August 23, 2010 marks the seventieth anniversary of the signing into law of the Investment Company Act of 1940, the law that governs mutual funds and other investment companies.
The Act was designed to address abuses that characterized many investment companies in the 1920s, such as excessive leverage, self-dealing by fund managers, and inadequate disclosure, while permitting funds to innovate in the interest of investors.
The Act has been a great success. Mutual funds, while not problem-free, have generally avoided abuse. The industry has introduced a myriad of new products and services, and has grown from less than $500 million in assets in 1940 to over $10 trillion and almost 90 million shareholders today. A major reason for this success is that the industry and its regulator, the Securities and Exchange Commission, have resisted calls to weaken key protections set forth in the Act.
The major regulatory problems the industry and investors face today are not due to the original 1940 Act, but to amendments that were added in subsequent years. ....