Northern District of California on January 5, 2011, Skinner said the court rejected the causation defense that was embraced by the court a few months later in Yu.

At issue was an exchange-traded fund that allegedly failed to disclose adequately the effect of mathematical compounding on the cumulative returns of the ETF for periods longer than one day. Relying on the reasoning of a 2009 decision by another judge in the Northern District of California, in re Charles Schwab Corp. Securities Litigation, the Rafton court pointed primarily to the policy arguments considered and rejected by the Yu court in denying the defendants’ motion to dismiss on causation grounds.

According to the court: “If defendants are correct that disclosures are immaterial to mutual funds/exchange traded funds, then there can never be a Section 11 or Section 12(a)(2) claim of misrepresentation or material omission against such funds. That would lead to the absurd result that such funds could even intentionally misrepresent material facts with impunity.”

Janet Olsen, general counsel at Artisan Partners Limited Partnership, told the audience that: “If you work for a big mutual fund group, you’re working on registration everyday of your life, which makes it hard to remember just how important the thing you’re working on is.”

But she advised the audience to make sure they’re getting the attention of the fund’s board of directors and outside legal counsel to make sure all the I’s are dotted and T’s crossed.

And what about amendments to current registrations? Aren’t they potential grounds for lawsuits from shareholders? Olsen said that mutual fund firms are damned if they do and damn if don’t make amendments. “The only way you can go forward is if you and your organization treat registration as your own,” she offered.

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