December 15, 1995
TO: ACCOUNTING/TREASURERS COMMITTEE No. 57-95
BOARD OF GOVERNORS No. 79-95
FEDERAL LEGISLATION MEMBERS No. 26-95
MEMBERS - ONE PER COMPLEX No. 109-95
PUBLIC INFORMATION COMMITTEE No. 49-95
SEC RULES COMMITTEE No. 128-95
STATE LIAISON COMMITTEE No. 33-95
RE: INSTITUTE TESTIFIES ON STATE-FEDERAL REGULATION OF MUTUAL
FUNDS
______________________________________________________________________________
In early December, Institute President Matthew P. Fink testified before the House of
Representatives Telecommunications and Finance Subcommittee on H.R. 2131, the "Capital Markets
Deregulation and Liberalization Act of 1995", on federal-state regulation of mutual funds. (Also, see
Memorandum 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; and State Liaison Committee No. 31-95, dated October 26, 1995.)
Institute Testimony
In its testimony, the Institute addressed the federal-state regulatory proposals in
H.R. 2131. 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 strongly encouraged Congress to move without delay to place sole authority for
review of mutual fund prospectuses and advertisements in the hands of the SEC and NASD. Likewise,
the Institute recommended that authority over investment limitations and other substantive
requirements should be established exclusively at the federal level. The Institute noted that the states
play a critical role in fraud and sales practice enforcement and investor education, and that redefining the
federal-state partnership as the Institute recommends would allow states to focus more resources on
these areas. The Institute also advocated that states should retain the authority to receive notice filings
and fees from mutual funds, thereby providing the revenues necessary to support enforcement and
educational programs.
The Institute emphasized that the time was ripe for Congressional action regarding mutual fund
regulation, pointing to the broad general support for the proposal and the exhaustive amount of study
that has already been given to the issue.
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Other Testimony
Other witnesses were in agreement with legislation to redefine the federal-state relationship for
securities regulation, particularly with regard to the mutual fund industry. The Securities Industry
Association, the American Bankers Association, and the Managed Futures Association, expressed strong
support for such legislation. In addition, Professor Mark Sargent (University of Maryland School of
Law) said states should focus on anti-fraud enforcement, and monitoring the activities of broker-dealers,
leaving all other aspects of the securities industry to the federal government. Professor Rutherford
Campbell
(University of Kentucky, School of Law) agreed, adding that state bureaucrats should not control the
flow of capital into the market. (In testimony on H.R. 2131 in November, SEC Chairman Arthur Levitt
also stated that reallocating the federal-state regulation of mutual funds could be done "without
compromising investor protection." Levitt proposed that "investment companies [would] be exempt
from state review, but [would] continue to file documents with the states and pay the same fees...the
states would still enforce sales practice violations.")
Although Dee Harris, President of NASAA, stated his general opposition to "sweeping federal
pre-emption of state securities laws," he acknowledged the national character of the mutual fund
industry and indicated an openness to discussion of a federal resolution of state review of
investment company offerings. Harris explained the work of a newly appointed Task Force to study
the issue of federal-state regulation. When questioned by Chairman Fields concerning the timing of
any recommendations from the Task Force, Mr. Harris offered that the Task Force expected to
complete its work in April but may be willing to move forward earlier on changes in discrete areas of
state securities laws.
We will keep you informed as this matter develops. Copies of the Institute's oral and
supplemental testimony are enclosed. For those members with access privileges, this memo, without the
attached testimony, can be found on ICINet. For additional information, please contact as follows:
Legislative Affairs 202-326-5890
Media Relations 202-326-5860
ICINET 202-326-5933
Julie Domenick
Senior Vice President
Public Affairs
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