[10458]
November 6, 1998
TO: ACCOUNTING/TREASURERS COMMITTEE No. 48-98
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 24-98
DIRECT MARKETING COMMITTEE No. 20-98
FEDERAL LEGISLATION COMMITTEE No. 2-98
INDUSTRY STATISTICS COMMITTEE No. 15-98
INTERNATIONAL COMMITTEE No. 33-98
INVESTMENT ADVISERS COMMITTEE No. 34-98
OPERATIONS COMMITTEE No. 42-98
PENSION COMMITTEE No. 76-98
PRIMARY CONTACTS - MEMBER COMPLEX No. 106-98
PUBLIC INFORMATION COMMITTEE No. 53-98
RESEARCH COMMITTEE No. 22-98
SALES FORCE MARKETING COMMITTEE No. 23-98
SEC RULES COMMITTEE No. 110-98
SHAREHOLDER COMMUNICATIONS COMMITTEE No. 22-98
SMALL FUNDS COMMITTEE No. 15-98
STATE LIAISON COMMITTEE No. 10-98
TAX COMMITTEE No. 36-98
UNIT INVESTMENT TRUST COMMITTEE No. 32-98
RE: REPORT ON THE STUDY OF THE FUTURE ROLE OF THE INSTITUTE
______________________________________________________________________________
INTRODUCTION
In May 1997, ICI’s Board of Governors authorized a study of the Institute's future role in serving its
membership. Eight years had passed since the previous study of the Institute's role had been conducted.
The purpose of the study was both to assess the value to members of the Institute’s current services and
to investigate whether any Institute policies or programs should be changed to reflect likely future needs
of the membership.
The study, which was guided by a subcommittee of the Executive Committee, proceeded on three
parallel and integrated tracks:
1) The Board of Governors and the Executive Committee identified major issues that are
likely to face the investment company industry in the future.
2) A survey of the membership was conducted to help determine members' priorities with
respect to current and future Institute activities.
3) Institute President Matthew Fink prepared a paper addressing future issues from a staff
perspective, addressing whom the Institute should serve and what services it should
perform.
2From those three sources, consultants for the study distilled a list of ten important issues. The Institute’s
Executive Committee considered those issues along with the Institute’s current position and options for
their disposition. Executive Committee recommendations were reviewed and approved by the Board of
Governors at its meeting on October 9, 1998. The ten issues, along with guidelines adopted by the
Board for future Institute activity in each area, are discussed beginning on page 3 of this paper.
THE PROCESS
A. The Board of Governors and Executive Committee identified four major areas of future
opportunity and challenge to the industry:
1. Downside Risks: Given the tremendous growth and popularity of investment
companies over the past decade, the industry is faced with elevated or potentially
unrealistic public expectations which might be frustrated by a securities market
downturn or a major industry operations problem. The result could be a significant
blow to public confidence in investment companies. What role should the Institute
assume to help the industry maintain public confidence?
2. Technology: Industry growth has been substantially facilitated through adaptation of
new information technologies. Numerous regulatory, legislative and operational
questions of industry-wide importance are raised related to the use of new technology.
Is the Institute adequately equipped to help the industry respond to these new concerns?
3. Globalization: The financial services industry and financial markets have become global.
US investment companies are investing worldwide. US investment advisers are seeking
markets for their services worldwide. Foreign funds and advisers are seeking entree into
the US market. What role should the Institute play in this process?
4. Financial Services Restructuring: Banks, insurance companies, securities firms, industrial
companies, foreign firms as well as traditional investment advisory organizations are
now engaged in the investment company segment of the financial services business.
Some investment company executives fear that the fiduciary culture of the industry may
be lost or diluted by the entry of many new firms whose parent companies have a
different culture. How should the Institute respond to the needs of a much broader,
diverse membership?
B. The Institute surveyed member complex CEOs/Senior ICI Contacts about their needs and
priorities for the Institute. A report of the survey made to the Board on
May 6, 1998 showed the following principal findings:
1. Members believe the Institute is highly effective in the performance of its functions.
2. Members rate highly important the information services, regulatory and legislative work
and operational assistance provided by the Institute.
3. Members value membership more highly for the benefits it offers their particular
companies than for the benefits that are industry-wide. This is particularly true for small
and medium-sized companies; larger companies tend to place greater value on industry-
wide benefits.
4. Members believe that the current mix of ICI activities is about right to meet their future
needs and that the cost of ICI services is appropriate to the value members receive.
An executive summary of the results of the 1998 Membership Survey is attached for your information.
