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Claims that the Investment Company Institute is violating federal securities laws are a legal longshot, according to mutual fund industry lawyers.

The lawsuit - which claims that the ICI is violating federal securities laws in the way it collects dues and manages its affairs (MFMN 6/5/00) - goes beyond any SEC pronouncements and court rulings in the 60 years since Congress passed the Investment Company Act, lawyers said. There is no precedent for the claim that a trade group violates federal securities laws because it receives fees from mutual funds at the same time that mutual fund company executives lead the organization, lawyers said.

"On the merits, I don't see how [the lawsuit] could survive a motion to dismiss," said Pamela Wilson, a partner at Hale & Dorr LLP of Boston. "I think they have an uphill battle."

Linda Rohrbaugh of Brinklow, Md. and Richard Krantz of Garden City, N.Y. filed suit against the ICI May 31 in federal district court in Washington, D.C. seeking what could amount to tens of millions of dollars in damages. Rohrbaugh and Krantz claim that the ICI, by virtue of its membership structure, has become an affiliate of mutual fund advisers and mutual funds, thereby violating the provision in the Investment Company Act that bars transactions and joint efforts between affiliates. The shareholders also contend that the ICI violated a provision in the Act that says that advisers have a fiduciary duty to shareholders.

The ICI issued a statement June 7 saying it believed the shareholders' allegations "are wholly without merit."

"The Institute will proceed vigorously to seek a prompt termination of this unfounded lawsuit," the ICI said. A spokesperson declined to elaborate.

Ronald Rubin, a partner at Rubin & Monahan of Rockville, Md. and the lawyer for Rohrbaugh and Krantz, declined to comment.

Mutual fund lawyers' overriding criticism of the lawsuit was that Congress did not intend the securities laws to govern the actions of trade groups. It is implausible to argue that a trade group becomes an affiliate under the securities laws because of the source of its dues, lawyers said. Also, while they said the ICI has some duty to its members, lawyers dismissed the idea that the ICI owed a fiduciary duty to mutual fund shareholders as a result of receiving fees from the funds.

Lawyers also questioned the lawsuit on tactical grounds. It seems unlikely that the plaintiffs would take on a well-financed defendant in a difficult case in which the defendant is unlikely to settle unless the plaintiffs had another agenda, lawyers said.

"Someone is making a statement," said Carl Frischling, a partner at Kramer Levin Naftalis & Frankel LLP of New York.

That statement has to do with the fee structure, management and lobbying efforts of the ICI, fund lawyers speculated. Rubin and his fellow counsel on the ICI case, Joel Feffer, a partner in Wechsler Harwood Halebian & Feffer LLP of New York, have been involved in at least seven cases involving mutual fund companies or issues in the past three years. In two of those cases, the ICI has filed friend-of-the-court briefs opposing the positions of Rubin's and Feffer's clients.

The ICI also hired a lobbyist in Maryland in 1998 to work for the passage of a law on mutual fund directors. Rubin sought to defeat the law in the legislature and lost. He then litigated a constitutional challenge of the law all the way to Maryland's highest court and won, despite opposition from the ICI.

"I do think (the lawsuit) is a statement of frustration on the part of the plaintiffs' bar," said Barry Barbash, a partner in the Washington office of Shearman & Sterling of New York.

That frustration seems to be a subtext of the language in the ICI lawsuit. The ICI receives a majority of its dues from mutual funds themselves while it takes positions that benefit investment advisers, the shareholders allege. Executives from fund companies dominate and control the ICI, the suit alleges. The situation creates an untenable conflict of interest that hurts shareholders, Rohrbaugh and Krantz alleged.

The two have asked a U.S. District Court judge to order the ICI to stop accepting membership payments from mutual funds because of the alleged conflict.

The shareholders' perceptions about the agenda of the ICI are unfounded, Barbash said. Investment adviser members of the ICI have complained that the ICI either has not been active enough on investment adviser issues or has taken positions that are adverse to investment advisers, he said. Barbash cited as an example the ICI's vehement, successful public opposition in 1999 to a proposal from the securities industry to reduce the restrictions on affiliated transactions. Some ICI members supported the change in the law, Barbash said.

The ICI also has kept a low profile on a recent SEC proposal that largely bars political contributions by investment advisers to government officials despite the opposition of many investment advisery members to the proposal, Barbash said.

"If you look at what the ICI has done over time, the evidence will suggest a different picture than the one painted in the lawsuit," Barbash said. "You don't see a monolith."