July 23, 1993
TO: BOARD OF GOVERNORS NO. 64-93
MEMBERS - ONE PER COMPLEX NO. 48-93
RE: INSTITUTE TESTIFIES AT CONGRESSIONAL HEARING ON MUTUAL FUND
INDUSTRY
__________________________________________________________
On July 22, the Institute testified before the Telecommunications and
Finance Subcommittee of the House Energy and Commerce Committee at a hearing on
the "general state of the nation's mutual fund industry."
The other witnesses at the hearing were: Robert Egelston, Former Chairman,
The Capital Group; Edward C. Johnson 3d, Chairman & CEO, Fidelity Management and
Research; Thomas R. Powers, Chairman of the Board, Transamerica Fund Management;
and Arthur Zeikel, President, Merrill Lynch Asset Management.
Institute Testimony
In its testimony, the Institute provided a general overview of the mutual
fund industry. Specifically, the Institute described the growth of the industry
since the enactment of the Investment Company Act of 1940, noting that the growth
in mutual fund assets is due to both capital appreciation of portfolio securities
and to new sales.
The Institute attributed the popularity of mutual funds to a number of
factors, including new types of funds, improved shareholder services, increased
investment in mutual funds by retirement plans and by institutional investors,
new channels of distribution, a shift by individuals from direct investment in
securities and CDs into mutual funds, and additional investments by existing
shareholders. The Institute testified that the most critical reason for the
industry's growth is public confidence in the industry, which is based on the
strict regulatory regime to which mutual funds are subject.
The Institute recommended several legislative and regulatory changes that
are necessary to ensure that the high level of investor protection afforded to
mutual fund shareholders continues and to meet new and anticipated investor
needs. In doing so, the Institute testified that the most critical need is to
ensure that the SEC is provided with adequate resources to oversee the industry
in the future.
The Institute's testimony also discussed the educational efforts undertaken
by the industry to explain to the public the risks, as well as potential rewards,
of investing in mutual funds to ensure that investors do not have unrealistic
expectations when they purchase mutual fund shares.
In addition, the Institute testified on the mutual fund industry's role (1)
in the economy through its effect on overall capital formation and on capital
markets and (2) in the marketplace, particularly in its ability to act as a
"shock absorber" helping to cushion against sharp price changes, as demonstrated
by the fact that in the 1987 stock market break mutual funds were able to meet
most shareholder redemptions from their cash reserves, rather than through the
sale of portfolio securities.
Finally, the Institute expressed two concerns with respect to the
internationalization of the mutual fund industry. First, the Institute testified
that the U.S. should negotiate to secure better access for U.S. mutual fund
managers seeking to enter foreign markets. Second, the Institute opposed any
changes to the Investment Company Act that would permit foreign funds to be
distributed in the U.S. without complying with the basic investor protections
applicable to U.S. funds.
Chairman's Statement
In his opening statement, Chairman Markey noted the tremendous growth of
the mutual fund industry, which he said had "developed into a genuine American
success story." He explained that the hearing was scheduled not because of any
perceived problems but rather to examine, in light of the industry's growth,
whether the Investment Company Act of 1940 "remains fundamentally sound," and
whether the Securities and Exchange Commission has the resources to ensure
compliance with the Act.
PROMPT(`PRINTNESTFORM(NEXTRECORD CHAINMACRO( f the Institute"s and
other witnesses" testimony and of Chairman Markey"s opening statement are
attached.
Matthew P. Fink
President
Attachments