An Introduction to Mutual Funds Worldwide

Chapter3

REGULATION

This chapter covers the background and purpose of regulations, describes how a mutual fund is created and presents the regulations affecting fund management, marketing and administration, and those designed to protect investors.

3.1 BACKGROUND AND PURPOSE

The primary purpose of regulations is to protect investors, and the roots of governmental regulation of mutual funds in the longer-established markets are often associated with major scandals and market crashes.

In the USA, the stock market crash of 1929 prompted an extensive investigation by Congress into the securities industry. It revealed that overselling, or ‘ramping’ of shares, particularly radio company shares, had created unrealistic expectations and false, overvalued markets. The investigation resulted finally in the Investment Company Act 1940, which established the Securities and Exchange Commission (SEC) – this Act remains the cornerstone of US mutual fund regulation – and the Investment Advisers Act 1940. Along with two Acts passed into Federal law in the 1930s – the Securities Act 1933 and the Securities Exchange Act 1934 – these four Acts provide the bulk of federal powers over the activities of US investment companies. In fact, the only addition to US legislation affecting all companies since 1940 is the Sarbanes-Oxley Act of 2002 and that has only an indirect bearing on mutual funds themselves, being more concerned with accounting, auditing and disclosure practices of trading companies, following ...