Oversight of a Mutual Fund

As I read the articles about the investment professional or product which has swindled its investors out of their life's savings, it occurs to me that publicly traded mutual funds do not get enough credit for the carefully developed regulatory oversight already in place to protect mutual fund shareholders.   

In the investment industry, publicly traded mutual funds are referred to as Regulated Investment Companies, or RICs, and regulated they are.  By being a RIC, the fund enjoys some preferential tax concessions.  It is very important for a fund to maintain its RIC status.  It's not easy, but it is vital to their existence.  To do so a fund must comply with a substantial set of regulations from a diverse set of regulatory organizations.  Let me give you one example, the Prospectus. 

Whether you already own a mutual fund, or are looking to invest in one, a universal piece of literature provided to all mutual fund shareholders is the Prospectus.  I refer to it as the owner's manual for your mutual fund investment.  And what many shareholders may not realize is how scrutinized this annual document really is.  The Securities and Exchange Commission ("SEC") has jurisdiction over this piece, and prior to it being distributed, it must be approved, each year, by a SEC examiner.   Everything from the content to the font size is reviewed and filed with the SEC each year.  

Other regulatory agencies overseeing your mutual fund investment include the Financial Industry Regulatory Agency ("FINRA") and the Office of the Comptroller of the Currency ("OCC").  FINRA regulates the sales practices used in distributing a fund, while the OCC oversees the bank being used as custodian of the fund's assets.   The SEC also plays a vital role in auditing your investment advisor, as well as other service providers to the fund.  At any given time, a fund may have several agencies concurrently reviewing the policies and practices being used to maintain your mutual fund. 

Two other parties I need to recognize as fiduciaries of your investment are the Independent Board of Trustees and the Independent Registered Public Accounting Firm.  Note the "independent" moniker attached to each entity.  Neither have any direct link to the fund or advisor.  The board meets quarterly to ensure your fund is being run in compliance with all the fund's stated objectives, restrictions and policies, while the independent accounting firm annually audits and signs off on the financial statements of the fund.

The debate will always be there as to how much regulation is enough or not enough, but one thing I know.  The mutual fund industry realizes that there is already enough inherent risk involved in investing, without having to worry about the practices being used by your service provider. 

My point is this, the organizations and firms I mention above cannot protect you from down markets and losses on your investment, however from an operational standpoint, they go a long way in keeping all the service providers attached to your investment in line.  So take some solace in the fact that the publicly traded mutual fund industry has recognized the need for comprehensive regulatory oversight, and it is all done in with one goal in mind, protecting the mutual fund shareholder.

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