The storm warnings are up. Even during the current mutual fund boom, policymakers in Washington have been expressing concern over mutual fund growth in general, and of bank involvement in the fund business in particular. If and when the tide turns, policymakers' concerns are likely to intensify.
What can be done now to ensure that governmental scrutiny of bank mutual fund activities, including possible legislation, will be balanced and constructive rather than harsh and punitive?
The best solution would be legislation - now, in a noncrisis atmosphere - that ratifies bank entry into the mutual fund business and sets basic ground rules governing bank mutual fund activities.
Underwriting Power
The legislation should do two things. First, it should grant banks full mutual fund powers - for example, authorizing banks to underwrite mutual funds without the need to employ third-party underwriters, and permitting bankers to serve on fund boards.
Second, the legislation should close regulatory gaps - for example, requiring all sales personnel to register as broker-dealers. Both sets of provisions - granting powers and closing gaps - should be included.
In 1991, Congress, as part of comprehensive banking legislation, considered these types of provisions addressing bank mutual fund activities. Unfortunately, when the overall banking legislation died in 1991, these provisions died with it.
If the opportunity presents itself, it would serve the public interest, and the interests of the banking and mutual fund industries, to seek enactment of such legislation. As long as these issues remain open, there will be concern by policymakers and the possibility of adverse legislation.
What the Industry Can Do
Absent such legislation in the near future, we should consider what constructive measures the industry and the regulatory agencies can take, without congressional action.
Early last spring, the Investment Company Institute undertook a comprehensive survey o the requirements that the various regulators place on banks and bank affiliates that sell mutual fund shares. We found that the various regulators have different, and often conflicting, requirements.
At about the same time, learned that each of the different banking agencies was preparing to adopt its own set of additional regulations. The institute convened a committee that agreed on a set of proposed guidelines, which we provided to all of the regulatory agencies.
We urged the various agencies to work together in a coordinated fashion and to promulgate similar, if not identical, requirements.
Regulation Is Needed
Some of you may find it surprising that the Investment Company Institute, an industry trade association, asks government agencies to develop regulation. I must say that, while the mutual fund industry does not favor needless regulation, our experience is that sound regulation is essential for the protection of the public and for building and maintaining public confidence in the mutual fund industry.
These conditions - investor protection and public confidence - are ones that we have long recognized as critical, indeed indispensable, for our industry's success. Therefore, we will continue to call for regulation whenever it is needed.
But even if Congress were to enact the type of legislation that I have outlined, and even if all of the agencies were to use the utmost wisdom in devising regulations, the fate of bank involvement in the mutual fund business ultimately will depend on individual firms conducting their mutual fund activities on a responsible basis.
Rules of Thumb
In early May, at the institute's meeting of its bank members, a speaker set forth 10 rules of thumb for bank mutual fund sales activities:
1. Emphasize advance planning and preparation.
2. Avoid misleading names.
3. Develop a code of conduct for employees involved in sales and marketing activities.
4. Actively supervise employees involved in sales efforts.
5. Provide potential customers with full disclosures.
6. Direct inquiries to qualified, trained sales representatives.
7. Know your customers.
8. Know your investment products.
9. Satisfy the most, not least, stringent standards established by banking regulators.
10. Recognize that the worst enemies of good procedures are perfect procedures.
Free-Market System
For over 50 years, mutual funds have operated under a regulatory system characterized by virtually free entry, full disclosure, prohibitions against self-dealing, and economic transparency, with a reliance on free market forces and a total absence of government subsidies or a federal safety net.
The growth and popularity of mutual funds in recent years have produced two very different reactions in the banking community. On the one hand, progressive bankers have sought to compete in this new market.
But other bankers are urging government to stifle bank and nonbank competitors in the fund business by imposing measures that would penalize fund shareholders. They have suggested the imposition on mutual funds of community reinvestment lending requirements, federal insurance premiums, reserve requirements, and the like.
When the growth of the mutual fund industry raises legitimate public policy issues, you will find us willing participants in that debate.
