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Rethinking the Regulation of Securities Intermediaries

By Harvard Law School Program on Corporate Governance

In the paper, Rethinking the Regulation of Securities Intermediaries, which is forthcoming in the University of Pennsylvania Law Review [Jill E. Fisch, Rethinking the Regulation of Securities Intermediaries, 158 U. Pa. L. Rev. (forthcoming 2010)], I argue that existing regulation of mutual funds has serious shortcomings. In particular, the Investment Company Act, which is based primarily on principles of corporate governance and fiduciary duties, fails to support and, in some cases impedes, market forces. Existing evidence suggests that retail investing behavior and the dominance of sales agents with competing financial incentives further weakens market discipline.

As a solution, I propose that funds should be treated primarily as financial products rather than corporations and, correspondingly, investors should be treated primarily as consumers rather than corporate shareholders. To implement this approach, I propose the creation of a new federal agency that would develop standardized financial products coupled with corresponding disclosure principles. Sellers of retail products would be required either to conform their products to these standards or to explain material differences. The goal is to enhance market discipline while making retail funds less complicated and more understandable for individual investors.

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Full post as published by The Harvard Law School Corporate Governance Blog on July 07, 2010 (boomark / email).