July 5, 2009
Schwartz on Mutual Fund Conflicts
Mutual Fund Conflicts of Interest in the Wake of the Short-Term Trading Scandals: Encouraging Structural Change Through Shareholder Choice, by Jeff Schwartz, California Western School of Law, was recently posted on SSRN. Here is the abstract:
This piece contends that the way mutual funds are typically organized incentivizes fund managers to put their own interests ahead of fund shareholders. It goes on to argue that the legal regime in place to protect investors from such abuse is flawed, and that the late trading and market timing scandals that came to light several years ago, among other harms that shareholders have endured, illustrate the need for substantive reform.
Investors would be best served, I argue, if mutual funds were organized in an alternate fashion - one which alleviates the conflicts of interest motivating management overreaching. The article concludes that a restructuring is possible through informed shareholder choice, but for this to occur the SEC must take steps to create a more knowledgeable investor base.
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