December 14, 2008
Coates on Mutual Fund Reform
Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis, by John C. Coates IV, Harvard Law School, was recently posted on SSRN. Here is the abstract:
Most Americans invest through mutual funds. 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, shows: (a) mutual funds are taxed less favorably and regulated more extensively in the US than direct investments or other collective investments, including alternatives available only to wealthy investors; (b) the structure of US regulation - numerous proscriptive bright-line rules written nearly 70 years ago, subject to SEC exemptions - makes success of US mutual funds dependent on the resources, responsiveness and flexibility of the SEC; (c) the US fund industry continues to be the world leader, but now lags domestic and foreign competitors, primarily because of US tax and securities law; and (d) while formal laws imposed on mutual funds in other countries are as or more restrictive and inflexible in most respects than US law, the resources and responsiveness of foreign fund regulators exceed the SEC in its oversight of mutual funds. The paper discusses a number of reforms to improve the treatment of middle class investments, including improvements in mutual fund taxation, 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.
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