Or, perhaps, the SEC has been captured by the mutual fund industry

Stewart Brown:

Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The theory of regulatory capture may be given both a broad and narrow interpretation. Under a broad interpretation, a group of entities seeking regulatory favor or “a special interest” affect state intervention in various areas, including taxation, monetary policy and legislation. Under a narrow interpretation, special interest groups manipulate regulators directly.

Mutual fund assets in the U.S. currently exceed $16 trillion, and these assets generate more than $100 billion per year in revenue to firms that manage mutual funds. Thus, there are ample incentives and financial means for investment management firms to influence the political and regulatory process. The potential for a regulatory employee to be hired by a special interest is one means by which a special interest can influence regulators directly. And not surprisingly there is a busy and well-documented revolving door between the Securities and Exchange Commission and the financial services industry.

My recent paper, available here, shows that the SEC has been effectively captured in both a broad and narrow context. Broadly, the investment management industry has succeeded in manipulating advisory fees, distribution fees and soft-dollar commissions. In a narrow context, the Commission has slow-walked the disclosure of information crucial to investors and has failed to reform the fund distribution system in spite of clear abuses and documented evidence that distribution fees are deadweight costs.