Mutal Funds and Other Collective Investment Mediums —A Comparative Analysis of Their Regulation and Governance


The mutual fund market timing and late trading scandals initiated by New York Attorney General Eliot Spitzer in 2003 received widespread and sensational publicity in the financial press and led to settlements totaling over $3.5 billion. However, those actions were controversial and undercut the role of the Securities and Exchange Commission (“SEC”), which had been given pervasive regulatory authority over mutual funds by the Investment Company Act of 1940. In order to regain its role as prime regulator of those entities, the SEC adopted more regulations, including a requirement that mutual funds increase the number of outside directors on their boards. The actions taken by the SEC were highly politicized, and critics noted that such a requirement would not have prevented the mutual fund scandals and had no empirical support for providing better performance results. This raised the issue of whether an alternate regulatory structure for mutual funds would be more effective. That issue is of importance since mutual funds are the leading investment medium for most retail investors as evidenced by the fact that 8,000 mutual funds holding about $8.1 trillion in assets for ninety-five million investors.


Securities Law

Date of this Version

May 2006