RETHINKING THE REGULATION OF SECURITIES INTERMEDIARIES

This Article argues 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 weaken market discipline. As a solution, this Article proposes that funds should be treated primarily as financial products, rather than corporations; correspondingly, investors should be treated primarily as consumers, rather than corporate shareholders. To implement this approach, the Article proposes the creation of a new federal agency that would develop standardized financial products coupled with corresponding disclosure principles. Sellers of retail financial 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.