The Regulation of Mutual Funds

Mutual Funds Regulation by the SEC Benefits Investors

investing charts_mutual funds
••• Getty Images

Compared to other pooled investment options like hedge fundsmutual funds are extensively regulated. 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 and these rules are largely designed to protect the investor.  

The SEC and Regulation of Mutual Funds

The SEC monitors a fund’s compliance with the Investment Company Act of 1940, as well as its adherence to other federal rules and regulations. The regulation of mutual funds has provided investors with confidence in terms of investment structures and it has offered a number of other benefits such as:

  • 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: If a mutual fund company goes out of business, fund shareholders receive an amount of cash that equals their portion of ownership in the fund. Alternatively, the fund’s Board of Directors might elect a new investment advisor to manage the funds.

    The Rules That Govern the Operation of Mutual Funds

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

    • The Investment Company Act of 1940: The 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 has the objective of requiring that investors receive certain significant information pertaining to securities that are offered for sale in the public markets. The Act also prohibits fraud and misrepresentations in the sale of securities.
    • The Securities Act of 1934: The Act of 1934 created the SEC and it empowers the SEC with authority over the securities industry.

      Researching the Rules and Regulations of Mutual Funds

      The SEC website 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.

      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.

      Note: 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.