Rethinking the Regulation of Securities Intermediaries
Jill E. Fisch
Institute for Law and Economics, University of Pennsylvania Law School
July 27, 2010
University of Pennsylvania Law Review, Vol. 158, p. 1961, 2010
U of Penn, Inst for Law & Econ Research Paper No. 10-04
This Article argues that existing regulation of mutual funds has serious shortcomings. In particular, the Investment Company Act, which is based primarily on principles of corporate governance and fiduciary duties, fails to support and, in some cases impedes, market forces. Existing evidence suggests that retail investing behavior and the dominance of sales agents with competing financial incentives further weakens market discipline.
As a solution, the Article proposes that funds should be treated primarily as financial products rather than corporations and, correspondingly, investors should be treated primarily as consumers rather than corporate shareholders. To implement this approach, the Article proposes the creation of a new federal agency that would develop standardized financial products coupled with corresponding disclosure principles. Sellers of retail products would be required either to conform their products to these standards or to explain material differences. The goal is to enhance market discipline while making retail funds less complicated and more understandable for individual investors.
Number of Pages in PDF File: 82
Keywords: Mutual funds, retail funds, Investment Company Act of 1940, financial services regulation, market interference, erosion of market discipline, retail investment behavior, sales agent incentives, consumer protection, standards, standardized financial products, material differences, disclosure
JEL Classification: G23, G28, K22, K23Accepted Paper Series
Date posted: March 24, 2010 ; Last revised: July 28, 2010
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