Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis

79 Pages Posted: 8 Dec 2008 Last revised: 11 Jan 2009

See all articles by John C. Coates, IV

John C. Coates, IV

Harvard Law School; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 3 versions of this paper

Date Written: December 30, 2008

Abstract

Most Americans invest through mutual funds. A comparison of US tax and securities law governing mutual funds with laws governing other collective investments, in both the US and in the EU, shows: (a) the US fund industry continues to be the world leader, but now lags domestic and foreign competitors, primarily because of US tax and securities law; (b) mutual funds are taxed less favorably and regulated more extensively in the US than direct investments or other collective investments, including alternatives available only to wealthy investors; (c) the structure of US regulation - numerous proscriptive bright-line rules written nearly 70 years ago, subject to SEC exemptions - makes success of US mutual funds dependent on the resources, responsiveness and flexibility of the SEC; (d) while the high-level formal framework for mutual funds in the EU is as or more restrictive and inflexible in most respects than the Investment Company Act, competitive pressures in the EU constrain supervisors in EU countries to be more flexible in adopting implementing regulations, and EU regulators have greater resources and are more responsive than the SEC, which could achieve the same flexibility and responsiveness through exemptive orders but has been unwilling or unable to do so in a timely fashion. The paper discusses a number of reforms to improve the treatment of middle class investments, including improvements in mutual fund taxation, ways to enhance the flexibility and resources of US fund regulators, modifications of the existing ban on asymmetric advisor compensation and the exclusion of foreign funds, and unjustified disparities in the treatment of mutual funds and mutual fund substitutes.

Keywords: mutual funds, investment companies, shareholder litigation, taxation, mutual fund taxation, regulation, securities regulation

JEL Classification: D4, G18, G2, K22, K23, L1

Suggested Citation

Coates, John C., Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis (December 30, 2008). Available at SSRN: https://ssrn.com/abstract=1311945 or http://dx.doi.org/10.2139/ssrn.1311945

John C. Coates (Contact Author)

Harvard Law School ( email )

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

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Belgium

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