Should Mutual Funds Be Corporations? A Legal & Econometric Analysis*

By Warburton, A. Joseph | Journal of Corporation Law, April 1, 2008 | Go to article overview

Should Mutual Funds Be Corporations? A Legal & Econometric Analysis*


Warburton, A. Joseph, Journal of Corporation Law


There has been significant policy debate in recent years about whether mutual fund boards of directors, and the corporate paradigm imposed upon mutual funds in the United States, serve the interests of mutual fund investors. It is imperative that the effectiveness of the mutual fund corporate form be evaluated, as mutual funds are increasingly competing with alternative investment vehicles, such as hedge funds, with greater organizational freedom. If mutual funds in the United States are organized in corporate form simply to satisfy legal requirements, those requirements represent a deadweight cost to mutual fund investors. If mutual funds are organized in corporate form as a market solution to the agency problems that characterize mutual funds, corporate mutual funds should, in total, benefit funds and their investors. This Article finds empirical evidence in favor of the mutual fund corporate form. In the United Kingdom, where corporate and non-corporate mutual funds exist side-by-side, mutual funds organized as corporations charge significantly lower front-end loads and annual management fees than mutual funds not organized as corporations, after controlling for other factors. This difference in expenses is not reflected in significantly different fund performance on a gross (pre-expense) basis. In all, the corporate form's downward impact on fund expenses, and its insignificant impact on gross performance, provide empirical support in favor of corporate funds.

I. INTRODUCTION

Since the inception of the Investment Company Act of 1940 (the "Investment Company Act"), the U.S. Securities and Exchange Commission (SEC) has sought to enhance the independence and effectiveness of mutual fund boards of directors and to improve their ability to protect the interests of the funds and fund shareholders they serve. Most recently, in 2004, after discovering that a number of mutual fund complexes had been engaging in late trading, inappropriate market timing activities, and misuse of nonpublic information about fund portfolios, the SEC proposed numerous changes pertaining to fund governance, including requirements that independent directors comprise at least 75% of each mutual fund's board, and that an independent director chair each fund's board.1 These changes followed the SEC's adoption, in 2001, of rules that required independent directors to comprise at least a majority of each mutual fund's board (the previous requirement had been 40%), and that required independent directors to be selected and nominated only by other independent directors.2 In fact, the SEC has been reviewing, revising, and adopting rules and regulations pertaining to fund governance throughout the more than six decade existence of the Investment Company Act.3

This continuing need to revisit fund governance issues raises the possibility that the SEC is not asking the correct questions.4 Instead of asking how to enhance the effectiveness of mutual fund boards, perhaps the SEC should consider whether mutual funds should have boards at all. Similar consideration might also be given to the requirement that mutual fund investors be shareholders in the fund with full voting rights. That is, perhaps the SEC should question, more broadly, the assumption that mutual funds must be organized in accordance with a corporate model. This reevaluation is particularly important as mutual funds increasingly compete with collective investment arrangements, such as hedge funds, that have freedom in their choice of organizational form. If mutual funds in the United States are organized in corporate form simply to satisfy legal requirements, those requirements represent a deadweight cost to mutual funds and their investors. This Article analyzes whether mutual fund investors in the United States could be better served by mutual funds organized according to an alternative, non-corporate governance structure.

Part II of this Article explores the corporate model required in the U. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Should Mutual Funds Be Corporations? A Legal & Econometric Analysis*
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.