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114 comment The Future of Mutual Fund Regulation in the United States: Another View allan s. mostoff Ihave been asked for my view of the future of mutual fund regulation in the United States. In addressing this subject, I suggest that we start with an understanding of where the industry is today and why it has achieved widespread investor acceptance. There can be no doubt that the U.S. mutual fund industry is one of the great financial success stories of recent history. Starting as a modest accommodation by investment counselors to the financial needs of small investors more than seventy years ago, the acceptance of the mutual fund—as both an efficient investment vehicle and a profitable service for advisers to offer—quickly took hold. Since then, of course, industry growth has been explosive, to the point that mutual fund investment assets now rival those of other financial institutions. Today, investors entrust more than $11 trillion to the industry.1 Much of that success is due to the genius of the idea itself. Few investments can provide diversi fication and professional management as easily and efficiently as a mutual fund can, in particular for retail investors who are saving for their retirement, their children’s education, and all their other financial goals. These remarks are my personal views and do not necessarily represent those of the Mutual Fund Directors Forum, its members, or its staff. In preparing them, however, I benefited from the valuable assistance of my colleagues at the Forum, and particular thanks are due to David Smith and Carolyn McPhillips. 1. See Investment Company Institute, “Trends in Mutual Fund Investing: August 2007,” September 27, 2007 (http://www.ici.org/stats/mf/trends_08_07.html). But the industry does not owe its spectacular success to the ingenuity of the mutual fund concept alone. Investors would not have entrusted their wealth and financial well-being to mutual funds unless they had significant confidence in the safety of their assets and in the motivation of their fund managers. To what is that trust attributable? History has demonstrated time and again that investment managers cannot be relied on to manage investors’ money unchecked . For compelling evidence of the need for effective oversight of fund managers , one need only look to the numerous abuses that occurred in the infancy of the U.S. industry during the 1920s and 1930s; the scandal in Europe and the United States in the 1960s of the unregulated Fund of Funds Ltd., a Canadian investment company, and its sponsor, IOS Ltd.; and, most recently, the U.S. fund scandals that occurred earlier in this decade. Although money managers and their clients have a common interest in the growth of the clients’ assets under management, few would argue today against the proposition that there also exist real and potential conflicts between money managers and their clients that need to be monitored on a day-to-day basis. In the mutual fund industry, those conflicts include—but certainly are not limited to—the setting of fees charged to a fund, the risk of self-dealing whenever a fund does business directly with its investment manager or one of the manager’s affiliates, the manner in which fund assets are spent to support distribution of its shares, the use of soft dollars and other issues related to whether funds receive best execution on trades in their portfolios, and the challenge of fair valuation of fund assets. Because of the risk that a mutual fund’s investment manager will resolve conflicts in its favor rather than in a manner consistent with its fiduciary obligations to the fund’s shareholders, the key to the continued success of the mutual fund industry, from the perspective of both investors and fund managers, has been a regulatory system that facilitates maintaining and increasing investor trust. I am convinced that this central goal should—and will—drive the future of fund regulation. In the United States, from the inception of the mutual fund regulatory structure in 1940 onward, an essential technique relied on to meet the challenge of maintaining investor trust in the face of fund manager conflicts has been the empowerment of independent directors. They are the fund shareholders’ first line of defense in the necessary monitoring of conflicts and overseeing the relationship of their fund with the fund’s investment manager. At this point, we might well pause and ask why Congress and...

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