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Panel: McLaughlin, Wesley, and Kahn (NDNY)
Opinion by: Wesley
Appeal from: SDNY (Jones, USDJ)
Result below: 12(b)(6) Dismissal
Result: Affirmed
Form N-1A Disclosure Obligations
Plaintiffs’ class action complaint alleges that Morgan Stanley had wrongfully failed to disclose conflicts of interest concerning the subject mutual funds that could possibly taint the objectively of its stock research. The conflict arose because Morgan Stanley allegedly dismantled the “information barrier” — the Court’s preferred phrase for what used to be called a “Chinese Wall” — between its investment banking and research functions during the class period, and because the compensation of Morgan Stanley’s research analysts was tied to investment banking revenues. (Morgan Stanley did, in fact, settle with the SEC claims of improper commingling of research and investment banking functions, disgorging $25 million, and paying $100 million in fines and remedial action). Plaintiffs claims are brought under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.
The precise question on appeal is whether Morgan Stanley was obligated to disclose the alleged conflicts of interest in its registration statements and prospectuses under Form N-1A of the Securities Act. On request of the Court, the SEC submitted an amicus brief concerning duties to disclose under Form N-1A. The SEC opined that Form N-1A was “not an independent source of disclosure obligations,” and this conclusion is entitled to deference “in light of the SEC’s expertise in administering the securities laws, its ability to seek input form the public when crafting regulatory policy, and its relative political accountability.” Slip Op. at 31 (citation omitted). Because plaintiffs “failed to identify a legal basis requiring disclosure of the allegedly omitted information”, the Court holds that the district court properly dismissed the complaint.
