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The Mysterious Ways of Mutual Funds: Market Timing

61 Pages Posted: 30 Jan 2007  

Tamar Frankel

Boston University School of Law

Lawrence A. Cunningham

George Washington University

Abstract

The term market timing was little known outside the arcane world of mutual funds until state attorneys general from across the country popularized it. The term's innocuous-sounding ring assumed a more pernicious note when the mysterious ways of mutual funds became more transparent. In its pernicious sense, market timing denominates mutual fund insiders using the inscrutable structures of mutual funds to provide benefits selectively to favored participants at the expense of less favored participants.

Mutual fund shares are not like common stocks; investments made using these vehicles are unlike those made through traditional securities markets. While the peculiar features of mutual funds were manifested in the contemporary environment, these peculiarities are inherent in the very structure of mutual funds. Regulatory efforts dating to the 1940s recognize these realities and regulatory reforms of the early 2000s struggle to respond in much the way earlier reforms did.

The wide range of reforms that have been adopted and proposed may overlook this reality, however. By correcting this oversight, and unveiling the historical and contemporary landscape, this Article provides more realistic appraisals for increasing the integrity of the mutual fund investment vehicle. Chief among these is a deeper point: critical to sustaining the mutual fund as an important institution in the financial system is a renewed appreciation of concepts of trust and professionalism.

Keywords: mutual funds, market timing, regulation, external regulation, market reform

JEL Classification: K22, K23

Suggested Citation

Frankel, Tamar and Cunningham, Lawrence A., The Mysterious Ways of Mutual Funds: Market Timing. Annual Review of Banking and Financial Law, Vol. 25, No. 1, 2006; Boston College Law School Research Paper No. 119; Boston University School of Law Working Paper No. 06-39. Available at SSRN: https://ssrn.com/abstract=960145

Tamar Frankel (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
1070G
Boston, MA 02215
United States
617-353-3773 (Phone)
617-353-3077 (Fax)

Lawrence A. Cunningham

George Washington University ( email )

2000 H Street, N.W.
Washington, DC 20052
United States
202-994-0732 (Phone)

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