Fund industry gets overdue scrutiny



When a House subcommittee held a hearing on the mutual fund industry in July, Chairman Edward J. Markey, D-Mass., began by quoting James Stockdale's words from the 1992 vice presidential debate: "Why am I here?"

Markey said industry executives also might have wondered why they were there, given the industry's avoidance of problems in the 1980s "almost alone among American financial services companies." But he said Congress needed to determine whether federal regulators still were able to protect investors in the fast-growing industry.

When a Senate subcommittee held a similar hearing a few days ago, Chairman Christopher J. Dodd, D-Conn., started the proceedings by also saying positive things about the industry -- and followed up by also quoting Stockdale's question.

Why did he call the subcommittee's "first hearing on the mutual fund industry . . . in more than 20 years?" Several reasons:

* To hear the case made by Securities and Exchange Commission Chairman Arthur Levitt -- and endorsed by the industry -- for beefing up fund inspections by letting the SEC keep more of the fees it collects from funds.

* To hear what steps firms have taken to strengthen their internal compliance systems, given the SEC's staff shortage.

* To hear whether the industry is prepared to deal with a bear market, if it occurs.

* To discuss banks' increased role in the industry, including the likelihood of investors mistakenly assuming that bank-sold fund shares are federally insured.

* To consider the consequences for retirees' standard of living as increased amounts of retirement assets go into conventional mutual funds and bank collective trust funds.

In advocating greater self-funding for SEC oversight programs, Levitt repeated familiar points. In 1983, for example, 43 examiners were each responsible for 148 portfolios having $7.9 billion in assets. By this year, each of 133 examiners was %J responsible for $16.9 billion of assets in 158 portfolios.

"The strain on our inspection staff has not come about simply because of the increase in the size and number of investment company portfolios," he said. "It is also the result of the many new types of funds, the complex financial instruments in which they now invest, the changing organizational and distribution structures of funds, and the geographical dispersion of fund service providers."

His comments seemed to be favorably received. Unlike the House of Representatives, which has passed legislation toward the self-funding goal, the Senate has been holding up action on technical points.

Both Levitt and President Matthew P. Fink of the Investment Company Institute addressed concerns that many equity fund investors -- especially those who have just cashed in bank certificates of deposit to buy fund shares -- would rush to redeem them if the stock market falls and thus make the fall worse.

Levitt, a former chairman of the American Stock Exchange, wasn't very worried. "In past periods of market stress, shareholders in equity funds have not responded so uniformly," he said. Some, he said, had moved into money market funds, some had switched funds, and others had viewed the periods as opportunities to buy additional shares.

"Nevertheless," he cautioned, "we recognize that the past is not necessarily a good predictor of future events in financial markets."

Fink cited recent studies to challenge the notion that much of the money flowing into mutual funds comes from people who are new to investing and who bought fund shares with the proceeds from maturing, low-yield CDs.

For example, one survey shows that only 8 percent of holders of recently maturing CDs moved the proceeds into stocks and funds.

Levitt used the occasion to release the sobering results of an SEC survey. Among its findings: 28 percent of respondents believe -- wrongly -- that all mutual funds sold through banks are federally insured.

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