At a Senate Banking Committee hearing on Sept. 14, Sen. Patty Murray, D-Wash., quizzed former regulators on whether it is desirable to extend the Community Reinvestment Act to nonbank financial institution, such as mutual fund companies. The response was a resounding no.
Among those who responded were former Securities and Exchange Commission Chairman Richard Breeden, now with Coopers & Lybrand; former Comptroller of the Currency John Heinmann, now with Merill Lynch, and former Federal Deposit Insurance Corp. Chairman L. William Seidman. Excerpts below.
MURRAY: [During the August recess] I heard over and over from banks that they felt they were at a competitive disadvantage because entities like mutual funds weren't held to regulations like CRA. Is that an issue that anyone here can comment on?
BREEDEN: I would, as the former regulator of mutual funds, note that banks have felt that they were at a regulatory disparity forever. They always complain about what their competitors can do and "there's greener grass on the other side of the fence."
[CRA] may make perfectly good sense for banks. It is a concept that is utterly foreign and almost impossible to conceive of how or why it would apply to mutual funds.
Mutual funds don't have a local chartering entity. They operate nationwide. They are not local institutions. The shareholders are in every state. How do you say that it's this community or that one? It's everywhere.
The charge of [mutual fund] directors is to make investments 100% in the sole interests of the shareholders, not to get into other forms of investing that wouldn't be in the shareholders' best interest.
The money in a mutual fund is not Merrill Lynch's money. It's not Fidelity's money. It's the customer's money. And what you would be doing if you tried to extend CRA to mutual funds would be expropriating a portion of the assets of the shareholders.
HEIMANN: This debate has been one that's building. I find myself somewhat in disagreement with Mr. Breeden. I would like to try to put it in a different perspective.
The fact of the matter is the commercial banks over the years have been at an increasing competitive disadvantage because of changes in technology and a host of other external happenings that have nothing to do with the actions of the Congress or of the banks themselves.
Because the banks have been imprisoned doesn't mean that the way you solve the problem is to throw a lot of other people in prison. The way to solve it is to decide ... how you use these funds, if in any way they are directed.
A mutual fund owner, it's his money. And I would point out that a depositor in a bank, it's his or her money, so the same situation applies.
The big difference has been historically that commercial banks and thrifts have had the benefit of deposit insurance and access to a payment system and the discount window.
CRA was born for a very good purpose, with which I thoroughly agreed at the time. But I think it's a very simplistic way that some of the bankers are talking about it -- put everybody in jail to solve the competitive problem. [CRA] has to be rethought, but that's not the way to do it.
SEIDMAN: I think CRA is antiquated, out of date, and no longer ought to apply to the banking industry either.
The banking industry is no more local than the mutual fund is. I mean, banks are all over, and with what's coming with interstate banking, they will become national institutions in how they reinvest in their community.
I would say to your bankers, the worst think I could think they could do would be to try to apply [CRA] to mutual funds.
