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E-MailThis paper from John Coates was also recently accepted for publication in the Journal of Legal Analysis, a new peer-reviewed opened access journal sponsored by Harvard Law School.
I recently presented my paper Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis at the Law and Economics Seminar at Harvard Law School. The paper provides a comparison of US tax and securities law governing mutual funds with laws governing other collective investments, in both the US and in the EU.
Current US tax law governing mutual funds has a number of unfortunate economic effects, including the discouragement of saving and investment by middle class Americans, misallocation of capital to sectors such as real estate, and the essential walling-off of the US from competition from or with foreign mutual funds, in the US or overseas. In addition, although much less important than US tax law, the current design and implementation of US securities law applicable to mutual funds is inhibiting innovation and growth in the fund sector, again with the effect of reducing investment.
My review of US regulation of collective investments, comparing regulation and data on the size and growth of US mutual funds with their major competitors, in the US and abroad shows that:
1. Within the US, regulation of mutual funds is more extensive and restrictive than for other types of collective investments.
2. The structure of US regulation – mutual funds are tightly restricted by bright-line rules written into a statute nearly 70 years ago, subject to SEC exemptions – makes continued success of US mutual funds dependent on the resources, responsiveness, and flexibility of the SEC.
3. The US fund industry continues to be the world leader, but its growth and international competitiveness now lags that of its domestic and foreign competitors, primarily because of US tax law.
4. While the formal laws imposed on mutual funds in other countries are as or more restrictive in many respects than US securities laws, the resources and responsiveness of foreign fund regulators (particularly in Ireland and Luxembourg) exceed those dedicated to funds by the SEC.
The paper concludes by describing potential improvements in US regulatory oversight of collective investments, including ways to enhance the flexibility and resources of US fund regulators, modifications of the existing ban on asymmetric advisor compensation and the exclusion of foreign funds, and unjustified disparities in the treatment of mutual funds and mutual fund substitutes.
The complete paper is available for download here.
