Disentangling Mutual Fund Governance from Corporate Governance

73 Pages Posted: 27 Feb 2015 Last revised: 13 Jun 2015

See all articles by Eric D. Roiter

Eric D. Roiter

Boston University - School of Law

Date Written: June 10, 2015


This Article addresses mutual fund governance, explaining how in recent years it has become entangled with the norms of corporate governance. There are two essential features of mutual funds, however, that differentiate them fundamentally from ordinary corporations. First, mutual funds are not only separate legal entities; they are also financial products (or services). Mutual fund investors are therefore both shareholders and customers. This stands, of course, in marked contrast to ordinary corporations, whose shareholders and customers are two distinct and separate groups. Second, mutual funds are fundamentally different owing to the right of redemption, a right of investors to withdraw their capital. The right of redemption is not only a financial right, it is also essential to the governance of mutual funds, imposing direct discipline upon a fund’s adviser. In contrast, redemption rights are antithetical to the organizing principles of ordinary corporations, whose economic viability in the markets depends upon the ability to lock in shareholders’ capital. This Article examines how recent mutual fund rulemaking by the SEC rests on mistaken comparisons to corporate governance, and makes recommendations as to how the SEC can improve its approach. In particular, this Article proposes that the SEC take steps to allow two new types of mutual funds that can compete in the marketplace alongside traditional mutual funds. One type is the unitary investment fund, which would retain fund boards solely to serve as monitors of fund advisers’ legal and fiduciary duties, while leaving judgments over the competitiveness of an adviser’s fees to the marketplace. The other is a “crowdfunded” mutual fund that would allow for investors themselves, rather than investment advisers, to initiate and organize funds.

Keywords: mutual funds, mutual fund governance, corporate governance, Securities and Exchange Commission, Investment Company Act of 1940

JEL Classification: K22, K23

Suggested Citation

Roiter, Eric D., Disentangling Mutual Fund Governance from Corporate Governance (June 10, 2015). Forthcoming, Harvard Business Law Review, Vol. 5, Fall 2015, Boston Univ. School of Law, Law and Economics Research Paper No. 15-18, Boston Univ. School of Law, Public Law Research Paper No. 15-18, Available at SSRN: https://ssrn.com/abstract=2568392 or http://dx.doi.org/10.2139/ssrn.2568392

Eric D. Roiter (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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