Dancing with the Derivatives Devil: Mutual Funds\u27 Dangerous Liaison with Complex Investment Contracts and the Forgotten Lessons of 1940

This Article examines the implications of the drastic increase in the use of complex derivative instruments by mutual funds and the inadequacy of the current statutory and regulatory framework to protect investors. With a series of derivatives disasters and with ninety-four percent of individual mutual fund investors saving for retirementemphasize the need for prompt reform. The 1940 Act was not designed to address complex derivative instruments utilized today and actually prohibits most derivative transactions by mutual funds. Further, the SEC has never engaged in any rulemaking with respect to derivatives transactions by mutual funds. Thus, reforms must be enacted to prevent the types of egregious harms to investors and the financial markets that the 1940 Act was designed to prevent, while preserving the benefits that derivatives trading can offer