Latin American Capital Markets

136 KAREN GOLDSTEIN ROSSOTTOMutual funds in the United States are subject to a comprehensive system ofregulation administered by the U.S. Securities and Exchange Commission (SEQ.The Investment Company Act of 1940 is the principal statute governing mutual funds andother investment companies. 8 Reflecting recognition of the role of investment companiesin channeling savings into the capital markets, the act imposes detailed restrictionson investment companies to ensure they operate for the benefit of their shareholderand not in the interests of their managers and corporate insiders. Specifically, the actprohibits self-dealing, prescribes fairness in pricing investment company securities forsale or redemption, ensures the safekeeping of fund assets, restricts leveraging of companyassets, and sets forth a corporate governance scheme in which independent directorsserve as fund watchdogs. Detailed disclosures are required in a prospectus outliningthe investment company's investment objectives, shareholder costs, and financialcondition. The financial disclosure is governed by a well-established set of principlesunder Generally Accepted Accounting Principles (GAAP) in the United States.The Investment Company Act was adopted with considerable cooperationfrom the mutual fund industry, demonstrating its commitment to sound industry practicesand recognition that institutional growth depends on household demand (U.S.SEC !992).The act also has built-in flexibility, enabling the SEC to accommodate industryinnovations by exempting a company from regulation under the act if an exemptionis in the public interest, is consistent with the protection of investors, andmeets certain other standards.In addition to being the holders and managers of savings, investment companiesare also issuers and active traders in the securities markets and thus subject to thelaws governing these activities. Other institutional investors also rely on these laws toensure the market continues to function well and that investor confidence remainshigh.To protect the integrity of the markets, the Securities Exchange Act of 1934 prohibitsunfair and inequitable trading practices, such as insider trading and market manipulation,and sets forth a system of self-regulation to monitor market operations, subjectto SEC oversight 9 The market governing bodies, or self-regulatory organizations,must register with the SEC and receive SEC approval of their rules. Self-regulation iscost-effective because it promotes efficient rules and eases the burden of expensiveoversight from the SEC.The laws governing market activities also rely on a system of disclosure tofurther confidence in the markets. The Securities Act of 1933 governs securities issuersby requiring that securities be registered with the SEC before being offered tCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub8 l5U.S.C§80a-l (1994).9 !5U.S.C.§78a(l994).