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Thursday, August 20, 2015

Three Lessons From the Passage of the '40 Act, 75 Years Later

News summary by MFWire's editors

The Investment Company Act of 1940 created the modern mutual fund industry as we know, yet it was not the first law to regulate mutual funds.

In a guest column for InvestmentNews, former chief of the ICI Matthew Fink celebrates the '40 Act's 75 years by trying to dispel five myths about the law.

There are several important lessons that modern fundsters could draw from Fink's piece. First, though change often looks inevitable in retrospect, it is often anything but certain (perhaps even seemingly impossible) in the moment. Fink notes that, despite a 1940 SEC report about mutual fund industry abuses, Barron's, the New York Times, and the Wall Street Journal "unanimously predicted legislation would not be enacted." As more legal and regulatory change looms over the industry today, fundsters would do well to remember that just because fiduciary redefinition, or distribution fee changes, or more disclosures, seem unlikely now doesn't mean that change won't happen.

Fink's column is also a welcome reminder that things get done by bringing groups in, not shutting them out. The way he tells it, the closed-end fund industry supported the '40 Act in exchange for the SEC helping them get tax treatment equal to open-end funds, and the smaller open-end fund industry wanted an industry-wide branding boost.

And though talk about regulating giant asset managers as "systemically important financial institutions" (SIFIs) may have subsided for now, systemic risk is not a new worry to industry regulators; some folks in the '30s thought that funds triggered the 1929 crash by "dumping securities into a falling market." Fink points out that the '40 "granted the SEC explicit authority to investigate and make recommendations to Congress regarding any problem associated with a substantial increase in the size of investment companies." 

Edited by: Neil Anderson, Managing Editor

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