Giving the Federal Reserve Board sweeping authority over financial services conglomerates would stifle creativity in the securities market and fail to protect investors, the head of the mutual fund industry's trade group said Monday.
Speaking to a large gathering of investment management executives, Matthew P. Fink, president of the Investment Company Institute, argued against a proposal in Congress that would make the Fed an "umbrella regulator." That structure would give the Fed authority to regulate a bank holding company as well as all of its subsidiaries, including securities firms and mutual funds.
The Fed would "seek to impose banking doctrines of safety and soundness on securities firms," Mr. Fink said. "As Securities and Exchange Commission chairman (Arthur D.) Levitt has warned, this would 'constrain securities firms' ability to respond quickly to market movements and could change the risk-taking character of the securities business.'"
Mr. Fink's remarks set the stage for the annual mutual fund and investment management conference sponsored by the Federal Bar Association and the Investment Company Institute Education Foundation. Keeping mutual fund regulation up-to-date against a background of cross-industry mergers, increasing globalization, and rapid growth promises to be a key topic of the gathering, which drew 1,600 people.
As banks and securities firms continue to enter one another's businesses, Mr. Fink said too little attention has been paid to how new financial giants will be regulated. Banking laws, like the Bank Holding Company Act, value the soundness of institutions, while securities law look to protect investors, he said.
If given broad oversight for financial conglomerates, banking regulators' emphasis on safety and soundness could limit the types of mutual funds offered to investors, Mr. Fink said.
For example, an umbrella regulator might have barred or restricted money market funds in the early 1970s because they competed heavily against bank deposits, thereby threatening banks' safety, Mr. Fink asserted.
Mr. Fink offered some other frameworks for regulating financial services firms, including eliminating the use of an umbrella regulator and relying on functional regulation instead. Another possibility is limited umbrella oversight of subsidiaries or using an umbrella regulator only for financial services firms with large banking units.
"It would be unfortunate if, after so many years of debate, Congress were to enact legislation that successfully addresses the issue of powers but only deals with regulations as an afterthought," he said.
"It would be particularly ironic if the highly successful system of securities regulation is replaced by an inappropriate system of bank regulation," Mr. Fink said.
Barry P. Barbash, director of the SEC's division of investment management, also addressed the impact of mergers and acquisitions on the investment management business.
Consolidation will eventually decrease the number of distribution channels open to mutual funds, potentially driving up delivery costs for investment advisory firms, he asserted in a speech Monday. If those costs are passed along to investors that could become an issue once people begin to take a closer look at fund expenses.
"Most investors are blissfully unaware of how much they pay for funds," Mr. Barbash said. "When economic times are good, investors are oblivious to cost. At some point, we are going to be faced with penny-pinching consumers."
He also said the success of financial services mergers will depend on how well new entities can integrate their different regulatory systems. Too often, he said, compliance staffs are hastily eliminated after a merger in an effort to cut costs.
