Matt Fink was with the Investment Company Institute from 1971 to 2004 and served as its president from 1991 to 2004. He is the author of a history of mutual funds, “The Rise of Mutual Funds: An Insider's View,” (Oxford University Press, 2008). A new edition, covering the 2008 financial crisis and its impact on mutual funds, has just been published.
Since publication of the first edition of my book, I have lectured on mutual fund history at over 20 venues, including think tanks, historical societies, law firms, and mutual fund boards. Some of the most frequently asked questions about mutual fund history and my responses are as follows.
What was the most important event in mutual fund history?
The Revenue Act of 1940, which provided favorable tax treatment for mutual funds, was the first time the federal government regulated mutual funds, and was the critical factor that led Congress to enact the Investment Company Act of 1940.
What is the most important regulation governing mutual funds?Section 18 of the Investment Company Act, which severely limits mutual funds’ use of leverage through borrowing. As John Kenneth Galbraith has observed, all financial debacles can be traced to excessive borrowing.
What was the most important innovation in fund history?
The development of money market funds, which gave Americans market rates of return on their savings, provided the industry with millions of new shareholders, and led to the removal of interest rate ceilings on bank deposits.
Who was the most important figure in mutual fund history?
I’d like to say Matt Fink, but beginning in 1924 there have been a series of key individuals, including Edward Leffler, Paul Cabot. Merrill Griswold, Jon Lovelace, Howard Stein and Jack Bogle.
If I had to name once individual in recent years, it would be Ned Johnson. Under his leadership, Fidelity has introduced a long series of innovations, including check-writing on money market funds, tax-exempt money funds, and no-load tax-exempt funds. The industry is populated by executives who got their start, and their training, at Fidelity under Ned Johnson.
What was the worst event in fund history?
First prize must go to the deals fund executives cut with market timers, leading to the 2003 trading scandals. The runner-up is the 1970 Amendments to the Investment Company Act that sought to impose a form of rate regulation on the fund industry. We are still living with the consequences.
What event are you personally most proud of?
It actually was a non-event—helping see to it that Congress did not enact punitive legislation in response to the 2003 trading scandals. At a time when the scandals had severely weakened the industry’s credibility, I used all of the knowledge and experience I had gained over the past 33 years to help prevent the enactment of legislation that would have commoditized, homogenized, and dumbed down the industry, to the great detriment of investors.
In the course of your research, what surprised you the most?
Discovery of a 1937 internal SEC staff memorandum that confirmed my hypothesis that the Revenue Act of 1936 was the critical factor that led to the enactment of the Investment Company Act of 1940. The 1936 Act gave tax relief only to mutual funds, and not to closed-end funds. The memorandum made it clear that the SEC would block legislation extending tax relief to closed-end funds unless they agreed to the Investment Company Act.
Matt Fink can be reached at email@example.com.