Investment Company as Instrument: The Limitations of the Corporate Governance Regulatory Paradigm

58 Pages Posted: 19 Aug 2012 Last revised: 23 Dec 2013

Date Written: August 17, 2012


U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (non-investment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity-centric,” focusing on intra-entity relationships to the exclusion of super-entity ones. This Article argues that corporate governance norms, which came to dominate U.S. investment company regulation as a result of the unique history of U.S. investment companies, are poorly-suited to achieve the goals of investment company regulation. In particular, the corporate governance paradigm has given rise to a number of regulatory weaknesses, which stem from investment advisers’ effective control over investment company boards of directors and courts’ deference to state corporate law doctrine in addressing investors’ grievances. Accordingly, investment company regulation should acknowledge that investment companies are not merely another type of business enterprise with the same challenges and tensions arising from the separation of ownership and control that appear in the traditional corporate context. Toward that end, this Article contends that policymakers should view, and regulate, investment companies as an avenue through which investment advisers provide financial services (investment advisory services, in particular) to investors — and should view investment company shareholders more as advisory customers than as equity owners of a firm. This “financial services” model of regulation moves past the entity-focus of corporate governance norms and, therefore, permits dispensing with governance by an “independent” body such as the board of directors. More importantly, if adopted, this model would remedy some of the more significant problems plaguing U.S. investment company regulation.

Keywords: investment companies, financial services regulation, Investment Company Act of 1940, securities regulation

JEL Classification: G28

Suggested Citation

Krug, Anita K., Investment Company as Instrument: The Limitations of the Corporate Governance Regulatory Paradigm (August 17, 2012). Southern California Law Review, Vol. 86, No. 2, p. 263, 2013; University of Washington School of Law Research Paper No. 2012-14. Available at SSRN:

Anita K. Krug (Contact Author)

Chicago-Kent College of Law ( email )

565 W. Adams Street
Chicago, IL 60661
United States
3129065010 (Phone)

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