(1) INSTITUTE TESTIMONY ON FEDERAL/STATE REGULATION (2) SEC CHAIRMAN LEVITT'S SPEECH

October 26, 1995 TO: BOARD OF GOVERNORS No. 73-95 FEDERAL LEGISLATION MEMBERS No. 23-95 MEMBERS - ONE PER COMPLEX No. 93-95 SEC RULES COMMITTEE No. 114-95 STATE LIAISON COMMITTEE No. 31-95 RE: (1) INSTITUTE TESTIMONY ON FEDERAL/STATE REGULATION (2) SEC CHAIRMAN LEVITT’S SPEECH ______________________________________________________________________________ (1) Institute President Matthew Fink was scheduled to testify before the House Commerce Subcommittee on Telecommunications and Finance on October 24 regarding federal/state regulations. The hearing was cancelled late on October 23 and rescheduled for November 14. In preparation for the hearing, Institute testimony was distributed to the Congress, the media and others. In its testimony, the Institute addressed the state/federal regulation provisions of H.R. 2131, the "Capital Markets Deregulation and Liberalization Act of 1995." Calling the measure an extremely important initiative, the Institute described it as offering "the opportunity to revise a system that has resulted in regulatory conflict, duplication, inefficiency, and, most importantly, harm to investors" and urged Congress to achieve a rational reallocation of regulatory powers between the Federal government and state securities regulators. The Institute noted that mutual fund investors need an allocation of federal and state responsibilities "that reflects the fact that mutual funds are sold in a national marketplace." Moreover, the Institute continued, the current system frustrates national policies designed for investors benefits (such as prospectus simplification); hinders innovations in products and services that are beneficial to fund shareholders; imposes needless compliance burdens on funds; and diverts state resources away from areas where state action is needed. Specifically, the Institute urged that review of fund prospectuses and advertisements should be lodged exclusively with the Securities and Exchange Commission and National Association of Securities Dealers, while preserving the states
valuable role in aspects of securities regulation such as enforcement and education. The Institute pointed out that this model of regulation has been adopted in a number of states, to the benefit of their investors, and that the mutual fund industry did not object to state notice filings and payment of fees -2- to support these functions. The Institute urged Congress to adopt such a regulatory scheme nationwide in order to insure "that all investors in each of the 50 states receives the full benefits of this more rational approach to mutual fund regulation." (2) On October 23, SEC Chairman Arthur Levitt addressed the North American Securities Administrative Association (NASAA) on this subject and generally agreed with the Institute’s position. In his speech, a copy of which is included, Chairman Levitt noted that regarding investment companies "a strong argument can be made that reducing [State regulatory] oversight will not compromise investor protection." Levitt continued: "The fact that fund sales are national also makes a good case for national regulation. Some of the stories told about the current system sound like Kafka: What is a national investment company supposed to do when several states impose investment limitations that conflict with federal law -- and conflict with one another? As I see it, investment companies would be exempt from state review, but would continue to file documents with the states and pay the same fees. The Commission would continue to seek input from NASAA in our rulemaking process with respect to investment companies. And of course, the states would still enforce sales practice violations." Please see page 5 of the Levitt speech. We will keep you informed as this matter develops. For additional information, please contact the Legislative Affairs Department at (202) 326-5890. This memo can be found on FUNDS, the Institute
s Fund User Network and Delivery System, under "Legislative Affairs; Washington Update." Copies of the Institute testimony and the Levitt speech are enclosed. Julie Domenick Senior Vice President Legislative Affairs Attachments