The New Portfolio Society, Sec Mutual Fund Disclosure, and the Public Corporation Model

The Securities and Exchange Commission's disclosure philosophy has largely focused on a single model: the publicly held corporation. From its inception, the SEC's disclosure framework for mutual funds has been a relative backwater and based largely on the disclosure framework for publicly held corporations. This situation is untenable. The use of the public corporation model leads to fundamental flaws in the SEC's fund disclosure system. The inherent differences between a public corporation and a mutual fund and the markets for their respective shares are significant and have manifold implications for disclosure. Moreover, the stakes have changed: far more households own stock funds than own stocks. Ours has become a portfolio society, a society in which household investments will largely define retirement well-being. This Article proceeds to outline a new SEC fund disclosure framework. One element in this new framework is the adoption of investor education as a supplemental principle for guiding disclosure requirements; this departure from the disclosure philosophy found in the public corporation context in fact furthers classic SEC regulatory tenets. In addition, the new framework contemplates moving away from the fund-specific focus of the current framework, a carryover from the firm-specific focus of the public corporation model. In most situations, a fund should instead be viewed primarily as the asset class or asset classes in which it invests, coupled with a managerial overlay. The implications of such a reconceptualization are set out in respect of the three key elements that together will largely determine how a typical fund will perform over the long run: asset class returns net of deadweight costs comprehensively defined, asset class risks, and the locus of asset class decisionmaking. The longstanding SEC fund disclosure framework not only has the potential for misleading investors as to risks and returns but can result in the very absence of rational decisionmaking as to the surprisingly important matter of asset class choice. A new fund disclosure framework can play a role in helping a massively unprepared public