New SEC chief defends funds' use of 'derivatives'


August 06, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Washington Bureau

WASHINGTON -- Arthur Levitt Jr., the chairman of the Securities and Exchange Commission, resisted congressional pressure yesterday to restrict mutual funds' use of one of Wall Street's fastest-growing forms of investment -- financial derivatives.

The new head of the investment monitoring agency told members of a House panel that there was no "present danger" to ordinary investors from the funds' use of derivatives -- financial instruments that are based on underlying securities traded outside the normal clearance and settlement system.

Countering congressional concern that investors, particularly the elderly, could be hurt, Mr. Levitt, a former chairman of the American Stock Exchange, said that derivatives are used by fund managers mainly to "hedge risk."

"I don't think there is sufficient evidence that we have at this point that the use of derivatives by the funds provides a significant danger," he said.

Asking rhetorically whether the use of derivatives could increase investment dangers and whether their presence in a portfolio should be disclosed in fund prospectuses and advertisements, he replied, "Absolutely."

But asked directly by Rep. Edward J. Markey, the Massachusetts Democrat who heads the House subcommittee on telecommunications and finance, whether limits should be placed on the ability of mutual funds to invest in derivative products, he said, "In terms of legislating against the use of derivatives, I think we would be taking away from the funds a legitimate device for protecting against unnecessary risk, and I think that would be a mistake to do."

The SEC chief outlined the explosive growth of the investment industry, whose assets have doubled every four years since 1980 and amount to nearly $2 trillion.

Assets of mutual funds, the major growth sector for investments, multiplied from $135 billion to $1.7 trillion between 1980 and April this year. This represented an increase of more than 1,100 percent, five times the growth rate of insurance companies' assets in the same period.

A major factor in the funds' growth has been retirement investments, with individual retirement accounts worth $211 billion now lodged with mutual funds.

"We expect pension money to continue to pour into mutual funds," Mr. Levitt said, noting that banks had also entered the mutual fund business, prompted by low interest rates for their traditional products, anxiety about losing customers and an interest in gaining fee income.

The SEC's ability to monitor investment companies has lagged behind the expansion, with each member of the agency's management staff responsible for an average of 87 portfolios with $8.9 billion in assets, compared with thrift and credit union regulators, who are each responsible for monitoring an average of $150 million in assets.

"I believe these figures show a dangerous shortfall in the commission's resources to oversee one of the fastest-growing and most important segments of the financial services industry," Mr. Levitt said.

Questioned by Mr. Markey on whether the SEC's 13 inspectors were enough to monitor investment advertising nationwide, Mr. Levitt said: "I think we have to beef up these resources. They are clearly inadequate."

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