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Mutual Funds, Conflicts of Interest, and Regulatory Error: A Property Rights Approach

36 Pages Posted: 16 Nov 2005  

D. Bruce Johnsen

George Mason University - School of Law; PERC - Property and Environment Research Center

Date Written: November 15, 2005

Abstract

All humans and the institutions they create err from time to time. Regulatory agencies are no exception. This essay hypothesizes that by failing to recognize mutual fund abnormal returns as an open-access common pool subject to a race to first possession, the U.S. Securities and Exchange Commission has fundamentally misunderstood the nature of the conflicts of interest said to plague the industry. As a result, its regulatory response to the recent wave of mutual fund scandals, including rule making and civil actions, fails to maximize the institutional value of mutual funds as a savings vehicle. I rely on the property rights approach to economic theory to derive testable implications and recommend structural reforms to ensure that regulatory error is internally corrected by the common law process of adjudication and appellate review.

Keywords: conflicts of interest, mutual funds, open access, common pool, market timing

JEL Classification: D02, D21, D23, D86, G28, K22, L14, L22

Suggested Citation

Johnsen, D. Bruce, Mutual Funds, Conflicts of Interest, and Regulatory Error: A Property Rights Approach (November 15, 2005). George Mason Law & Economics Research Paper No. 05-37. Available at SSRN: https://ssrn.com/abstract=847865 or http://dx.doi.org/10.2139/ssrn.847865

D. Bruce Johnsen (Contact Author)

George Mason University - School of Law ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8066 (Phone)
703-993-8088 (Fax)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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