C. The paper prepared by Matt Fink addressed which entities the Institute should serve and
what it should do for those companies in the future. Several possibilities for expanding or
3contracting the definition of companies eligible for membership were considered, as were changes to
the list of ICI activities outside the core of regulatory and legislative work. Policy guidance developed
during the course of this study on the most significant of the questions raised in that paper is
included in the section of this report on specific issues below.
MAJOR CONCLUSIONS
Following a thorough review of material developed in the three tracks of the Future Role Study, the
Board of Governors concluded that ICI's historic focus on being the regulatory and legislative advocate
on behalf of companies registered under the Investment Company Act of 1940 and their shareholders is
the proper one to continue for the future. Most of the decisions as to whom the ICI should serve, what
it should do for those companies, and how it should respond to future issues flow naturally from this
central premise.
The Board also acknowledges that to be effective in the future ICI must achieve an appropriate balance
among three factors:
1. Concentration on the core legislative and regulatory mission where ICI can achieve
excellence and dominance.
2. Offering a breadth of programs sufficient to provide value to a wide array of members.
3. Inclusiveness of all segments of the industry in the policymaking mechanisms of the
Institute so that members do not feel compelled to develop a separate voice on policy
matters.
The Board of Governors notes that ICI's mix of policies, programs and participation has served the
membership well in the past and that the challenge is to maintain a balance that will work well in the
future.
DECISIONS WITH RESPECT TO SPECIFIC ISSUES
Issue 1. Downside risks: Should ICI substantially increase its public education/investor
awareness efforts, possibly including a major advertising program, to attempt to ameliorate adverse
public reaction to a precipitous or a prolonged market drop?
Current ICI Position: ICI conducts an extensive media relations program and a modest public
education/investor awareness effort. No resources are allocated to investor awareness advertising
programs. Being recognized as a leader in investor awareness initiatives is strategically necessary to
accomplish industry policy goals. Conversely, damage to the industry's reputation can have an adverse
effect on policymakers' disposition.
Board of Governors Guidance: The Board noted that 1) members are in a better position than
the ICI to communicate with their investors about risks and rewards, 2) ICI would have to spend a large
sum (e.g. $5-10 million) on institutional advertising to begin to have an impact on investors, 3) even a
campaign of that magnitude would have difficulty rising above advertising by members and other
financial organizations, and 4) ICI's present program of media education and support for public
initiatives such as the SEC's Investor Awareness Campaign continue to be the most effective use of
resources. Therefore, the Institute is directed to continue its media education and investor awareness
initiatives but it should not undertake a special advertising campaign directed toward the investing
public.
***
4Issue 2. Downside risks. What should ICI do to assist the industry to improve operations
systems and processes to handle major peaks in shareholder activity and to preserve integrity of
shareholder accounts against fraud?
Current ICI Position: Operations and fraud prevention activities are principal activities of ICI's
Operations Committee and Operations Department. ICI Mutual Insurance Company maintains a fraud
database and a fraud prevention program for its insureds. This past year a capacity planning paper and
workshop were developed to focus attention on this matter. ICI has convened a high level Technology
Task Force of members to receive guidance regarding downside risks and technology issues. The top
priorities for the Task Force are Year 2000 readiness and computer security issues. The Operations
Committee is developing industry utilities for IRA asset transfer, 401(k) processing, and IRA/financial
planner order processing; however, support for these utilities, both from within the industry and from
counterparties, has been slow.
Board of Governors Guidance: Implementation of enhancements to the ICI operations/fraud
prevention activities should remain in the hands of the Operations Committee and Technology Task
Force. ICI should support the development of industry utilities and standards and encourage members
to use them, though ICI should not take on operating responsibility for such entities. The FY 1999 ICI
budget includes resources for an enhanced effort to expand usage of industry utilities.
***
Issue 3: Technology: In the face of accelerating rates of technological innovation and consumer
acceptance of technology, ICI needs to be technologically proficient in order to help the industry with a
wide variety of legislative, regulatory, business standard and other issues that are likely to arise. Three
areas of particular concern are:
a) Year 2000 computer issues;
b) Computer security, especially as it relates to
shareholders' access to their accounts over the
Internet; and
c) Development of standards, procedures and regulations
for electronic commerce.
Current ICI Position: Professionals in the Legal, Operations, Information Services and
Legislative Affairs Departments work on industry technology matters, including Y2K, computer security
and electronic commerce. However, ICI does not have depth of technological expertise in its staff
comparable to that in other substantive areas. ICI has convened a high level Technology Task Force to
advise it with respect to technology matters.
Board of Governors Guidance: Assign to the Technology Task Force (and the Operations
Committee where appropriate) the role of advising ICI on its involvement in industry technology
matters. The Institute’s FY 1999 budget includes authorization to add a technologist to the staff.
