The Supreme Court's Janus decision: no secondary liability, but many secondary questions

Abstract

PurposeThe purpose of this paper is to review significant questions raised by the US Supreme Court's June 13, 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders and discuss issues that fund directors and advisers may want to consider as a result.Design/methodology/approachThe paper explains the narrow interpretation of Rule 10b‐5 that the Court decision represents and the Court's effort not to allow expansion of secondary liability for aiding and abetting under the federal securities laws. It raises questions about the allocation of liability for prospectus content among fund directors, officers, and advisers. It compares liability of advisers and their affiliates under provisions of Rule 10b‐5 and Sections 11 and 12 of the Securities Act of 1933. It recommends three matters that directors should consider concerning the allocation of liability in a case involving a false prospectus: the best way for fund directors to carry out their “due diligence” regarding the content of fund registration statements; the provisions of advisory, administrative and distribution contracts that allocate liability between those entities and the fund for prospectus misstatements and omissions; and various avenues for indemnification and shared liability, including D&O/E&O coverage and an indemnification agreement with the adviser. It introduces the alternative of shared liability in which the adviser signs the fund's registration statement.Practical implicationsThe paper finds that the Janus decision has caused fund directors, officers and advisers to focus on the allocation of liability for prospectus errors.Originality/valueThe paper provides a practical guidance from experienced securities lawyers.