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Targeting Mutual Funds
Successful enforcement efforts against investment banks have emboldened state and federal authorities to target the next deep pocket in the securities industry: mutual funds, or more precisely, the funds' investment advisers. There are over 10,000 mutual funds in the United States today, with approximately $7 trillion in investments from approximately 83 million individual investors.
Over the next several years, one can expect to see a familiar pattern repeat itself. As happened with defense contractors, commercial bankers and then with health care providers, federal and state regulators will direct their sights at investment advisors and mutual funds. What was traditionally an administrative issue for the SEC or state could become major civil enforcement litigation. Fines could easily skyrocket into multimillion-dollar figures. Prosecutors – armed with statutes that prohibit false statements, fraud, theft of honest services, and others – will threaten criminal sanctions in what had previously been regulatory actions under the Investment Company Act of 1940, the main statute governing mutual funds, and related securities laws. The mutual fund industry will see prosecutors target common practices that the industry thought acceptable, or at least inevitable.
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