Allen Ferrell is Harvey Greenfield Professor of Securities Law at Harvard Law School and John D. Morley is Professor of Law at Yale Law School. This post is based on their recent paper.
This paper, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies and reviews the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We cover investment funds, credit-rating agencies and broker-dealers. We review existing research, identify new areas of research and suggest possibilities for legal reform.
We begin with investment funds, focusing primarily on publicly registered investment companies, such as open-end mutual funds. The first task of the regulation of these funds is to define what exactly an investment fund is. And on this score the existing regulation is doing poorly. The industry’s principal regulatory statute, the Investment Company Act of 1940, defines an “investment company” (the statute’s name for what is commonly known as an “investment fund”) as a company that holds a lot of securities, rather than a company that holds operating assets like land and intellectual property. This definition is impractical and often has the unintended effect of treating operating companies—including Microsoft and Yahoo!—as though they were the legal equivalent of mutual funds. We suggest that rather than focusing on securities ownership, the definition of an investment company should focus on organizational structure. The truly distinctive feature of an investment fund, we argue, is a fund’s unusual tendency to maintain a separate existence and a separate set of owners from the management company that operates it.
