Mutual Funds vs. Collective Investment Fund: Equal Investor Protection on the Horizon?

For more than a year, SEC Chair Gary Gensler has, in some public forums, been mentioning concerns about gaps in the regulation of collective investment funds (CIFs), as compared to that of registered open-end investment companies, i.e., mutual funds. CIFs are maintained by banks or trust companies and are similar to mutual funds, except that investment in a CIF generally is limited to entities, such as certain types of employer-sponsored retirement plans, that meet specified eligibility criteria.

Given the similarities, Gensler views disparity in the regulation of the two types of investment vehicles with suspicion. In Gensler’s view, one area that calls for alignment of regulatory approaches is liquidity risk management. Over the years, the SEC has promulgated numerous rules designed to manage liquidity and dilution risks for mutual funds, often in response to specific market events. These included the money market fund reforms in 2010 and 2014 in response to the 2008 financial crisis, as well as the liquidity risk management rules of 2023 in response to the 2020 market events.

Gensler has specifically mentioned that the rules governing CIFs lack limits on illiquid investments, minimum required levels of liquid assets, or limits on leverage. He also has mentioned that, unlike mutual funds, CIFs are not required to regularly report to investors on their investment holdings and are not subject to oversight by a board with independent directors. For some time, the SEC staff, at Gensler’s direction, have been in discussion with banking regulators about narrowing the regulatory gaps in at least some such respects.

As a practical matter, mutual funds and CIFs often are in competition for the same investors, and disparate regulation can impact these vehicles’ costs and investment characteristics in ways that significantly affect their performance and competitive position. Indeed, Gensler has upon occasion emphasized in the context of CIFs that, when regulations don’t treat like activities alike, market participants may seek to arbitrage such differences.

Clearly, not every regulatory disparity need be eliminated. For example, although CIFs, unlike mutual funds, are not subject to regulation under the Investment Company Act of 1940, much of that regulation would be superfluous because of the regulation to which CIFs are subject under the banking laws, and the fact that banks and trusts do have certain fiduciary responsibilities with respect to their CIFs.

Accordingly, thoughtful balancing should be a significant part of any efforts by the SEC staff and bank regulators toward parity in the regulation of CIFs and mutual funds.