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ICI Alleged to Violate Securities Laws in Suit


The Investment Company Institute is violating federal securities laws by collecting membership fees from mutual funds while allowing the organization to be dominated by mutual fund advisory firms, according to a lawsuit two shareholders filed against the trade group last week.

Mutual fund executives control the ICI and influence it in ways that are adverse to fund shareholders at the same time that the ICI relies heavily on membership fees ultimately paid for by fund shareholders, the shareholders alleged. The shareholders - Linda Rohrbaugh of Brinklow, Md. and Richard Krantz of Garden City, N.Y. - alleged that the ICI's receipt of membership fees from funds while the organization is dominated by fund company executives represents a conflict of interest which hurts fund shareholders.

The ICI effectively has become an affiliate of investment advisory firms and mutual funds themselves, an arrangement federal securities laws prohibit without a special exemption from the SEC, according to the lawsuit. The ICI has not obtained the required exemption, the shareholders alleged.

"The investment advisers run the ICI for their own benefit despite the fact that more than 50 percent of the ICI's funding comes from fees paid by investment companies, (i.e., mutual funds) that are controlled by these same investment advisers but with which their interests conflict," Rohrbaugh and Krantz alleged.

Rohrbaugh and Krantz asked a federal court to find that the ICI had violated the Investment Company Act, the key federal law that governs mutual funds. The shareholders want the court to order the trade group to pay what would amount to millions of dollars in damages representing the amount of fees the ICI has received from mutual funds going back an unspecified period of years. Rohrbaugh and Krantz filed the suit May 31 in U.S. District Court in Washington, D.C.

A spokesperson for the ICI said he had not seen the suit and could not comment. Ronald Rubin, a partner in the firm of Rubin & Monahan of Rockville Md., the shareholders' lawyer, declined to comment.

The ICI receives its membership fees from various entities, including open- and closed-end funds, investment advisers who manage funds, fund underwriters and broker/dealers. The ICI in the past has declined to disclose its fee schedule.

The ICI lobbies Congress and state legislatures, conducts research and provides investor education. The firm received membership dues of approximately $30 million for the fiscal year ending Sept. 30, 1998.

"Most" of that revenue came from mutual fund fees, according to the lawsuit. At the same time, 39 of the members of the 45-person ICI board of governors - the trade group's governing body - were employed by or were principals of investment advisers, according to the lawsuit.

The ICI has backed mutual fund advisory firms on issues such as fund directors and soft dollars, the shareholders alleged. The "ICI is using funds provided by investment companies (and indirectly, by the public investors in investment companies...) to advance the interests of investment advisers," Rohrbaugh and Krantz alleged.

The two shareholders have some experience taking on mutual funds and the mutual fund industry in court cases. Krantz sued Fidelity Investments of Boston in 1998, contending that directors of Fidelity funds are not independent. Fidelity denies the allegations. The suit is pending.

Rohrbaugh unsuccessfully sued T. Rowe Price Associates of Baltimore in a similar case in U.S. District Court in Baltimore. She prevailed in a lawsuit in Maryland state court against the state of Maryland and Gov. Parris Glendening (D), challenging the constitutionality of a law on fund directors enacted in 1998.

The ICI filed a friend of the court brief in that case opposing Rohrbaugh's contentions that the law was unconstitutional. The ICI and fund companies lobbied for the law's passage.

Rubin is joined as lawyer for the shareholders in the ICI case by Joel Feffer, a partner in the firm of Wechsler, Harwood, Halebian & Feffer LLP of New York. Feffer is a lawyer for Krantz in the Fidelity case and has questioned the ICI's ability to fairly represent both shareholders and fund companies since at least 1998. (MFMN 10/12/98)