With more than $4 trillion of assets, the mutual fund business has expanded into many other industries, including banking. At a mutual fund conference in Orlando last week, sponsored by the Federal Bar Association and the Investment Company Institute Education Foundation, ICI president Matthew P. Fink spoke about the regulatory systems that fund companies now encounter as a result of the industry's expansion. The following is excerpted from his remarks:
A series of laws, such as the Glass-Steagall Act and the Bank Holding Company Act, produced a system under which financial services were strictly segregated.
Market developments, technological change, and regulatory actions have eroded these historic separations. Simply put, financial service providers are in one another's backyards.
Ancient battles over powers are fast becoming moot. There is a growing consensus as to comprehensive legislation that would permit banks, insurance companies, and securities firms to affiliate and that also would permit these financial conglomerates to have some degree of affiliation with commercial firms.
To date, most of the debate has been over powers. Too little attention has been paid to what will, in the long run, be at least as important-the regulatory system that will govern the new financial conglomerates.
Our existing regulatory systems pursue very different objectives. Banking regulation has as its guiding principle the safety and soundness of banks. In contrast, the federal securities laws value not the soundness of any institution but the protection of investors.
These very different regulatory systems made sense when industries were separated. But if Congress permits amalgamation of the various financial service industries, what type of regulatory system would be appropriate? Unfortunately, the most common proposal in Congress today is schizophrenic.
First, the bills provide that each entity in a financial services holding company would be subject to "functional regulation." This makes perfect sense.
However, the Federal Reserve Board would serve as the overall, "umbrella" regulator, with authority to regulate not only the holding company but all of its subsidiaries, including securities firms, mutual funds, and insurance companies. This makes little sense.
Granting the Fed such sweeping authority raises the likelihood that it will seek to impose banking doctrines of safety and soundness on securities firms. As Securities and Exchange Commission Chairman (Arthur) 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 and affect the capital formation process."
These are not theoretical concerns. In 1984, when the FDIC permitted state banks to sponsor mutual funds, it imposed safety-and-soundness restrictions on the types of funds they could manage. Professor John Coffee of Columbia Law School has observed that an umbrella regulator might have barred or restricted money market funds in the early 1970s because of the competition they posed to bank deposits.
Legislation must address legitimate concerns regarding the stability of the banking and financial systems but do so without suffocating creativity in the securities markets.