TAILIEUCHUNG - Mutual Funds: Temporary Problem or Permanent Morass?

The view of investor as customer also receives some weight from the fact that investors can redeem their mutual fund shares at net asset value at any time. This feature makes investing in a mutual fund unlike owning stock in a traditional company or a closed-end investment company, where the price at which an investor can liquidate reflects the market’s perception of the firm’s management. In that case, when management is revealed to have taken a “bad” action, current investors are damaged because they can resell their shares only at a much lower price. In contrast, when open-end mutual fund advisers are found, or even perceived, to be “in the wrong,” each investor. | Mutual Funds Temporary Problem or Permanent Morass PAULA A. TKAC The author is a financial economist and associate policy adviser in the financial group of the Atlanta Fed s research department. She thanks Diane Del Guercio Jerry Dwyer and Ann Gillette for helpful conversations. This paper was presented at the Atlanta Fed s 2004 Financial Markets Conference Wall Street Against the Wall Transparency and Conflicts of Interest. Morass n. A complicated or confused situation which it is difficult to escape from or make progress through. Oxford English Dictionary OED Online 2004 There has been no recent shortage of commentary on conflicts of interest in mutual fund From Eliot Spitzer to Warren Buffett from the halls of Congress to investor discussion boards the mutual fund industry has been under attack. What began in September 2003 as revelations of improprieties regarding pricing calculations and trading deadlines has now evolved into scrutiny of soft-dollar arrangements manager compensation governance structure and the level of mutual fund fees. Given that this is the first real scandal that the industry has experienced it is somewhat surprising to see the rush to regulation that has followed. But this is a post-Enron world. The . House of Representatives has already passed the Mutual Funds Integrity and Fee Transparency Act of 2003 the Securities and Exchange Commission SEC is considering ten new rules covering almost all aspects of mutual fund pricing and operations and the similarly wide-ranging Mutual Fund Reform Act of 2004 is now before the . Senate. The motivation behind this flurry of activity is clear protecting the interests of 95 million mutual fund shareholders. But how will investors really be affected by the current scandals and future regulatory changes My goal in this paper is to address this question by stepping back from the details of particular settlements or proposals and instead beginning with an economist s view of the .

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