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Originally published March 2005, updated annually (most recently November 2006)

The fallout from the recent regulatory enforcement cases have rocked the mutual fund industry, which until recently prided itself on operating for six decades without scandal. Nearly half of all U.S. households have a stake. New York State Attorney General Eliot Spitzer (NYAG) attributes the current fund-trading scandal to the democratization of investing over the past twenty years, the emergence of massive financial outfits following a spate of mergers, and those financial outfits’ inability to be satisfied with the profits they earned from individual investors. Other commentators have suggested that pressure to generate good fund performance, higher management fees and new assets in light of a declining stock market was a factor, while others propose that greed and lax oversight by regulators and the funds themselves were the root causes.

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This article first appeared as Chapter 28 of Mutual Fund Regulation and has been reprinted with the permission of the publisher, Practising Law Institute, copyright PLI 2006.  For more information, including how to order Mutual Fund Regulation, please visit:  http://www.pli.edu/product/book_detail.asp?ptid=501&stid=59&id=EN00000000019295