A congressional subcommittee may ask the Securities and Exchange Commission to study how derivatives are used in the mutual fund industry, a congressional aide said last week.
"We are considering making such a request," an aide to Rep. Edward J. Markey, D-mass., said. "We want regulators to know that that's an issue we are concerned about. We have questions about the possible risks involved."
Some of the concerns center on whether mutual funds are using derivatives appropriately. For example, one question involved the use of derivatives as speculative instruments to prop up yield, rather than as hedging techniques, the staff member said.
The request would be an outgrowth of congressional hearings on the mutual fund industry held in July and August. The hearings were sponsored by the House Energy and Commerce subcommittee on telecommunications and finance, chaired by Markey.
The hearings covered a number of issues related to the state of the mutual fund industry, such as regulation, fees, and the SEC'S role in monitoring the burgeoning market. Questions involving the use of derivatives also were raised.
Currently, no hearings are expected on the use of derivatives, the Markey aide said. Instead, the subcommittee is reviewing existing reports on the use of derivatives to determine whether a separate SEC evaluation is needed. The subcommittee also is awaiting the release of a report by the General Accounting Office on derivatives, which is expected before the end of the month.
In testimony before the congressional panel, executives of several of the nation's largest mutual fund organizations said they supported proposals to provide the SEC with adequate resources to continue to oversee the mutual fund industry.
The executives also voiced support for a reevaluation of the SEC's resources and a possible increase in its oversight capabilities over the mutual fund industry.
Any legislation resulting from the hearings might initially address proposals in an SEC report done last year on the mutual fund industry, the Markey aide said.
The most critical reason that mutual funds have succeeded has been public confidence in the industry, said Matthew P. Fink, president of the investment Company Institute. The institute is the trade organization of the mutual fund industry.
The mutual fund industry was launched in 1940 with 68 funds totaling less than $500 million in assets. Since then the industry has grown to more than 4,000 funds totaling more than $1.7 trillion in assets, Fink said.
While the industry has expanded rapidly in the last decade, the SEC's resources devoted to regulating the industry have not grown at a similar pace, he said.
"From 1982 to 1992, the number of investment companies increased by 133%, and assets by 344%, yet SEC staff devoted to investment company regulation increased by only 74%," Fink said.
"As the SEC recently testified, the situation is ~ironic given that last year the SEC collected over $80 million in fees from mutual funds-... [but was] only allowed to use $18 million of these fees with the $62 million balance diverted to pay for other federal spending,'" Fink said. Thus, mutual funds are paying far more in fees than the SEC spends on mutual fund regulation.
"For these reasons, we strongly support efforts to provide the SEC with greater resources to oversee the mutual fund industry in the future," he said.
The House telecommunications and finance subcommittee has jurisdiction over securities. The subcommittee and its parent, the House Energy and Commerce Committee, oversee securities markets activities, participating firms, and the agencies that regulate participation and exchanges throughwhich securities are traded. .
The Securities and Exchange Commission, the Municipal Securities Rulemaking Board, and the National Association of Securities Dealers all fall under the jurisdiction of the Energy and Commerce Committee and the telecommunications and finance subcommittee.
Mutual funds are regulated under four of the federal securities laws: the Securities Act of 1933; the Securities Exchange Act of 1934; the Investment Advisers Act of 1940; and the Investment Company Act of 1940.
However, mutual fund investors' deposits are not secured by any type of federal insurance, as are regular bank deposits.
A large part of the subcommittee's work will focus on efforts to increase funding and manpower at the SEC, so the agency can broaden its examination of mutual fund companies beyond the major firms and largest funds in the industry, the Markey aide said.
