Why are investment companies are regulated so differently from every other kind of company? The multitude of other companies across our diverse spectrum of business endeavors—from software design to clothing retail to food service, and so forth—are regulated by a generic body of securities regulations. What exactly makes an investment company so different from every other kind of company that it alone deserves special securities regulation? The chapter concludes that, whatever the historical rationales for investment company regulation, the most compelling rationale for investment company regulation today is an investment company’s unique organizational structure. An investment fund almost always has a separate legal existence and a separate set of owners from the managers who control it. A fund investor thus relates to her managers in a radically different way from an investor in every other kind of company.
Chapter 5 attempts to compile an investor profile that describes who mutual fund investors are. It concludes that this portrait of investors, painted by academic and governmental studies, is disturbing. Fund shareholders, who are in charge of making their own investment decisions, are ignorant of important characteristics of the funds in which they invest, inattentive to risks, and insensitive to fund fees. The chapter ends with a “trillion-dollar question”: whether the legal regime charged with protecting fund investors and ensuring the viability of our private retirement system is up to the task.
Anita K. Krug
The chapter contemplates possible ways to improve the governance of mutual funds, focusing specifically on a new model. In this new governance model, multiple funds in a common family are not managed by a single investment adviser but rather by numerous advisers, each managing one or a small number of funds within the organization. The chapter contends that although the new model produces novel risks, there are reasons to believe that it is as least as effective as the traditional model, and may in fact be superior in some ways. Specifically, because the new model produces fewer sources of conflicts of interest than the traditional one, it may strengthen the board’s ability to uphold its fiduciary duties to fund investors.
Jill E. Fisch
The chapter considers money market funds and the shadow banking debate by tracing their evolution from their inception in the 1970s. It focuses particularly on the events of September 2008, when the bankruptcy of Lehman Brothers caused the Reserve Primary Fund to “break the buck” and triggered investors’ redemptions from money market funds. It explains the political interplay among government regulators regarding the need for reform and the ensuing regulations adopted by the SEC. The chapter closes by offering thoughtful observations about the likely structure of the money market fund industry in the future.
The chapter explores the rise and fall of the mutual fund brand, beginning with the observation that growth in the mutual fund industry has stagnated relative to the industry’s dramatic rise in the preceding two decades. It suggests that both that stagnation and the previous growth may be attributable to government policies. Specifically, the chapter identifies a suspension of the SEC’s program of aggressive regulatory innovation and the agency’s inaction in the face of threats to the mutual fund brand. The author calls for the Commission to reclaim its role as a regulatory entrepreneur by using its broad exemptive authority to stave off the prospect of the mutual fund brand stagnating and withering in the vacuum of SEC paralysis.
Edited by William A. Birdthistle and John Morley
Pamela Hanrahan and Ian Ramsay
Over two decades, Australia developed a unique legal and regulatory framework for mutual funds and other collective investments. Utilizing a trust structure, the framework is built around a single “responsible entity” that combines the role of the fund sponsor and adviser with that of the trustee. This chapter explains three key features of that framework: the fiduciary duties imposed on the responsible entity and its officers; the limited role of an independent party to monitor or oversee the responsible entity’s conduct of the fund; and the availability of investor “self-help” mechanisms, including information rights, voting rights, enforcement rights and exit rights.
Iris H-Y Chiu
The chapter provides a comprehensive analysis of pan-European investment law. By providing an overview of European Union sources of law and regulatory objectives, he offers a thorough introduction to a large and growing market that rivals the United States in global economic importance. It explores the unique features of the two key pillars of European fund governance: UCITS (broadly corresponding to public funds like mutual funds in the United States) and Alternative Investment Funds (broadly corresponding to private US funds, such as hedge or private equity funds). It then offers an analysis of the future trajectory of European investment fund law.
Lyman P.Q. Johnson
The chapter examines the variety of approaches taken on investor protection since 1940 and argues that making efforts on many fronts is the best—and probably the only politically viable—regulatory strategy. Specifically, it considers board-centered, investor-centered, SEC-centered, and market-centered solutions. Though it is found that all are flawed by themselves, and that each could be improved, the medley of their combined effect may be the best protection for investors.
The chapter looks specifically at the history and current state of mutual fund fee litigation under Section 36(b) of the Investment Company Act and finds little evidence that lawsuits are effective in lowering the fees of funds managed by defendant advisers of sued targeted funds or that plaintiffs target particularly expensive mutual funds. It attempts to situate new developments in fee litigation within the larger context of the Section 36 legislation. Many problems afflicting the operation of Section 36(b) are traceable, the chapter argues, to the compromises, limitations, and ambiguities that resulted from the competing efforts of the SEC and the Investment Company Institute during the adoption of the 1970 amendments to the Company Act.