The 1933 and 1934 Securities Acts brought the first regulation of mutual funds, requiring a prospectus disclosing the potential risks, in addition to various other reporting requirements heaped across the entire securities market. The 1940 Investment Company and Advisors Act set forth more detailed requirements for mutual funds, thus making them the most heavily regulated segment of the securities industry. The 1940 act required funds to price assets daily at market value, prohibited certain transactions between the fund and its manager, limited the amount and type of leverage a fund could carry, and required redemption of shares within seven days at the net asset value. These are all aspects of mutual funds that today we take so much for granted, that it is hard to imagine an environment in which these requirements did not exist. In 1970 the Act was amended to limit the layering of fees. Additionally, the SEC has promulgated many rules, most significantly allowing marketing fees to be paid directly out of fund assets rather than through a load, under Rule 12-b-1, and requiring publication of total return. Still today, an issue that will be discussed later, mutual fund return percentages and expense ratios do not include portfolio transaction fees, or brokerage costs, in addition to initial or deferred sales load charges.
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B. Recent History.
1. Political Backdrop.
The ushering in of the new millennium has included addressing many sobering economic issues. The accounting scandals and related fallout of such names as Cendant, Enron, Tyco, Worldcom, and Arthur Andersen (to name but a few) has secured the discussion of financial oversight and regulation as a staple of the news media. In three years, rarely a week passes without an article (usually a headline) in the Wall Street Journal concerning some aspect of the recent spate of scandal, including discussion of why the issues were undetected, who should have detected them, and how can they be detected in the future.
