What Role Do Regulations Play in Investing?

Outside view of the Securities and Exchange Commission building in Washington DC

The financial industry is heavily regulated, and for good reason. In 2020, total assets under management (AUM) reached $103 trillion, representing a 11% growth from the previous year. In North America, AUM saw a 12% growth, reaching $49 trillion. These numbers represent real money that has been invested, which highlights the importance of oversight and regulation for financial investment products.

Whether you’re new to working in finance or have been in the field for some time, the laws that regulate the investment industry can be complicated. However, there are a few key regulations you should be aware of if you want to grow your understanding of investment and portfolio management. 

How Are Mutual Funds Regulated?

Mutual funds are an investment product that uses collective money from investors to purchase stocks, bonds, and other investments. It can be easier to build a diversified portfolio using mutual funds because the invested money is spread out over a variety of financial instruments. Passive mutual funds focus on matching their performance against the performance of a market index, while actively managed mutual funds are carefully curated by an investment portfolio manager—or potentially a team of investment managers.

Who regulates mutual funds? While there are various laws in place that govern how mutual funds can operate, the Security and Exchange Commission (SEC) is primarily responsible for oversight. Mutual funds must be registered with the SEC and investment advisors must also register with the SEC if they fall into either of the following categories: 

  1. Manage assets of $100 million or more;
  2. Provides investment advice to a company that is registered under the Investment Company Act of 1940.

Investment advisers that don’t fall into these categories may still need to be registered with local regulatory agencies. 

Major Financial Regulatory Groups 

Regulation is vital to the world of investments. It not only protects the financial future of individual investors—it also protects the stability of our national economy. Having adequate oversight helps create a level playing field, limits fraud, and encourages responsibility among financial professionals.

To understand how mutual funds are regulated, along with other financial products, you have to first look at the organizations that are given regulatory power. The job of overseeing these trillions of dollars in investments primarily falls to the following four organizations:

Security and Exchange Commission (SEC)

The SEC is a federal agency responsible for overseeing stock markets and securities. It was created by Congress in 1934 under the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934. The SEC was the first regulatory agency to oversee the securities market, which includes stock exchanges, mutual funds, and hedge funds. It also monitors investment advisers, brokers and securities exchanges. 

The SEC states that their mission is to protect investors, facilitate capital formation and to maintain fair, orderly and efficient markets. They have the power to take enforcement action and are designed to be nonpartisan.

Financial Industry Regulatory Authority (FINRA) 

FINRA is a nonprofit organization that is overseen by the SEC. It was founded in 2007 and is the largest nongovernmental regulatory agency for securities brokers and dealers. The goal of FINRA is to protect investors and the integrity of the market. It regulates broker-dealers, capital acquisition brokers, and funding portals. FINRA also works to educate and take action on behalf of investors. 

Although it is a nongovernmental body, FINRA does have the ability to levy fines and issue disciplinary actions. According to FINRA’s “What We Do” page, in 2020, the organization brought 808 disciplinary actions against brokers and firms, levied $57 million in fines, and referred 970 fraud and insider trading cases to the SEC and other agencies. 

Commodity Futures Trading Commission (CFTC)

The CFTC is an independent federal agency which regulates the derivatives markets. The CFTC was created in 1974 by the Commodity Futures Trading Commission Act. The CFTC oversees derivatives clearing organizations (DCOs), which clear and settle derivative transactions. 

The CFTC is also involved in helping create new legislation regarding derivatives. Their mission is to “promote the integrity, resilience, and vibrancy of the U.S. derivatives market.” Along with the SEC and IRS, the CFTC plays a role in the regulation of cryptocurrencies. 

North American Securities Administrators Association (NASAA)

NASAA is an organization that helps regulate transactions that fall under state security laws, often called blue sky laws. These regulations happen at the state-level and aim to prevent fraud and protect investors. This includes overseeing licensing for brokers, investment advisors, and brokerage firms. Founded in 1919, NASAA is a unique organization because it includes the U.S., Canada and Mexico.

NASSA is largely focused on investor education, and has many education-based resources on their website. So while they do investigate fraud and file actions, one of their primary focuses is helping investors learn how to protect themselves against fraud. 

Related: Investment Quiz: Test Your Portfolio Management Knowledge

Regulations That Investors Should Know About

If you want to work in investment management, it’s important to understand how regulations may affect your clients’ portfolios. This type of investment portfolio management training is typically achieved through online courses, degrees, and certificate programs. 

Programs such as Wharton Online’s Asset and Portfolio Management Certificate can help you gain a firm understanding of the legal intricacies involved in investment management. For example, our Fundamentals of Portfolio Management course provides a summary of how the Investment Company Act of 1940 affects mutual funds. 

The regulations affecting the investment industry are extensive, but listed below are a few key laws that aspiring investment managers should be aware of: 

  • Securities Act of 1933: This is sometimes called the “truth in securities law” because it prohibits misrepresentations and fraud in the sale of securities. It mandates the disclosure of key information about any security for sale.
  • Securities Exchange Act of 1934: This is the law that created and empowered the SEC to act as a regulating body with disciplinary powers. It also defined and prohibited some types of actions and created required reporting and disclosures for securities that are publicly traded.
  • Trust Indenture Act of 1939: This law governs debt securities that are publicly sold, including bonds, notes, and debentures. Its goal was to provide investors more rights, including the right to take legal action to obtain payment.
  • Investment Company Act of 1940: This act regulates companies that invest and trade publicly available securities, including but not limited to mutual funds. The law focuses on requiring disclosures about company operations, fund details, financial condition, and investment policies.
  • Investment Advisers Act of 1940: This act put investment advisors under the regulation of the SEC. This law was rolled back with amendments in 1996 and 2010, limiting its reach. Now, it only applies to advisors working with or for investment companies that are registered with the SEC, or those that have $100 million or more in assets.
  • Sarbanes-Oxley Act of 2002: This is a broad law that sought to enforce corporate responsibility and fight against corporate fraud. This included aspects of financial record keeping and reporting. It also created the Public Company Accounting Oversight Board (PCAOB) with the goal of having better oversight for auditing professionals. 

Learn More With Professional Asset and Portfolio Management Training 

These are only a few of the laws and regulations that investors should be aware of before they put their money on the line. As an investment manager, you’ll need a deeper understanding of the regulatory environment than an average investor would. Thankfully, online courses can help.

In Wharton Online’s Asset and Portfolio Management Certificate Program, you’ll learn about key investing terminology, investment products, asset allocation strategies, and need-to-know information about how mutual funds are regulated. By the end of the three-course, you’ll feel confident when making investment decisions for your clients. Request more information today to learn about the certificate program.

The Wharton School is accredited by the International Association for Continuing Education and Training (IACET) and is authorized to issue the IACET CEU.

The Wharton School is accredited by IACET