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Revised Mutual Fund Regulations

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What Are the Rules Governing Mutual Funds?

For many years, it was assumed that mutual funds were rock-solid investments and immune to the scandals of individual public companies such as Enron and WorldCom. However, with recent revelations of unethical business practices by fund managers, it has become apparent that investors of mutual funds should be as cautious and knowledgeable about their rights as an investor who owns stock in a public company.

What Must Directors Now Disclose?

Investors will now receive detailed information about the factors that formed the basis for the board of directors' approval of advisory contracts during the most recent fiscal half-year:

  • The fund is required to discuss who they picked as the investment advisor, and how much the advisor in being paid under the advisory contract.
  • The fund must describe the nature, quality, and extent of the services to be provided by the investment advisor.
  • The fund must state how much the advisor's services will cost, along with the profits that are to be attained.
  • The fund must state if they did comparison shopping when arranging an investment advisory contract (i.e., did the fund compare the services and fees of this contract to other advisory contracts of the past as well as advisory contracts of other investment advisors with other investment companies?).

How Must Directors Now Govern a Fund?

New regulations have been made pertaining to the governance of a fund in order to make the fund's independent directors even more independent and effective in overseeing and approving any transactions between the fund and its managers and affiliates so as to prevent any potential conflict of interests between those managers and the fund:

  • 75% of the board must be composed of independent directors.
  • The board's chairman, who controls the board's agenda and has strong influence over board decisions, must be an independent director.
  • The board must complete an annual assessment of its committee structure and the number of funds on whose boards the directors serve.
  • The independent directors must have their own meetings together at least once a quarter where they can openly discuss management's performance.
  • Independent directors must be allowed to hire their own staff.

What Should I Do If the Fund Is Not In Compliance?

While there are plenty of governmental agencies and independent watchdog groups that monitor funds to make sure they are complying with the law, there are a huge number of funds to investigate, so sometimes the individual investor can be the best form of monitoring.

First, you should probably close your account with that fund, as it is a risky bet to put your money into a fund that is not operating within the limits of the law. Next you will want to file a complaint with the SEC to let them know of the improper practices of the fund. In addition, you may want to hire a business attorney with experience in securities fraud. Your attorney can advise you of your rights and let you know if you are entitled to any damages in a lawsuit against the fund's managers.

Photo of page author Kristen Johnson

, LegalMatch Legal Writer

Last Modified: 09-30-2014 03:39 PM PDT

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