Greenfield Professor of Securities Law, Harvard Law School
Professor of Law, Yale Law School
New Special Study of the Securities Markets : Institutional Intermediaries
This essay, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We survey existing legal and economic research and suggest new areas for regulatory reform and scholarly inquiry. We cover registered investment companies (such as mutual funds), private investment funds (such as hedge funds and private equity funds), credit-rating agencies, and broker-dealers.
1. REGISTERED INVESTMENT COMPANIES
We begin with registered investment companies. Registered investment companies, or “RICs,” consist mostly of the open-end mutual funds that dominate household investing and are publicly registered and regulated under the Investment Company Act of 1940. America’s system for regulating these vehicles has been, by almost any measure, an enormous success. Since Congress adopted the Investment Company Act (the “ICA”) and its sister statute, the Investment Advisers Act (the “IAA”) in 1940, the mutual fund industry has grown massively, progressing from its origins as a niche industry for wealthy northeasterners to a vast behemoth. Investment funds publicly registered under the ICA now reach 43% of American households and comprise some $18 trillion in assets (Investment Company Institute 2016, p. 112). Even more remarkable is that the investment fund industry’s growth has brought with it remarkably few problems.
Though the 1920s and 1930s witnessed extensive fraud and abuse and saw the dramatic bankruptcy of dozens of large publicly traded investment funds, the years since the ICA and IAA began regulating investment funds in 1940 have been impressively quiet. Even during the onceina-generation catastrophe of the financial crisis of 2008 and 2009, remarkably few publicly registered investment funds collapsed from debt or illiquidity. Fraud, though an ever-present challenge, has never been pervasive or widespread. The ICA and IAA have become models for regulatory statutes around the world.