In our previous post, we introduced the idea of a “regulatory perimeter,” the boundary separating highly protected retail investments from less regulated institutional terrain. To understand why today’s retirement marketplace feels strained, we first need to understand how that perimeter was constructed and what problems it was meant to solve.
This post traces the origins of modern U.S. investor protection, from the securities laws of the 1930s to the Investment Company Act of 1940 and ERISA itself, and explains why these regimes assumed a very different role for retirement savers than the one they play today.
Chapter 2: The Regulatory Perimeter
How Investor Protections Were Designed and Where They Stop
How We Got Here: The Investor-Protection Architecture
The Problem to Be Solved: Retail Investors as a Protected Class
Modern U.S. financial regulation starts with a simple observation: left to their own devices, markets tend to disadvantage small, unsophisticated investors.
The 1929 crash and the Great Depression exposed three core problems:
1. Information asymmetry – issuers and intermediaries knew far more than buyers.
2. Conflicted distribution – products were sold with heavy conflicts and little disclosure.
3. Fraud and manipulation – there were few effective guardrails on market conduct.
Congress’ response in the 1930s and 1940s was to treat retail investors as a protected class and to design a regulatory regime that forces issuers and pooled vehicles to provide “full and fair disclosure” of material information before and after securities are sold, regulates trading venues and intermediaries (exchanges, broker-dealers) rather than the instruments, and imposes structural and governance constraints on pooled vehicles like mutual funds, so they cannot easily be used to extract value from small investors.
Later, with ERISA in 1974, Congress extended that logic to the workplace retirement system, explicitly to “provide protection for individuals” in private retirement and health plans, even though in 1974, participants had little direct exposure to investment products. The majority was held in defined benefit pension plans, where investment decisions were made by the fiduciary of the sponsoring employer.
For purposes of this paper, it’s useful to think in terms of a regulatory perimeter. Inside the perimeter sit public companies, registered funds, and ERISA plans, subject to heavy disclosure and fiduciary standards. Outside the perimeter are private funds, insurance balance sheets, and bespoke vehicles with lighter or different rules, assumed to be the domain of “sophisticated” capital. The core question we’ll return to is: what happens when retail investors’ money pushes toward the edge of, or outside, that perimeter?
The Public Markets Regime
The Securities Acts of 1933 and 1934
The public markets regime rests on two foundational statutes:
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The Securities Act of 1933 governs the offering of securities. The Securities Act of 1933 requires issuers to register public offerings with the Securities and Exchange Commission (SEC) and provide investors with financial and other significant information. Its twin objectives are to ensure that investors receive material information and to prohibit deceit, misrepresentation, and other fraud in the sale of securities.
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The Securities Exchange Act of 1934 governs the trading of securities and the ongoing life of public companies. The Securities Act of 1934 regulates exchanges and over-the-counter markets and seeks to prevent “inequitable and unfair practices” on those markets. It empowers the SEC to require periodic reporting—annual, quarterly, and current reports—so that investors receive updated information over time, not just at issuance.
This framework is intentionally disclosure-based rather than merit-based. The government generally doesn’t tell investors what a “good” or “bad” investment is; it forces issuers and intermediaries to provide standardized information and prohibits fraud.
The Investment Company Act of 1940: Mutual Funds as a Regulated Answer
The Investment Company Act of 1940 (’40 Act) brought pooled investment vehicles, primarily mutual funds and ETFs, firmly inside the perimeter. The key features, many of which matter to retirement savers:
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Registration and structure. Funds with more than 100 investors generally must register with the SEC and comply with detailed rules on capital structure, operations, and disclosures.
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Governance requirements. At least 40% of a fund’s board must be independent of the adviser and affiliates; affiliated transactions and self-dealing are sharply restricted.
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Custody and asset protection. Strict rules on custody, reconciliation, and fidelity bonding are designed to prevent theft or misuse of fund assets.
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Liquidity and pricing. Daily NAV, “forward pricing,” and detailed valuation requirements make it harder to game the timing of purchases and redemptions.
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Standardized disclosure. Prospectuses, statements of additional information, and periodic reports must follow SEC formats and are subject to review and enforcement.
For retail investors, the mutual fund was meant to be the regulated answer to pooled investing: constrained in how it can be run, transparent in what it holds and charges, and overseen by both a board and the SEC.
The Public Company Disclosure Framework
Overlaying all of this is a dense public company disclosure regime. Public issuers (companies) must file detailed registration statements and ongoing reports (Forms S-1, 10-K, 10-Q, 8-K, etc.) that include audited financial statements, descriptions of the business, risk factors, management biographies, and executive compensation. The SEC periodically modernizes and expands these obligations, including recent examples of climate risk, cyber risk, and other thematic disclosures, thereby increasing the breadth and cost of reporting.
The intended outcome is that any member of the public can, in principle, pull up an issuer’s filings on the SEC’s website and see:
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What the company does
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How it makes money
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How it is financed
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Who runs it and how they are paid
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What are the major risks
From an investor-protection standpoint, this is the high-water mark: frequent, standardized, public, and enforceable disclosures backed by the threat of SEC enforcement and private litigation.
That historical architecture made sense when retirement assets were managed on behalf of workers by professional fiduciaries in defined benefit plans. But as the retirement system shifted, its protections did not fully shift with it. In the next post, we’ll explore how ERISA operates in a defined contribution world, and what it means when participants effectively become their own CIOs.
Want to read ahead? Download our full Beyond the Perimeter guide. (Free to download, no form to fill out)
Multnomah Group is a registered investment adviser registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.