ABSTRACT
Section 2(a)(19) of the Investment Company Act classifies directors of mutual funds and other types of investment companies as either interested or not interested. Section 10(a) of the Act requires that directors who are deemed not interested by section 2(a)(19) must comprise at least 40 percent of the board of an investment company that needs to register with the Securities and Exchange Commission. Section 10(a) is based on the assumption that only non-interested directors consistently protect the shareholders of investment companies from financial exploitation. The assumption exists even though all directors, regardless of their classification by section 2(a)(19), are subject under state law to the same fiduciary duties and to the same test for determining whether they breached a fiduciary duty. Notably, social science studies on the accuracy of the assumption have reached contradictory conclusions. However, a considerable body of research casts doubt on the effectiveness of law as a mechanism to regulate social behavior in general. Thus, Chapter 3 suggests that law regulating the composition of the boards of directors of investment companies does not markedly reduce the frequency with which investment company shareholders are financially exploited but, instead, benefits society in ways captured by the concept of social productivity. In particular, Chapter 3 hypothesizes that section 2(a)(19) serves as a symbol of a commitment by society to combating shareholder exploitation and thereby aids in bonding individuals to the social system. Section 2(a)(19) can also be expected to preserve public trust in, and protect the reputation of, investment companies.
