Securities Industry Regulations - Rules and Reporting Requirements for Mutual Funds

The following restrictions apply to mutual fund companies:

  • A mutual fund company may not purchase securities on margin.
  • A mutual fund company may not own a joint account that trades securities.
  • A mutual fund company may not effect a short sale of any security.
  • A mutual fund company may not purchase more than 3% of the outstanding voting stock of another investment company.

Section 12b-1
Section 12b-1 of the Investment Company Act of 1940 allows the mutual fund company to pay the principal underwriter for the costs of sales literature, promotional items and other selling expenses by collecting 12b-1 fees. These fees are charged to fund's shares and are permissible if the following conditions are met:

  • Payments to the principal underwriter are made according to a written plan that outlines the proposed financing and distribution agreement
  • The majority of shareholders and majority of non affiliated directors initially approves and continues to annually approve the plan
  • The board of directors reviews the payments under the plan at least quarterly
  • The plan and its related agreements may be terminated without penalty at any time with 60 days written notice

Shareholder Rights
An investment company must abide by certain shareholder rights. The following activities are prohibited unless approved by a majority shareholder vote:

  • A mutual fund company may not borrow money, make loans, buy or sell real estate, or underwrite securities issued by other companies.
  • A mutual fund company may not change its investment objectives.
  • A mutual fund company may not change the nature of its business and cease acting as an investment company.
  • A mutual fund company cannot change from a diversified form to an undiversified one.

Shareholders must also receive certain semiannual financial reports, including the following:

  • A balance sheet and a statement of the fund's total investment value
  • An income statement for the period covered
  • A list of the securities' amounts and values on the date the balance sheet was issued
  • A statement of the salaries and other monies paid to the directors, advisory board and officers
  • Total dollar amounts of securities purchases and sales
Insider Trading and Securities Fraud Enforcement Act of 1988


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