[11911]
May 26, 2000
TO: BOARD OF GOVERNORS No. 30-00
PRIMARY CONTACTS - MEMBER COMPLEX No. 34-00
SEC RULES MEMBERS No. 35-00
RE: ICI 2000 GENERAL MEMBERSHIP MEETING SPEECHES
______________________________________________________________________________
Paul Roye, Director of the Securities and Exchange Commission’s Division of Investment
Management, John J. Brennan, Chairman of the Institute’s Board of Governors, and Institute President
Matthew P. Fink spoke at the Institute’s 2000 General Membership Meeting. Copies of their speeches
are attached, and they are summarized below.
Paul Roye’s Address
Paul Roye’s address focused on the impact of new technological advances on the mutual fund
industry in three key areas: (i) changes in market participants; (ii) fund fees; and (iii) fund advertising.
With respect to changes in market participants, Mr. Roye noted that many industry competitors are
aggressively questioning the benefits of fund ownership and are trying to lure fund investors with new
products, such as on-line trading. Mr. Roye cautioned that in response to this competitive environment
funds will have to demonstrate that they can provide value, service and performance at competitive fee
levels.
On the topic of fund fees, Mr. Roye stated that competition among funds and from other
financial products is going to force funds to become more sensitive about the fees that they charge. He
noted that the Commission’s long-standing priority to focus investor attention on the impact of fund
fees prompted the Commission’s recent proposal for funds to disclose the effects of taxes on fund
performance. Mr. Roye mentioned that both the General Accounting Office and the Division of
Investment Management are in the process of completing independent studies of mutual fund fees. Mr.
Roye stated that the Commission has no desire to become the arbiter of appropriate fee levels. Instead,
the Investment Company Act envisions regulating fees through standards designed to reduce conflicts of
interest and full disclosure. In this regard, Mr. Roye noted that the fund governance proposals issued by
the Commission last year were designed to give directors greater power to act in the best interests of
shareholders, including in the review of fund fees.
Finally, Mr. Roye cautioned that funds should not “respond to the new competitive
environment with overly aggressive advertising.” He stated that through its recent enforcement actions,
the Commission has tried to send the message that the misuse of performance information to mislead
investors will not be tolerated. Mr. Roye praised the ICI for its recent public service advertisements that
cautioned investors not to place too much
2emphasis on mutual fund performance, and applauded those funds that have attempted to place 1999’s
extraordinary returns in proper perspective in their communications with investors.
Chairman’s Report
Mr. Brennan’s report focused on the industry’s accomplishments and some of the challenges it
will face moving forward. He stated that 1999 was an impressive year of accomplishment for the
industry in terms of its expanding client base, growing assets, and significant cash flow. Mr. Brennan
noted that the industry’s progress on fund governance, particularly the Report of the Advisory Group on
Best Practices for Fund Directors, which extends well beyond current law and practices, represents a
significant accomplishment in 1999.
With respect to the future, Mr. Brennan highlighted several areas in which the mutual fund
industry will continue to face challenges: (1) Investor Expectations – the industry must continue to
emphasize to investors the importance of reasonable expectations; (2) Benefits of Funds – the industry
must do a better job of defining its fundamental value proposition of sound investment products and
exceptionally good service at a fair price; (3) Investor Base – the industry should continue to focus on
broadening its shareholder base to reach out to different segments of the population; and (4) Asset
Velocity – annual redemption rates for stock funds increased in 1999, even though constant trading
activity in mutual funds is perilous both for those who engage in it and long-term shareholders. Mr.
Brennan concluded his remarks by noting that the industry’s greatest challenges and opportunities in the
coming years will relate to technology, a “double-edged sword” that poses “great hazards” for investors
while also offering opportunities for innovative products and services.
President’s Report
Mr. Fink’s report emphasized that the industry’s ability to carry its tradition of integrity forward
in a time of extraordinary change requires it to embrace change without abandoning the basic principles
that have been instrumental to its success.
Mr. Fink discussed three examples that demonstrate how the Securities and Exchange
Commission has effectively made use of its authority to serve evolving shareholder needs: (1) the
creation in the early 1970’s of money market funds with one dollar per share net asset values; (2) the
adoption of Rule 482 in 1979, which permitted funds to advertise performance; and (3) the 1998
overhaul of many of the rules governing fund prospectuses and the adoption of the fund profile rule.
Mr. Fink noted that these examples illustrate that the mutual fund industry must constantly identify and
work for regulatory innovations that allow it to better serve shareholders.
Mr. Fink also noted that “it is equally vital that we oppose change that would harm shareholders’
interests” by safeguarding the core protections of the Investment Company Act. In this regard, Mr.
Fink highlighted the Institute’s opposition to a 1999 proposal that effectively would have repealed
Section 17(a) of the Act, which prohibits principle transactions between a fund and its affiliates, and the
Institute’s success in ensuring that hedge funds received narrower exemptions from regulation under the
Act in 1996 than were being called for.
Mr. Fink also highlighted several examples that illustrate the Act’s continued vitality, including:
(1) the Commission’s proposed rules to modernize and strengthen key elements of the fund governance
provisions of the Act, as well as the best practices report for fund directors; (2) the implementation of
the historic Gramm-Leach-Bliley legislation that repealed the Glass-Steagall Act and modernized the
regulation of American financial services; and (3) the Commission’s roundtable to examine the
3regulation of investment advisers. In conclusion, Mr. Fink stressed that “to meet our shareholders’
needs, our business practices must change, but our business principles must not.”
Doretha VanSlyke Zornada
Assistant Counsel
Attachments
Note: Not all recipients receive the attachments. To obtain a copy of the attachments referred to in this Memo, please call
the ICI Library at (202) 326-8304, and ask for attachment number 11911. ICI Members may retrieve this Memo and its
attachments from ICINet (http://members.ici.org).