Mutual Funds:

SEC Adjusted Its Oversight in Response to Rapid Industry Growth

GGD-97-67: Published: May 28, 1997. Publicly Released: May 28, 1997.

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GAO reviewed the Securities and Exchange Commission's (SEC) regulation and oversight of open-end investment companies, focusing on how SEC has responded to rapid industry growth in carrying out its mutual fund oversight through inspections, disclosure review, and other regulatory activities.

GAO noted that: (1) SEC has increased its inspection staffing and adjusted the focus of its inspections to keep up with the rapid growth in the mutual fund industry; (2) since fiscal year (FY) 1990, SEC has more than doubled the number available to do mutual fund inspections; (3) SEC used the increased staff to expand the scope of its inspections to focus primarily on the activities of families of funds, called fund complexes, that may present high risks to investors; (4) it also expanded its coverage of investment advisers, and SEC inspectors spent more time on each mutual fund inspection; (5) as a result, the number of mutual fund inspections completed each year has remained relatively constant; (6) SEC still met its current goal of inspecting fund complexes at least once every 5 years, and most had been inspected more than once since FY 1992; (7) as inspections became more comprehensive, the number of deficiencies that inspectors found increased each year, but few deficiencies were serious enough to be considered for potential enforcement action; (8) SEC reported that the mutual fund industry had generally been free of major scandal for the last 2 decades; (9) SEC selectively reviews mutual funds' disclosure documents; (10) a large part of the growth in the mutual fund industry has been in adding new funds to already existing fund complexes; (11) as a result, although each new mutual fund must submit disclosure documents, these documents often contain disclosures that are very similar to those of other funds within the same complex; (12) SEC officials told GAO that, by selectively reviewing these documents, they have been able to review all new or materially different disclosures, despite an almost 8-percent increase in the number of documents that SEC has received since FY 1994 and despite a relatively constant staffing level in this function over the same period; (13) SEC's other regulatory activities relating to mutual funds include: (a) granting exemptions from various provisions in mutual fund laws and regulations, (b) developing and modifying rules to implement these provisions, and (c) providing the industry, Congress, and other government agencies with SEC interpretations of mutual fund laws and regulations; (14) these activities have allowed the mutual fund industry to change dramatically in size and scope without substantially amending existing laws; (15) SEC staff devoted to these regulatory activities increased nearly 45 percent from FY 1990 to FY 1993; and (16) SEC officials said that the National Securities Market Improvement Act of 1996 will increase their rulemaking workload by about 30 percent through 1997.

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