Seventh Circuit Holds "Market Timer" Is Unable to Challenge SEC Rules

The National Law Journal reports: A "market timer" lacks standing to challenge Securities and Exchange Commission (SEC) rules, as it can establish neither an injury-in-fact nor the causation and redressability elements of standing, the 7th U.S. Circuit Court of Appeals held on Sept. 7. DH2, Inc. v. U.S. S.E.C., No. 04-2242, 422 F.3d 591 (7th Cir. Sep. 07, 2005).

DH2 Inc. is a "market timer," i.e., a firm that takes advantage of short-term price/value discrepancies that occur when the current value of a fund's portfolio securities has changed and that change is not yet reflected in the fund's share price. Investigations by New York Attorney General Eliot Spitzer into abuses in the mutual fund industry prompted the SEC to issue certain rules releases that changed the interpretation of rules on how mutual funds calculate their daily prices. DH2 challenged statements in the releases that require mutual fund companies to estimate the current "fair value" of a security when the market price at which that security closed has become unreliable. DH2 challenged some releases in an Illinois federal court, which transferred the case to the 7th Circuit, where it was consolidated with a second petition challenging another release.

The circuit court treated them as petitions for review of orders of the SEC. The 7th Circuit dismissed the petitions, holding that DH2 lacks standing to challenge the SEC's releases as it cannot establish an injury-in-fact, nor the causation and redressability elements of standing. DH2 is neither an investment company nor an investment advisor, and is therefore not subject to the requirements of the SEC's compliance or disclosure rule or any of the terms of the accompanying rules releases.

National Law Journal. September 19, 2005