June 25, 1997
TO: BOARD OF GOVERNORS No. 40-97
PRIMARY CONTACTS - MEMBER COMPLEX No. 42-97
RE: GAO REPORT ON SEC REGULATION OF THE MUTUAL FUND INDUSTRY
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The US General Accounting Office recently released the results of its review of
the Securities and Exchange Commission’s oversight of investment companies. The
enclosed May 1997 Report, "Mutual Funds - SEC Adjusted Its Oversight in Response to
Rapid Industry Growth," concludes that the SEC has redesigned its procedures and
reallocated its resources to meet the regulatory challenges posed by industry growth.
The Report states that of the SEC’s six major regulatory programs, its investment
management program was the second smallest in fiscal 1990, and comprised about
twelve percent of the Commission’s total authorized positions. By fiscal 1996, it had
become the agency’s second largest regulatory program, accounting for almost twenty
percent of total authorized positions.
The Report notes that since 1990, the Commission has more than doubled the
number of staff available to conduct fund inspections. The Report finds that although
fund inspections have become more comprehensive and the number of deficiencies
uncovered has increased, few deficiencies have been serious enough to be referred for
potential enforcement action. The Report also states that violations of the Investment
Company Act typically do not involve fraud or investor losses, but rather are more
"technical" in nature.
The Report sets forth certain SEC observations on the mutual fund industry. For
example, the SEC’s conclusion that the mutual fund industry generally has been free of
scandal for the past two decades is noted. SEC officials also are cited in the Report as
crediting the mutual fund industry with support for "strong regulation and strict
compliance with the federal securities laws."
SEC Chairman Arthur Levitt’s comments on the Report (See Appendix 1)
commend the GAO and observe that the Commission has sought to direct its resources
so as to best serve investors while accommodating innovation and continued growth in
the industry. He states that the Commission is concerned, however, that continued
industry growth will require additional SEC resources to meet increasing demands on
the regulatory and examination programs.
The Institute will continue to support adequate funding for the SEC’s oversight
of the mutual fund industry.
Matthew P. Fink
Enclosure