The original impetus for this research was provided several years ago by a request to assist Counsel for Fidelity Management and Research Corporation in analyzing the mutual fund industry, with particular emphasis on money market mutual funds. We were asked to focus our efforts on the mechanism by which the advisory fees of mutual funds are determined. This request arose out of litigation that challenged the level of advisory fees charged to the shareholders of the Fidelity Cash Reserve Fund. Subsequently, we were asked to provide similar assistance to Counsel for T. Rowe Price Associates regarding the fees charged to shareholders of their Prime Reserve Fund. 1940, advisers of Under the Investment Company Act of mutual funds have a fiduciary duty with respect to the level of fees they may charge a fund's shareholders. Since the passage of the Investment Company Act, there have been numerous lawsuits brought by shareholders alleging that advisory fees were excessive. In these lawsuits, the courts have failed to provide a set of standards for determining when such fees are excessive. Instead, they have relied on arbitrary and frequently ill-defined criteria for jUdging the reasonableness of fees. This failure to apply economic-based tests for evaluating the fee structure of mutual funds provided the motivation for the present book, which undertakes a comprehensive analysis of the economics of the mutual fund industry.
One: History of the Development of the Mutual Fund Industry.- Investment Companies.- Organizational Structure.- Mutual Funds.- Money Market Mutual Funds.- Fund Complexes.- Pre-1940.- 1940 to 1970.- 1970 to the Present.- Overview.- Money Market Mutual Funds.- Other Mutual Funds.- Conclusions.- Two: Regulation of the Mutual Fund Industry.- Background.- Investment Company Act of 1940.- Purpose of the Act.- Mechanisms Established to Deal with the Abuses.- The 1970 Amendments.- Concerns Raised by the 1960s' Reports.- New Regulations in the 1970 Amendments.- Recent Regulatory Initiatives.- Is Regulation Necessary in the Current Environment?.- Three: Litigation under the 1940 Act and the 1970 Amendments.- Pre-1970 Amendments.- Post-1970 Amendments.- Summary of Economic Analysis Utilized in Litigation.- Four: Analysis of the Adviser-Shareholder Relationship in the Mutual Fund Industry.- Examination of Organizational Structure.- Shareholders and Advisers as Contracting Agents.- Competition as a Restraining Force.- Five: A Study of Current Market Conditions in the Mutual Fund Industry.- The Analytical Framework: On Industry Structure, Performance, and Conduct.- Perfect Competition and Perfect Contestability as Theoretical Structural Ideals.- Industry Concentration.- Conditions of Entry.- Investor Mobility.- Outlays on Inputs Used to Make Final Products Sold in Competitive Markets.- Industry Conduct under Perfect Competition and Contestability.- Conclusions.- Six: The Demand for Money Market Mutual Funds.- Demand Elasticity: An Introduction.- Elasticity of Market Demand for Money Market Mutual Funds.- Fund Elasticity of Demand.- Theoretical Specification of the Model.- A Workable Econometric Model.- Econometric Results.- Fund Elasticity With Respect to Total Fees.- Seven: A Cost Study of Mutual Fund Complexes.- Cost Functions.- Empirical Analysis.- Output Measures and Choice of Hedonic Variables.- Model Specifications.- Description of Data and Complex Selection Criteria.- Econometric Results.- Economies of Scale and Scope.- Conclusions.- Appendix A.- Appendix B.- Appendix C.- Eight: Toward Rational Policy on Regulation of Mutual Funds.- A Review of Fee Setting in the Mutual Fund Industry.- The Exploitation Hypothesis.- Economic Incentives and Industry Behavior.- The Evidence on Competition for Advisory Services.- Proposals for a Modified Regulatory Regime.- Eliminating the Special Pricing and Earnings Evaluation Criteria in the 1940 Investment Company Act.- Eliminating the Imposition of a Corporate-like Structure upon Mutual Funds.- Disclosure Requirements.- Facilitating Investor Ability to Move from One Fund to Another.- Conclusions.