Should Mutual Funds Be Corporations? A Legal & Econometric Analysis

There has been significant policy debate in recent years about whether mutual fund boards of directors, and the corporate paradigm imposed upon mutual funds in the United States, serve the interests of mutual fund investors. It is imperative that the effectiveness of the mutual fund corporate form be evaluated, as mutual funds are increasingly competing with alternative investment vehicles, such as hedge funds, with greater organizational freedom. If mutual funds in the United States are organized in corporate form simply to satisfy legal requirements, those requirements represent a deadweight cost to mutual fund investors. If mutual funds are organized in corporate form as a market solution to the agency problems that characterize mutual funds, corporate mutual funds should, in total, benefit funds and their investors. This Article finds empirical evidence in favor of the mutual fund corporate form. In the United Kingdom, where corporate and non-corporate mutual funds exist side-by-side, mutual funds organized as corporations charge significantly lower front-end loads and annual management fees than mutual funds not organized as corporations, after controlling for other factors. This difference in expenses is not reflected in significantly different fund performance on a gross (pre-expense) basis. In all, the corporate form's downward impact on fund expenses, and its insignificant impact on gross performance, provide empirical support in favor of corporate funds.