Date Posted: 2005
All humans and the institutions they create err from time to time. Regulatory agencies are no exception. This essay hypothesizes that by failing to recognize mutual fund abnormal returns as an open-access common pool subject to a race to first possession, the U.S Securities and Exchange Commission has fundamentally misunderstood the nature of the conflicts of interest said to plague the industry. As a result, its regulatory response to the recent wave of mutual fund scandals, including rule making and civil actions, fails to maximize the institutional value of mutual funds as a savings vehicle. I rely on the property rights approach to economic theory to derive testable implications and recommend structural reforms to ensure that regulatory error is internally corrected by the common law process of adjudication and appellate review.