Academic Assesses System of Mutual Fund Protections and Regulatory Arbitrage

Independent fund director and Harvard professor Howell Jackson writes in a recent publication that although there exists a historically strong set of fiduciary obligations and regulations underpinning mutual funds, industry participants have found ways, including alternative investment vehicles, to “escape the full application of fiduciary protections designed for mutual funds, sometimes escaping that regime entirely.” Jackson’s study of mutual funds will be a chapter in the forthcoming book Fiduciary Obligations in Business published by Cambridge University Press. The chapter asserts that companies who exercise such “regulatory arbitrage” may be reducing costs and satisfying client demands, however the practice raises questions for policymakers. Jackson comprehensively reviews the system of fiduciary protections and regulatory requirements that govern mutual funds in the United States, including requirements for mandatory shareholder approvals; independent board members, portfolio restrictions, disclosure obligations, and the fiduciary obligations of investment advisers, among others. Jackson describes how over time these protections have been relaxed in a number of ways, for example, exemptive relief and statutory adjustments. He also discusses how evolving business practices, such as the diminished role of the fund transfer agents in an era of omnibus accounts and the emergence of new products such as collective investment trusts have shifted the fiduciary and regulatory foundations of mutual funds. Jackson writes that the goal of the chapter “is to encourage government officials and legal scholars to consider whether aspects of that system of protections—most likely disclosure obligations related to performance and fees—should be extended to the increasingly large number of financial products that are functionally similar to mutual funds, but that are structured to fall, in part or entirely, outside of the system of fiduciary protections.”