***
Issue 4. Globalization: Financial markets have become globalized and many investment
management firms operate internationally. Many ICI members are involved in investing abroad,
operating funds abroad and managing non-fund portfolios abroad. What is the appropriate role for ICI
to assume?
Current ICI Position: ICI is active in four areas: 1) US fund investments overseas; 2) sale of US
investment company shares overseas; 3) the ability of US money mangers to sponsor and distribute
foreign-domiciled investment companies; and 4) the ability of US money managers to advise foreign
5pension funds and other private accounts. Two attorneys in the Legal Department provide staff support
to this effort. Legislative and research personnel are involved on a part-time basis. On April 17 the
Institute held a meeting of top executives of member companies active abroad for the purpose of
advising it on ICI's international activities. That group concluded that the ICI had been quite successful
to date, that its international activities should be enhanced and that more emphasis be given to areas 3
and 4 above.
Board of Governors Guidance: The Committee endorsed the consensus reached at the April 17
task force meeting, with the following additional recommendations:
! ICI should prioritize foreign issues and pursue those with the greatest potential impact
on members interests;
! ICI should continue to build relationships with counterpart associations overseas; and
! ICI should work with foreign regulators to develop standards that protect investors and
are compatible with US standards.
***
Issue 5: Financial Services Restructuring: The lines that traditionally separated securities firms
from banks and insurance companies have virtually dissolved. A large number of major investment
company groups are now part of financial conglomerates. Foreign financial conglomerates are entering
the US fund business. Inter-industry mergers are occurring frequently. The investment company
industry may be in danger of losing its clear definition as a separate line of business and, consequently,
ICI may become non-essential to companies which regard investment companies as just one of several
product lines used to gather assets. Should ICI expand its scope to represent a broader array of asset
gathering activities undertaken by its members and their affiliates, e.g. those of investment advisers
registered under the Investment Advisers Act of 1940, bank trust departments and insurance company
separate accounts?
Current ICI Position: Since its founding in 1940, the Institute’s primary focus has been the
representation of US investment companies on regulatory, legislative and tax matters. In addition to
representing investment companies, and since 1961 their advisers and underwriters, ICI has selectively
represented investment adviser members on non-fund matters, including federal investment adviser
legislation, rule-making by the SEC, Department of Labor and other federal agencies, and state laws and
regulations pertaining to investment advisers. In addition, associate membership is available to SEC
registered advisers who do not advise investment companies. There are approximately 500 associate
members that pay annual dues totaling $350,000. ICI has not represented other money managers such
as bank trust departments and insurance company separate accounts.
Board of Governors Guidance: Continue to maintain the focus of ICI on investment
companies registered under the 1940 Act, their investment advisers, underwriters and shareholders, with
no expansion of scope. The ICI's engagement on behalf of investment advisers on issues affecting their
non-investment company business should be pursued to the extent that it is compatible with ICI's basic
mission.
***
Issue 6: The "fiduciary culture" is the cornerstone of public confidence in the investment
company industry. Some observers suggest that the industry's "fiduciary culture" is in danger as a result
of rapid growth, new entrants and absorption of much of the industry into larger financial services
companies. What should ICI do to preserve the "fiduciary culture" of the industry?
6Current ICI Position: Many ICI activities, including the Directors Services Program, ICI
conferences and seminars, and compliance education and training courses, help maintain the "fiduciary
culture". Participation in ICI committees is a major way the culture of the industry is passed along. ICI
has an active program to bring new fund groups into membership and to make them aware of
educational, training and committee service opportunities. ICI represents almost all mutual fund groups,
having 98% of total mutual fund assets.
Board of Governors Guidance: Defining "fiduciary culture" and determining whether someone
does or does not have it is very subjective. ICI should continue current efforts to recruit all industry
participants into membership and to involve both new and seasoned members in committee work,
conferences and seminars, mailing lists, etc.; but ICI should not become a self-regulatory organization.
Instead, ICI should continue to pursue legislation and regulation that promote fiduciary principles,
support voluntary standards such as the Blue Ribbon Committee's recommendations on personal
investing and produce papers on best practices.
***
Issue 7: What should be ICI's role with respect to education and training of industry personnel?
Current Situation: ICI education and training activities consist of three components: 1)
Sponsorship of fourteen major annual conferences. 2) Sponsorship of regional workshops on subjects
such as SEC filings, blue sky compliance, portfolio compliance and shareholder communications. 3)
Production of basic study courses (many of which are self-taught, computer-based) and co-sponsorship
with the National Endowment for Financial Education (NEFE) of the Chartered Mutual Fund
Counselor Program. Much of this menu is compliance oriented. Some ICI training programs are being
used by members to help comply with NASD continuing education requirements, which are growing.
