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In recent months, shareholders of several equity mutual funds have filed class action lawsuits in New York and Delaware state courts alleging false and misleading statements and material omissions in the funds’ registration statements related to the funds’ accounting practices that treat the funds’ dividend income and capital gains as assets until the funds distribute (i.e., pay out) their net investment income and net capital gains to their shareholders. The plaintiffs suggest that these undistributed amounts are “effectively” fund liabilities and should be accounted for as liabilities. They allege that the funds’ treatment of undistributed income as an asset artificially inflates a fund’s net asset value (NAV) per share and results in investors overpaying for fund shares, paying management fees on what are effectively liabilities, and paying taxes on a portion of the distribution that is effectively a return of the investor’s principal. The plaintiffs argue that the defendant equity mutual funds should instead remove realized income from their NAVs on a daily basis, as money market funds do.

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The plaintiffs allege that the funds falsely disclosed, or failed to disclose, to shareholders in the funds’ registration statements the risk and resulting impact of the funds’ accounting practices with respect to these undistributed amounts. The plaintiffs allege that the funds’ disclosures—stating that a fund’s NAV will be reduced by the amount of the distribution on the ex-dividend date and that buying fund shares <em>“shortly before”</em> or <em>“just before”</em> (emphasis added) a distribution can cost the investor money in taxes—wrongly suggest that the impact of distributions is limited to a narrow window of time and fails to disclose the “real economic impact” of its accounting for accrued income and capital gains. Furthermore, they allege that the funds misleadingly defined their NAV as assets minus liabilities because they failed to disclose that the NAV included accrued income and capital gains as assets without any offsetting liability for eventual distributions to shareholders.

The plaintiffs named various equity mutual funds and the funds’ trustees, officers, investment adviser, and distributor as defendants in the lawsuits, alleging the defendants are liable for false and misleading statements and material omissions in the funds’ registration statements under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.

Chicago

Class Action Lawsuits Claim That Funds Undistributed Income and Gains Are Effectively Liabilities

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