The Economics of Mutual Fund Markets: Competition Versus Regulation

The original impetus for this research was provided several years ago by a request to assist Counsel for Fidelity Management and Research Corporation in analyzing the mutual fund industry, with particular emphasis on money market mutual funds. We were asked to focus our efforts on the mechanism by which the advisory fees of mutual funds are determined. This request arose out of litigation that challenged the level of advisory fees charged to the shareholders of the Fidelity Cash Reserve Fund. Subsequently, we were asked to provide similar assistance to Counsel for T. Rowe Price Associates regarding the fees charged to shareholders of their Prime Reserve Fund. 1940, advisers of Under the Investment Company Act of mutual funds have a fiduciary duty with respect to the level of fees they may charge a fund's shareholders. Since the passage of the Investment Company Act, there have been numerous lawsuits brought by shareholders alleging that advisory fees were excessive. In these lawsuits, the courts have failed to provide a set of standards for determining when such fees are excessive. Instead, they have relied on arbitrary and frequently ill-defined criteria for jUdging the reasonableness of fees. This failure to apply economic-based tests for evaluating the fee structure of mutual funds provided the motivation for the present book, which undertakes a comprehensive analysis of the economics of the mutual fund industry.

Inhalt
One: History of the Development of the Mutual Fund Industry.- Investment Companies.- Pre-1940.- 1940 to 1970.- 1970 to the Present.- Conclusions.- Two: Regulation of the Mutual Fund Industry.- Background.- Investment Company Act of 1940.- The 1970 Amendments.- Recent Regulatory Initiatives.- Is Regulation Necessary in the Current Environment?.- Three: Litigation under the 1940 Act and the 1970 Amendments.- Pre-1970 Amendments.- Post-1970 Amendments.- Summary of Economic Analysis Utilized in Litigation.- Four: Analysis of the Adviser-Shareholder Relationship in the Mutual Fund Industry.- Examination of Organizational Structure.- Five: A Study of Current Market Conditions in the Mutual Fund Industry.- The Analytical Framework: On Industry Structure, Performance, and Conduct.- Perfect Competition and Perfect Contestability as Theoretical Structural Ideals.- Industry Concentration.- Conditions of Entry.- Investor Mobility.- Outlays on Inputs Used to Make Final Products Sold in Competitive Markets.- Industry Conduct under Perfect Competition and Contestability.- Conclusions.- Six: The Demand for Money Market Mutual Funds.- Demand Elasticity: An Introduction.- Elasticity of Market Demand for Money Market Mutual Funds.- Fund Elasticity of Demand.- Seven: A Cost Study of Mutual Fund Complexes.- Cost Functions.- Empirical Analysis.- Econometric Results.- Conclusions.- Appendix A.- Appendix B.- Appendix C.- Eight: Toward Rational Policy on Regulation of Mutual Funds.- A Review of Fee Setting in the Mutual Fund Industry.- Proposals for a Modified Regulatory Regime.- Conclusions.

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