The Regulation of Mutual Funds

Mutual Funds Regulation by the SEC Benefits Investors

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Mutual funds are more extensively regulated than other pooled investment options like hedge funds, and that's a good thing for the everyday investor. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission (SEC).

The SEC keeps a close eye on a fund’s compliance with the Investment Company Act of 1940, as well as its adherence to other federal rules and regulations.

An Explanation of Mutual Funds  

A mutual fund is something like a bucket into which numerous investors place their money and become shareholders. A manager or investment adviser then invests the money in various securities, and she must be registered with the SEC.

Each of the shareholders equally gains or loses based on the performance of the fund's assets. Most mutual funds are open-end funds. New investors can buy in at any time. Some are load funds—investors must pay commissions.

Mutual funds aren't risk free because the securities they hold can always drop in value, but they do tend to offer diversity. Volatile funds—those that experience frequent ups and downs—are obviously riskier. Past performance can give you an idea of how steadily a mutual fund has performed over time.

The SEC and Regulation of Mutual Funds

The regulation of mutual funds has provided investors with confidence in terms of investment structures, and it has offered a number of other benefits as well:

  • Transparency: The holdings of mutual funds are publicly available, although there are sometimes delays in reporting. This ensures that investors are getting what they pay for.
  • Liquidity: Shares of mutual funds are redeemed by the fund company on the trade date, and this ensures daily liquidity for investors.
  • Audited Track Records: Funds must maintain their performance track records and they're audited for accuracy so investors can trust the fund’s stated returns.
  • Safety: Fund shareholders receive an amount of cash that equals their portion of ownership in the fund when a mutual fund company goes out of business. Alternatively, the fund’s board of directors might elect a new investment adviser to manage the funds.

    Rules That Govern the Operation of Mutual Funds

    The rules of mutual funds are extensive, but the key regulations include: 

    • The Investment Company Act of 1940. This act regulates mutual funds, as well as other companies. It focuses on disclosures and information about investment objectives, investment company structure, and operations.
    • The Securities Act of 1933. This act requires that investors receive certain significant information pertaining to securities that are offered for sale in the public markets. It also prohibits fraud and misrepresentations in the sale of securities.
    • The Securities Exchange Act of 1934. The Act of 1934 created the SEC. It empowers the SEC with authority over the securities industry.

      Researching the Rules and Regulations of Mutual Funds

      The offers many useful links that can help you research the regulations of mutual funds, as well as other securities laws.

      Investors can also find useful information about the rules and governance of mutual funds in a document called a prospectus that can be found on most reputable mutual fund companies' websites. The prospectus is required by the SEC and should fully explain the fees, the objective, the operations, and the market risks of each mutual fund.

      Mutual funds must also file regular shareholder reports with the SEC.

      Although the prospectus and the other requirements of the SEC don't totally remove the inherent risks of investing, they do provide a valuable benefit in the form of protections that help assure investors that they're buying what they intend to buy.

      Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice and it is not intended as investment advice.