Explain how, in certain types of funds, the lack of meaningful investor protection regulation is justified by the funds industry in jurisdictions such as the US and UK? Review the main aspects of funds regulation in a jurisdiction of your choice.
It was the investigations carried out by Congress (US) and the Board of Trade (UK), into the market crash of 1929 and subsequent economic depression that lead to the introduction of several acts that aimed to regulate the financial industry. In particular, the objective of much of the regulation affecting collective investment funds was to control the creation, marketing and disclosure, investment practices and administration of these funds. The regulations are designed to help prevent risk of fraud being perpetrated upon, or miss-selling to, the investing public, a section of the community whom governments have identified as vulnerable and in need of protection.
In the US, the Investment Company Act 1940 was the first to be implemented and it requires all collective investment vehicles that are marketed to US investors, to be licensed with the Securities Exchange Commission and adhere to operating and investment restrictions. There are two exemptions that a fund can take advantage of, under section 3 (c)(1) if the fund has no more than 100 beneficial owners and does not advertise its shares to the general public or section 3(c)(7) if the shares are owned exclusively by ‘qualified purchasers’ and does not offer shares to the general public. Either of these exemptions will enable a fund to avoid registration and the restrictive investment guidelines.
Once the fund is established and licensed, The Securities Act 1933 must be complied with in regards to whom the fund is promoted to. This act regulates the entire primary market, where the new securities are issued as opposed to traded. The particulars of the investment on offer must be disclosed to the public so they can make an informed choice. Funds can...