Regulations of Mutual Funds

How Mutual Funds Regulations Benefit Investors

investing charts_mutual funds
Learn how the regulation of mutual funds helps investors. Getty Images

Regulation of mutual funds, compared to other pooled investment options, such as hedge funds, is extensive and therefore beneficial for the everyday investor. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission.

The SEC and the Regulation of Mutual Funds

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

Since their development, the regulation of mutual funds has provided investors with confidence in terms of the investment structure and offered a number of benefits, such as:

  • Transparency: The holdings of mutual funds are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.
  • Liquidity: Shares of mutual funds are redeemed by the fund company on the trade date, which assures daily liquidity for investors.
  • Audited Track Records: Funds must maintain their performance track records and have them audited for accuracy, which ensures that 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.

The key regulations of mutual funds are:

The Investment Company Act of 1940 -- The Act regulates mutual funds (as well as other companies). The Act focuses on disclosures and information about investment objectives, investment company structure and operations.

The Securities Act of 1933 -- The Act has the objective of requiring that investors receive certain significant information pertaining to securities being 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 created the SEC and empowers the SEC with authority over the securities industry.

Researching the Rules and Regulations of Mutual Funds

The SEC website offers many useful links helping to 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 within a document called a prospectus, which can usually be found on the mutual fund company's website. The prospectus, which is required by the SEC, will 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 for mutual funds do not remove the risks inherent with investing, they do provide a valuable benefit in the form of protections that help assure investors they are buying what they are intending to buy.

Updated June 21, 2016, by Kent Thune.