June 13, 1994
TO: CLOSED-END FUND COMMITTEE NO. 15-94
SEC RULES COMMITTEE NO. 61-94
RE: COURT FINDS PRIVATE RIGHTS OF ACTION UNDER SECTION 17(j)
AND SECTION 36(a)
__________________________________________________________
The United States District Court for the District of Delaware
recently held that an implied private right of action exists under
Section 17(j) and Section 36(a) of the Investment Company Act and
Rule 17j-1 thereunder. A copy of the court's opinion is attached.
Limited partners of two business development companies brought
an action against the general partner and the investment adviser to
the BDC's. In 1990, the BDC's bought notes issued by a financially
ailing company in which several of the defendants had existing
interests. In 1991, the BDC's sold a stock option to a company
partially controlled by the adviser. Plaintiffs alleged that these
transactions violated Section 17(j) and Rule 17j-1. The court held
that plaintiffs "are within the class of persons to be protected by
section 17(j)" and that the plaintiffs' complaint "states a
cognizable cause of action" under Section 17(j) and Rule 17j-1.
Defendants also asserted that Section 17(j) and Rule 17j-1
apply "only to those situations where an 'insider' purchases or
sells securities that (a) are already owned by an investment
company or (b) are being considered for acquisition by the
investment company." Plaintiffs argued that Rule 17j-1 should be
read to prohibit an access person "through his/her position of
influence, to cause an investment company to purchase or sell
securities already owned by that access person, particularly in
situations where the access person expects to personally benefit by
the investment company's purchase or sale." The court found that
plaintiffs' interpretation was "at least plausible" and denied
defendant's motion to dismiss for failure to state a claim.
Plaintiffs also alleged violations of Section 36(a) in
connection with certain transactions. The court held that
"Congress intended courts to . . . imply private rights of action
for conduct proscribed under section 36(a)" and that plaintiffs
"have stated a cognizable cause of action" under that section.
The court found that no private action for aiding and abetting
exists under the Investment Company Act. Finally, the court held
that the statute of limitations applicable to the Investment
Company Act is one year from the date of discovery and three years
from the date of the violation.
Thomas M. Selman
Assistant Counsel
Attachment