[9955]
May 22, 1998
TO: BOARD OF GOVERNORS No. 33-98
PRIMARY CONTACTS - MEMBER COMPLEX No. 40-98
RE: ICI 1998 GENERAL MEMBERSHIP MEETING SPEECHES
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Arthur Levitt, Chairman of the Securities and Exchange Commission, Don G. Powell, Chairman
of the Institute’s Board of Governors, and Institute President Matthew P. Fink each spoke at the
Institute’s 1998 General Membership Meeting. Copies of the speeches are attached, and they are
summarized below.
Chairman Levitt’s Address
Chairman Levitt’s address focused on the improvement of three critical areas necessary to
respond to investors’ needs: (1) investor education; (2) adequate communication to investors; and (3)
fund oversight and the role of directors. With respect to investor education, Levitt expressed concern
that the financial literacy of Americans has not kept pace with the growth of fund investments, which he
viewed as particularly troublesome because workers now are shouldering a significant portion of their
retirement planning through 401(k) plans and IRAs. Although Levitt praised the efforts of the Institute
and the mutual fund industry, he urged funds to do more to educate investors about how to safeguard
their financial future.
With respect to investor communication, Levitt called attention to the recent overhaul of the
mutual fund prospectus, the creation of the profile, and the Commission’s plain English initiative, but
expressed concern that some mutual funds may only make a few cosmetic changes to their prospectuses.
He also urged fund groups to look beyond their prospectuses in thinking of ways to communicate with
investors, and expressed concern that the industry may be building unrealistic expectations through
performance advertisements, noting that many ads seem to stress performance without outlining clearly
the impact of expenses or the nature of risks.
Finally, Chairman Levitt discussed the role of fund directors, and announced that the
Commission plans to host a roundtable this fall on fund governance, where investor advocates,
directors, fund managers, academics, and others will engage in a “lively exchange of ideas” to work
toward a consensus on whether changes are needed in the current system of governance.
Chairman Powell’s Report
Chairman Powell’s report focused on building investor knowledge and efforts to maintain
investor trust. Powell stated that building investor knowledge is an important element in developing
realistic shareholder expectations and identified ways in which mutual funds could help build such
knowledge, including open and honest communication with shareholders about the risks, as well as the
rewards, of their investments, and educating shareholders about the importance of planning and saving
for secure retirements and other long-term goals. Powell also discussed challenges and opportunities for
mutual funds in the future. One example of the former he mentioned, was the possibility of mutual
funds becoming a target for unrelated programs and taxes, such as the Community Reinvestment Act
and other “success taxes.” Among the opportunities he noted were the ongoing discussions held by
Congressional leaders on Social Security reform.
President Fink’s Report
President Fink’s report stressed the importance of maintaining and strengthening widespread
public confidence in mutual fund investing and focused on ways to prevent the two greatest threats to
public confidence in mutual funds from becoming a reality: unrealistic investor expectations, and
mismanagement by one or more companies that potentially could harm the entire industry’s reputation.
Regarding investor expectations, Fink identified the recent overhaul of the mutual fund
prospectus and the creation of the profile as government initiatives that can help investors form realistic
expectations. He noted that the Institute supports the Commission in its efforts to reform annual and
semi-annual reports. In addition, Fink urged other regulators to assist in the education effort including,
for example, the Department of Labor, regarding 401(k) plan disclosure, and Social Security reform.
Regarding the threat of mismanagement, Fink commented that the stringent prohibitions of the
Investment Company Act of 1940 have been instrumental in allowing the industry to avoid the problems
that have beset other financial industries. While emphasizing the Institute’s support for government
proposals that would tighten regulatory standards, Fink stressed the importance of opposing proposals
that would displace Commission regulation, and thus weaken investor protections, such as imposing the
Community Reinvestment Act on mutual funds.
Barry E. Simmons
Assistant Counsel
Attachments