A federal court of appeals recently held out the possibility that insider trading prohibitions—at least under the classic theory—do not apply to mutual fund redemptions.

The U.S. Court of Appeals for the Seventh Circuit recently reversed and remanded a summary judgment granted to the SEC in a case alleging that a mutual fund’s chief compliance officer (CCO) improperly redeemed fund shares while in possession of material non-public information. The court directed the district court to address the novel issue of whether Section 10(b) of the Securities Exchange Act of 1934 applies to insider trading in mutual fund shares.

A key consideration in any insider-trading case is whether the non-public information is material. In this case, the issue may turn on the level of public information that was available to shareholders.  Mutual funds, their service providers and their boards should therefore consider not only their own disclosure obligations, but also other information available to the public when considering whether their risk disclosure is adequate.

Additional information about the case is available in our client alert.