Opening Remarks at the 75th Anniversary of the Investment Company Act and Investment Advisers Act

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks on the 75th Anniversary of the Investment Company Act and Investment Advisers Act. The full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. Thank you for coming today [September 29, 2015], and welcome to the SEC, both those here in person and through our webcast. Before I say anything else, I would like to acknowledge staff from the Division of Investment Management for their hard work in putting this anniversary program together. In particular, kudos go to Director Dave Grim, Jennifer McHugh, Bridget Farrell and Jamie Walter. I also would like to thank my fellow Commissioners who are introducing the panels, and all of the stellar panelists who will be sharing with us their insights throughout the day.

Today, we celebrate 75 years of the Investment Company Act and the Investment Advisers Act—two pieces of legislation that came to shape the financial markets as we know them. And this event is more than an anniversary celebration—it is a day to reflect on this extraordinary regulatory system that has facilitated the management and growth of assets for millions of Americans and other investors from around the world. In these opening remarks, my assignment is to first take us on a brief historical tour and then come back full circle to today where we see just how powerful and alive these Acts are in the modern markets.

The History

The Acts, which passed both houses of Congress unanimously, provided a solid regulatory foundation and afforded the Commission the ability to develop rules and other regulatory responses to adapt to changing markets and an evolving asset management industry. These critically important statutes were designed to protect investors from certain abuses that had arisen in the industry and were the product of the constructive cooperation of the Commission and the asset management industry.

When President Franklin D. Roosevelt signed the Acts into law, he hoped they would enable the industry “to fulfill its basic purpose as a vehicle to diversify the small investors’ risk and to provide a valuable source of equity capital for deserving small and new business enterprises.” President Roosevelt began with that bold vision.

And the reach of the Acts has dramatically expanded since then, as funds and investment advisers continue to fulfill their basic purpose, playing a major role in the lives of Americans and our national economy. At the end of 2014, more than 53 million households, which accounted for more than 43 percent of all U.S. households, owned mutual funds. In 1940, the asset management industry held only about $2 billion in assets, which included some $1 billion held by registered funds. Now, 75 years later, the Commission oversees registered investment companies with a combined $18.8 trillion in assets and registered investment advisers with approximately $67 trillion in regulatory assets under their management.

Our distinguished panelists will highlight developments in the asset management industry and Commission regulations over the last 75 years from various perspectives. But first, I would like to have us briefly reflect on the development of the Acts leading up to 1940 and their unique characteristics. This early history provides insight into why our regulation of the asset management industry has endured for 75 years and highlights the strengths of a regime that will continue to operate in the future.

The Early Asset Management Industry

The modern American investment company started in the 1920s with the end of certain state corporate laws that limited the growth of funds and with a desire of investors, particularly those of modest means, to invest in stocks by pooling their assets with those of others. Initially, the industry was dominated by closed-end funds, and by 1929 a closed-end fund was being created at the rate of almost one a day.

Many fund sponsors used a number of different structural and functional devices to control the funds that effectively excluded the participation of investors in fund management, leaving sponsors free to use fund assets fraudulently for their own benefit, including taking out personal loans, financing their own companies, and outright embezzlement. As a consequence of mismanagement and the market crash of 1929, holders of fund securities lost large amounts of money, including smaller, unsophisticated investors who were particularly attracted to these funds. By 1940, SEC Commissioner Robert Healy lamented that “the record of the industry [was] shocking,” as investors’ capital in all types of investment trusts and companies had fallen by about $3 billion.

The Study

The Commission conducted a congressionally mandated study of investment funds and investment advisory services beginning in 1935, which revealed that the industry’s problems were much bigger and even deeper than expected. Between 1938 and 1940, Commission staff led by Commissioner Healy produced reports to Congress on the industry. Ultimately, the Commission recommended legislation designed to address the specific abuses that had been identified, to restore investor confidence through certain protections and to allow for innovation and diversity in the industry.

The Acts were the product of extraordinary discussion, cooperation, and agreement among industry participants and the Commission. Industry leaders were willing to sit down with government representatives and think constructively about solutions. In the end, the asset management industry largely supported the legislation. In general, they had a common interest in ridding the industry of wrongdoers who had tarnished the reputation of the entire industry. Fortunately, the industry was relatively young, so that the abuses had not become fully embedded in the business practices.

