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


Related Articles
  1. Mutual Funds & ETFs

    A Mutual Funds Guide for Young Investors

    Learn how mutual funds work, why they are so popular and how younger investors can get started by putting mutual funds in their IRAs or 401(k)s.
  2. Mutual Funds & ETFs

    How Mutual Fund Companies Make Money

    Read about the many different kinds of fees and sales charges mutual fund companies can use to generate revenue from those who invest in their shares.
  3. Mutual Funds & ETFs

    Trading Mutual Funds for a Living: Is It Possible?

    Find out why trading mutual funds for a living isn't your best bet, including how funds discourage short-term trading and which options may better serve you.
  4. Investing

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
  5. Mutual Funds & ETFs

    A Guide to Mutual Funds Trading Rules

    Make sure to review this guide on the dos and don'ts of mutual fund trading before you invest, including how trades are executed and which fees to look out for.
  6. Investing Basics

    4 Mistakes to Avoid When Choosing Mutual Funds to Invest in

    Mutual funds are a great way to build wealth but not all of them are the same. Investors have to be mindful of fees, turnover, redundancy and performance.
  7. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  8. Financial Advisors

    Mutual Funds: How Many is Too Many? (VTSMX, VBMFX)

    How many mutual funds are too many when it comes to a well diversified portfolio?
  9. Investing

    How to Rate Your Mutual Fund Manager

    What to really look for when you're deciding on a mutual fund.
  10. Mutual Funds & ETFs

    The Benefits of Picking Mutual Funds Over Individual Stocks

    Learn about the advantages of investing in mutual funds rather than individual stocks, including the benefits of affordability, oversight and diversification.
RELATED TERMS
  1. 12B-1 Plan

    A no-load mutual fund that is allowed to use fund assets to pay ...
  2. 12B-1 Fee

    An annual marketing or distribution fee on a mutual fund. The ...
  3. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  4. 12B-1 Fund

    A type of mutual fund that charges its holders 12B-1 fees instead ...
  5. Mutual Fund Custodian

    A trust company, bank or similar financial institution responsible ...
  6. Mutual Fund Yield

    Dividend payments divided by the value of a mutual fund’s shares. ...
RELATED FAQS
  1. How much of a company's stock can a mutual fund own?

    There is no written rule that stipulates how much of a company a mutual fund can own. Instead, there are two major factors ... Read Answer >>
  2. What is the 12b-1 fee meant to cover?

    Understand what a 12b-1 fee is and what it's meant to cover. Learn about how the fee works and what personal investors should ... Read Answer >>
  3. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  4. What is considered a reasonable 12b-1 fee?

    Learn what is generally considered to be a reasonable 12b-1 fee, what these fees are charged for and how these fees are regulated. Read Answer >>
  5. Why don't mutual funds trade like stocks?

    Learn how mutual funds differ from exchange-traded funds (ETFs) in how they are traded. Also, learn what fees are involved ... Read Answer >>
  6. What kinds of expenses are included in the expense ratio?

    Understand the variety of costs and charges that are included in the total expense ratio assessed to investors using mutual ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center