WASHINGTON -- The sweeping revision in mutual-fund rules that will be unveiled this week figures to include good new and bad news for banks.
Some expected proposals, like the creation "hybrid" mutual funds designed to invest in relatively illiquid assets, could be a boon to banks looking for new ways to move commercial real estate loans off their books.
But the tradeoff could be lower profit margins on funds because of new reporting requirements, as well as tighter regulation of some bank trust department activities by the Securities and Exchange Commission.
Wednesday Unveiling
The SEC plans to announce a battery of proposals Wednesday to modernize laws governing the mutual fund business. The rules are the fruit of a two-year study.
To many banks, mutual funds are rivals, plain and simple. But increasingly, such funds are becoming and integral part of a package of investment options that banks offer their customers.
Mutual fund assets managed by banks had grown to $141 billion by the end of March -- or 10% of the $1.4 trillion invested in all funds, according to Geoff Bobroff, senior vice president, Lipper Analytical Services, Denver.
"The thing that is driving [banks] is the need for alternative products for clients that walk in and out of their branches daily," Mr. Bobroff said. "Sending money to someone else to manage just is not economical."
Still, bank have just begun to make inroads. About 70% of bank-managed mutual fund assets consist of money market instruments, not the equity and bond funds that dominate the traditional mutual fund business.
Coming Attractions
The SEC's recommendations aren't known. But a senior staff member said securitization is an area to watch.
What could change?
* Banks that engage in asset-backed arrangements have avoided regulation by the SEC, thanks to an exemption under the Investment Company Act.
But that might disappear. The market for these financings is, as the SEC noted in its 1990 request for comment, "huge, global, and still evolving." The securitization boom that began with mortgage-backed assets has spread to include credit card and auto-loan receivables.
* The SEC also want to bring some pension investments managed by bank trust departments under its purview. A catalyst for the SEC's concern is the boom in defined-contribution pension plans, such as 401Ks. Under these plans, employes allocate their own retirement dollars; the employer doesn't guarantee the results.
* A proposal that could be appealing to banks is one that would foster formation of so-called hybrid mutual funds.
A hybrid fund would redeem shares only at designated intervals: weekly, monthly, or quarterly. Because it would face only periodic liquidity demands, such a fund could invest in relatively illiquid assets.
"It could be a very food instrument to soak up some of the real estate that's overhanging the market," said Arthur C. Delibert, a lawyer at Kirkpatrick & Lockhart, Washington.
Such funds are called hybrids because they meld features of open-and closed-end funds, the two types that now exist.