At the time, politicians heralded this agreement on the Acts as “an amazing thing” and a “miracle.” Senator Henry Cabot Lodge said that “after very painstaking and careful study, in which really almost a miracle occurred…an agreement which is embodied in this bill was reached between those engaged in the industry and the members of the SEC.” He went on to say that this was “a very unusual and beneficial occurrence.” President Roosevelt similarly commented that “it [was] a source of satisfaction that business men” recognized his goals of helping “the honest businessman and bringing higher standards to his particular corner of the business community.” As you can tell from their comments, the passage of the Investment Company Act and Investment Advisers Act was cause for great celebration in both the public and private sectors.

The Acts

The Acts served to protect the public in many ways and addressed the identified abuses through the regulation of both funds and advisers.

The Investment Company Act, as you know, is the primary statute that regulates funds. The law incorporates some of the same principles of full and fair disclosure that are the foundation of our securities laws generally, but also extensively and comprehensively regulates funds through specific prohibitions and governance requirements, which reflect the characteristics of these funds. For example, the Act limits funds’ issuance of debt and other senior securities, and includes requirements related to valuation, redemptions of fund shares, and dealings with service providers and other affiliates. The Act also gives the Commission broad discretion to grant exemptions from requirements, which paved the way for the diversity of funds to develop and be made available in the market.

While the Investment Company Act contains specific directives, the Investment Advisers Act is more principles-based. The Advisers Act imposes a few specific restrictions, but investors are protected principally by the Act’s anti-fraud provisions and through application of a fiduciary duty, requiring disclosures that give investors the information they need to make informed decisions. Over the years, enforcement has made good use of the fiduciary duty owed by advisers to their clients to bring cases to address a wide range of problematic practices of investment advisers, including not adequately disclosing conflicts of interest related to compensation, expenses and loans to affiliates, distributing misleading advertisements, and misleading advisory clients about investments in affiliated entities.

Having briefly explored the foundations and applications of both of the Acts we celebrate today, I will end my historical tour and make a few observations about how the SEC continues to use these powerful tools as we look to the present and future of asset management.

The Future

With these pivotal Acts in our arsenal, the Commission continues to enhance, strengthen, and adapt its regulatory programs in response to an evolving asset management landscape. Over the last 75 years, Commissioners and staff have worked tirelessly to regulate funds and advisers while also allowing for innovation, and the industry has provided important input to help shape our regulations. In that constructive way, the contributions of the groups that led to the adoption of the Investment Company Act and Investment Advisers Act have continued for almost eight decades.

Today, as many of you know, the Commission has an ambitious agenda to address evolving risks for funds and advisers, recently proposing enhanced data reporting by investment companies and advisers, and, just last week, proposing to require open-end funds to enhance funds’ liquidity risk management. As we speak, Commission staff is also developing recommendations that I hope to advance for the Commission’s consideration by the end of this year related to the use of derivatives by funds, including measures to appropriately limit the leverage these instruments may create, as well as enhancing risk management programs for such activities.

Beyond that, the staff is developing recommendations regarding transition planning for advisers, annual stress testing by large investment advisers and funds, a program of third party examinations for investment advisers and a uniform fiduciary duty for investment advisers and broker-dealers. Talk about a full plate of critical initiatives. These measures will stay focused on keeping alive the promise of the Investment Company Act and Investment Advisers Act to protect investors and the vibrancy of funds. On these initiatives and others, we look forward to the continued dialogue with the asset management industry and its constructive input.


In conclusion, the next 75 years of asset management will undoubtedly hold many challenges. But the drafters of the Investment Company Act and Investment Advisers Act devised a regulatory structure with a broad and sturdy foundation. The past 75 years have been witness to that. Since the beginning, each successive generation here at the Commission has been steadfast in protecting the core ideals of protecting the investor while also maintaining the intended flexibility of the Acts. We have inherited a regulatory framework and a legacy of collaboration that is the bedrock of an industry envied around the world, and I am confident it will continue to thrive and play its intended major role in the lives of Americans and our national economy.

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