The Regulation of Mutual Funds

Mutual funds regulation by the SEC benefits investors

Illustration of investors discussing mutual funds with graphs in speech bubbles.

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Mutual funds are more regulated than other pooled investment options like hedge funds. That's a good thing for most investors. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission (SEC). The SEC keeps a close eye on whether a fund complies with the Investment Company Act of 1940, as well as whether it adheres to other federal rules.

Key Takeaways

  • Mutual funds are more regulated than other pooled investment options like hedge funds.
  • These funds must comply with at least three federal laws and strict rules that are monitored by the Securities and Exchange Commission.
  • The SEC website offers many links that can help you research the rules that apply to mutual funds, as well as other securities laws.

An Explanation of Mutual Funds

A mutual fund is something like a bucket into which many investors place their money. They become shareholders when they do so. A manager then invests the money in securities. They must be registered with the SEC.

Each of the shareholders equally gains or loses based on how the fund's assets perform. Most of these funds are open-end funds. This means that new investors can buy in at any time. Some are load funds. Investors must pay commissions with these funds.

Mutual funds aren't risk-free. The securities they hold can always drop in value. But they do tend to offer diversity. Volatile funds—those that go through a lot of ups and downs—are riskier. Past performance can give you an idea of how a fund has performed over time.

The SEC and Regulation of Mutual Funds

The regulation of mutual funds can provide you with confidence in terms of investment structures. It offers a number of other benefits as well.

  • The holdings of these funds are available to the public, although there can be delays in reporting. This ensures that you're getting what you pay for.
  • Shares of mutual funds are redeemed by the fund company on the trade date. This ensures daily liquidity for investors.


Funds must maintain their performance track records. They're audited, so you can trust the fund's stated returns.

Fund shareholders receive an amount of cash equal to their portion of ownership in the fund if and when a mutual fund company goes out of business. But the fund's board of directors might elect a new adviser to manage the funds instead.

Rules That Govern the Operation of Mutual Funds

The rules of mutual funds are extensive. The Investment Company Act of 1940 regulates mutual funds, as well as other companies. It focuses on disclosures about objectives, company structure, and operations.

The Securities Act of 1933 mandates that you receive a good deal of information about the securities that are offered for sale in the public markets. It also prohibits fraud and misrepresentations in the sale of securities.

The Securities Exchange Act of 1934 created the SEC. It gives the SEC authority and control over the securities industry.

Researching the Rules and Regulations

The SEC website offers many links that can help you research the regulations of mutual funds, as well as other laws. You can also get information about the rules for these funds in a prospectus that can be found on most reputable mutual fund companies' websites. It's required by the SEC and should fully explain the fees, the objective, the operations, and the market risks of each fund. These funds must also file regular shareholder reports with the SEC.

The prospectus and the other SEC rules don't remove all the risks of investing. But they do provide a layer of protection that can help assure you that you're buying what you intend to buy.

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  1. U.S. Securities and Exchange Commission. "Laws and Rules."

  2. U.S. Securities and Exchange Commission. "The Laws That Govern the Securities Industry."

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