Federal Misgovernance of Mutual Funds

63 Pages Posted: 23 Aug 2010 Last revised: 7 Oct 2010

Larry E. Ribstein

University of Illinois College of Law (deceased); PERC - Property and Environment Research Center

Date Written: August 18, 2010

Abstract

In Jones v. Harris Associates, the Supreme Court interpreted investment advisers’ fiduciary duty regarding compensation for services under Section 36(b) of the Investment Company Act of 1940. The Court endorsed an open-ended Second Circuit standard over a more determinate Seventh Circuit test calling only for full disclosure and no “tricks.” This paper shows that Congress created and must solve the fundamental problem the Court faced in Jones. At one level the problem stems from the existence of an investment adviser fiduciary duty as to compensation and the corporate structure from which it springs. At a deeper level lies the more basic problem of federal interference in firm governance, which lacks state corporate law’s safety valve of interstate competition and experimentation. This discussion is appropriate in light of the increasing federal role evident in the enactment of broad new financial regulation.

JEL Classification: G23, G24, G28, K22, K23, K42, L51, L84

Suggested Citation

Ribstein, Larry E., Federal Misgovernance of Mutual Funds (August 18, 2010). 2009-2010 Cato Supreme Court Review, Forthcoming; U Illinois Law & Economics Research Paper No. LE10-018; Illinois Public Law Research Paper No. 10-06. Available at SSRN: https://ssrn.com/abstract=1661163

Larry Edward Ribstein (Contact Author)

University of Illinois College of Law (deceased)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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