All training and education programs were developed in response to member demand and in aggregate
are self-financing. There is no member subsidization through dues. Furthermore, according to the
recent Membership Survey, these activities are part of the glue that holds a diverse membership together:
80% of respondents said they value ICI membership for the specific services it provides to their
companies.
Board of Governors Guidance: Continue member education efforts through conferences,
seminars and training courses at the current level of effort. These activities promote high ethical
standards, help insure compliance with applicable law and regulation, and directly respond to member
requests. They help preserve and lend credibility to ICI's reputation, which has been extremely valuable
when issues relating to SEC resources and calls for formal industry self-regulation are raised. The
current educational and training programs are self-financing and the market will determine if and when a
particular program has outlived its usefulness.
***
Issue 8: Should ICI engage in marketing support activities? If not, what should it do with
committees that formerly engaged in marketing support?
Current Situation: During the 1980s in response to member interest, ICI developed a variety of
marketing support activities through six committees under the supervision of the Marketing Policy
Committee. In recent years, the overwhelming public acceptance of mutual funds has made these
efforts superfluous. Consequently, during the 1990s ICI shifted resources away from marketing support
to policy-oriented purposes. Thus, the rationale for retaining ICI marketing-related committees is
questionable. However, many members of these committees would likely prefer that ICI continue to
support these activities. Indeed, ICI recently received a request that it consider establishing a new
7committee to serve as an information exchange and possible advocate for policies needed to facilitate
member activities on the Internet. The seven affected committees are:
Marketing Policy Public Information
Research Industry Statistics
Direct Marketing Sales Force Marketing
Shareholder Communications
Board of Governors Guidance: Although the ICI is no longer involved in marketing support
activities, most of these committees appear to serve other useful functions. Dissolution of these
committees would likely lead their members to forums outside of ICI, which is not a preferable result if
it leads to strengthening competing industry voices. Therefore, with the exception of the Marketing
Policy Committee whose supervisory function is no longer needed, the former marketing-related
committees should continue to function in their current roles.
***
Issue 9: Should ICI undertake representation of variable insurance products?
Current Situation: Variable annuities are among the fastest growing segments of the investment
company business. More than 1,000 funds that serve as the underlying investments of variable insurance
contracts are members of ICI. Many such funds are associated with member mutual fund groups,
although a number of stand alone variable annuity groups are also members, presumably to receive ICI
services that benefit all investment companies. However, ICI has never represented the particular
interests of variable annuities, such as insurance tax issues and SEC variable annuity issues, but has been
asked to do so several times by members. Historically, ICI determined every time the question was
raised that it should not assume that role. However, many ICI members now sponsor variable insurance
funds. If ICI were to undertake overall representation of variable insurance funds, it would have to
acquire new expertise in some areas of the federal securities and tax laws and, more importantly, under
state insurance laws. Also, it would have to face the issue of whether or not to promote and protect the
special tax-deferred nature of variable insurance products when to do so might conflict with the interests
of mutual funds.
Board of Governors Guidance: ICI's primary mission is to represent investment companies
registered under the 1940 Act, the overwhelming number of which are mutual funds. Therefore the ICI
should not undertake the general representation of variable annuities because of possible conflicts with
its primary mission. It should cautiously support variable annuities on issues where to do so will not
compromise ICI's primary mission.
***
Issue 10: Should ICI admit service providers to US investment companies (i.e. independent
transfer agents, custodians and third party administrators) into some form of membership?
Current Situation: At times service providers such as transfer agents, custodians and accounting
firms have sought some form of membership in ICI. They argue that they should be represented in
policy decisions that can have a significant impact on their business. Service providers have also pointed
out that some competitors, through affiliations with member groups, already have access to ICI
committees and other desired services. To keep the service community informed, the ICI has made
many of its services for members (memoranda, training materials, conferences, etc.) available for fees. A
number of service providers as well as members of independent public accounting firms are represented
on advisory committees to the Operations Committee. The National Investment Company Service
Association has arisen to serve the needs of the service community.
8Board of Governors Guidance: In order to maintain ICI's primary focus on it mission of
serving investment companies regulated under the 1940 Act and their shareholders, ICI should not
admit service providers to membership.
***
In presenting the results of the Future Role Study to the Board of Governors, Don G. Powell, Chairman
of the Future Role Study Subcommittee, commented that the Institute’s Executive Committee had been
extremely pleased with the disciplined process, the wide range of member participation, and the
conclusions the study reached. As the Institute’s recently installed Chairman, I am pleased to have this
clear guidance as background to the policy decisions the Institute will be called to make in the years
ahead.
John J. Brennan
Chairman
Attachment