SEC Dismisses Liquidity Rule Enforcement Case Against Independent Fund Trustees

In July, the Securities and Exchange Commission (SEC) voluntarily dismissed charges with prejudice against two independent mutual fund trustees. In the case, the first to apply the Liquidity Rule (Rule 22e-4), the SEC claimed the mutual fund’s two independent trustees “aided and abetted” the fund’s alleged misclassification of illiquid securities in violation of the Liquidity Rule. The case was brought in the Northern District of New York in May 2023.

In June 2024, the Supreme Court decided in Loper Bright Enterprises v. Raimondo that when reviewing agency action, federal courts must exercise independent judgment when interpreting a statute and cannot simply defer to agency interpretations even if they are deemed reasonable. The New York District Court determined that in light of the Loper Bright decision, the parties should brief the court on whether that decision has an impact on the SEC enforcement action. According to a client alert from Stradley Ronon, the defendants re-filed their motion to dismiss all charges arguing, “that the plain text of the statute did not grant rulemaking authority related to fund liquidity and resubmitted its arguments challenging the SEC’s failure to state a claim for aiding and abetting liability against the independent trustees.”

Following the briefing outlined above, the SEC agreed to dismiss all charges against the independent trustees with prejudice, meaning that the SEC cannot refile the charges.     

Click here to read the Stradley Ronon client alert covering the enforcement action dismissal.