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Why Owning Mutual Funds Should Give You Peace of Mind

August 8, 2018

Honesty and transparency are important when choosing investments.  Choices for investors can run the spectrum from highly regulated to little to no oversight.  And often, even the sophisticated investor can underestimate the nature of an investment whose risks and fees are not apparent. 

At PartnersInWealth, we take the view that investing should be transparent.  This is one reason mutual funds are attractive investment vehicles.  They fall in heavily regulated end of the spectrum.

owning mutual funds should give you peace of mind

This benefits the investor in a couple of ways:

  • Mutual funds are required to disclose the investments within their funds
  • Mutual funds are required to set up specific safeguard to protect investors against malfeasance.

Mutual funds are regulated under the Investment Company Act of 1940.  The regulation is designed to minimize conflicts of interest that arise in these complex operations. The focus of this Act is on disclosure to the investing public information about the fund and its investment objectives, as well as on investment company structure and operations.

  • A mutual find can only be advised by an investment advisor registered with the SEC pursuant to the Investment Advisors Act of 1940
  • The shares issued by a mutual fund are generally securities themselves registered with the SEC pursuant to the Securities Act of 1933 and regulated per the Securities & Exchange Act of 1934
  • Mutual fund shares are sold by firms which engage underwriters, and require a broker-dealer who is registered both with the SEC and with a self-regulatory organization such as FINRA (formerly NASD)

The moral of this story is that the seeming complex operations of a mutual fund are designed to keep any one party from running off with the investor’s money. 

Investment Company Act of 1940

Excerpted from the Securities and Exchange Commission (SEC) website (www.sec.gov):

“This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.”

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A mutual fund is one of the most highly regulated investment products

  • The mutual fund itself is registered with the SEC as an investment company under the Investment Company Act of 1940
  • A mutual find can only be advised by an investment advisor registered with the SEC pursuant to the Investment Advisors Act of 1940. The shares issued by a mutual fund are generally securities themselves registered with the SEC pursuant to the Securities Act of 1933 and regulated per the Securities & Exchange Act of 1934
  • Mutual fund shares are sold by firms which engage underwriters, and require a broker-dealer who is registered both with the SEC and with a self-regulatory organization such as FINRA (formerly NASD)

Unlike a hedge fund:

  • Mutual funds must have a majority of directors who are independent of the manager, charged with obligations for oversight of the fund audit process, nomination of other independent directors and fee approval. 
  • Mutual funds also operate with other heightened safeguards, such as audited financial statements and specific requirements on custody of securities. 
  • Unlike hedge funds which can custody assets at brokerage firms under “prime brokerage” arrangements, mutual funds must keep assets at custody banks in segregated accounts marked as “client accounts”, not subject to the bank’s own assets.

 

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Filed Under: Successful Investing

Written by PartnersInWealth

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