U.S. Rep. Tom Emmer (R-MN) on Jan. 8 introduced the Preventing Excessive Mutual Fund Litigation Act, H.R. 4738, to deter the overuse of unwarranted lawsuits that may impact how Americans pool their resources to purchase stocks, bonds or other securities.
“By cutting down the number of frivolous lawsuits targeted at mutual funds, we can allow Americans to continue to make the investments they need for their future,” Emmer, who serves on the House Financial Services Committee, said in a Jan. 10 statement.
A recent Investment Company Institute study reports that some 55 million U.S. households own mutual funds.
“Whether it’s the recent college graduate starting to save in a 401(k) plan at her first job, the young family who wants to save to pay for their children’s education, or the elderly couple who wants to better manage their assets in retirement,” Emmer said, “mutual funds are essential tools to help invest in the American dream.”
But mutual funds are heavily regulated, and many times get tangled up in lawsuits focused on Section 36(b) of the Investment Company Act, said Emmer’s office. This section was adopted in 1970 to allow mutual fund investors and the Securities and Exchange Commission to seek restitution for alleged excessive fees charged by an adviser.
Rep. Emmer’s office said the misuse and overuse of Section 36(b) lawsuits has cost millions of dollars and redirected the expertise of fund advisers away from their intended work of improving returns on their clients’ mutual fund investments.
And despite a U.S. Supreme Court ruling in 2010 to strengthen the so-called Gartenberg Standard, too many Section 36(b) lawsuits lacking merit continue to get filed. The long-standing Gartenberg Standard, a U.S. legal criterion, is a way to determine whether a mutual fund adviser has breached its fiduciary duty under Section 36(b) by allowing a fund to charge excessive fees.
H.R. 4738 would require Section 36(b) plaintiffs at the outset of a lawsuit to plainly state the facts for alleging a breach of fiduciary duty. The plaintiff also has the burden of proving this breach with “clear and convincing evidence,” according to the bill’s text.
Various federal laws rely on similar criteria in specific instances, so courts in these cases also could decide to end lawsuits for any deemed non-meritorious before pre-trial litigation costs started to add up, according to Emmer’s statement.
H.R. 4738 has been referred to both the House Financial Services Committee and the House Judiciary Committee.