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Mutual funds are regulated by whom? SEC and FINRA overview

The Securities Act of 1933 was the first major federal securities law. It passed during the Great Depression in the wake of the stock market crash of 1929. This landmark law established government oversight of financial markets.

Passed the next year, the Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC). The SEC's Investment Management Division watches over investment companies and advisors. This includes mutual funds. And the SEC Office of Compliance Inspections and Examinations also keeps tabs on registered mutual funds in the US.

The Federal Trade Commission (FTC) also dabbles in investments. But the SEC is the primary regulator over mutual funds and the financial markets.

FINRA, the Financial Industry Regulatory Authority, also oversees the investment industry. This organization puts further rules and regulations in place. While it does not directly regulate mutual funds, it regulates the broker-dealers and other registered companies that create and sell them.

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Landmark mutual fund regulations

Mutual fund laws may not be exciting reading, but they do a lot to keep investment companies from acting unfairly. Here are some of the most important laws to know about.

Securities Act of 1933

This 1933 law put mandatory financial disclosures in place for public companies. This paved the way for the income statements, balance sheets, cash flow statements, annual reports and other public financial statements we know today.

The act has farther-reaching consequences for companies that issue stocks and bonds and participate in public markets. Because mutual funds comprise other financial instruments, any regulation benefiting stock and bond investors ultimately benefits mutual fund investors as well.

Securities Exchange Act of 1934

Long live the SEC! This law formally established the main regulatory body that watches over financial markets and investments. The SEC creates and enforces securities laws. When Martha Stewart went to jail for insider trading, for example, the SEC was the prosecutor. When Enron blew up in a massive accounting and fraud scandal, the SEC was there to handle the case and do its best to protect investors.

This law also established rules to improve market transparency to prevent fraud and market manipulation. The SEC prevents the selling of unregistered stocks, prosecutes insider trading, creates systems to prevent stolen customer funds and ensures customers get a fair chance on Wall Street.

Investment Company Act of 1940

This law specifically includes mutual funds. It regulates companies that offer their own securities to the public, including securities made up of other securities. This regulation improves disclosure requirements and helps prevent conflicts of interest.

When you buy a mutual fund, you want to know what fees you will pay, what assets the fund holds and how the fund will operate to grow and protect your investment. Mutual fund companies should share this information, but it wasn't required before this 1940 law.

Investment Advisers Act of 1940

If you go to someone for financial advice, you want to know you can trust them to give you good advice. The Investment Advisers Act of 1940 helps you to that end. And because investment professionals regularly suggest mutual funds, this law benefits mutual fund investors.

This law requires investment advisors to register with the SEC and follow a set of guidelines to protect investors.

Sarbanes-Oxley Act of 2002

Lovingly referred to as SOX by accountants, Sarbanes-Oxley added a suite of rules to prevent financial fraud and improve corporate responsibility. This regulation improved accuracy and trust in publicly filed reports that are issued by mutual funds and the companies they hold.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Dodd-Frank came about in the aftermath of the financial crisis of 2007 and 2008. This law added dramatically stricter rules for consumer protection, trading, credit, corporate governance, corporate reporting and disclosures, and more.

The Jumpstart Our Business Startups Act of 2012 weakened this law somewhat. The JOBS Act aimed to curb restrictions on businesses looking to raise funds in the public markets.

State regulations and other rules

Every state puts its own financial rules in place. New York is well-known for its strict financial rules, but it isn't alone. 50 states lead to 50 additional sets of rules. That is on top of what you get from organizations like FINRA, the SIPC, FRB, FDIC, OCC, OTS and CFTC.

Invest in mutual funds with your eyes wide open

In the United States, your mutual fund investments are well regulated and protected. Unlike investors in the past and in some other countries, you have access to a wide array of information on company financials, news, insider trades and other public information.

There are more than 9,000 mutual funds in the United States with over $17 trillion in assets. Thanks to strong regulations, millions of investors with mutual fund assets can rest easy that their funds are safe and sound with a trusted financial company. Think you're ready? here's our guide to getting into the stock market.


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About the Author

Eric Rosenberg

Eric Rosenberg

Freelance Contributor

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time.

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