Hearing of the Senate Committee on Banking, Housing, and Urban Affairs

HEADLINE: HEARING OF THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS
 
SUBJECT: THE STATE OF THE SECURITIES INDUSTRY
 
CHAIRED BY: SENATOR. RICHARD SHELBY (R-AL)
 
LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES:
 
WILLIAM DONALDSON, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION
 
BODY:
SEN. ALLARD: Thank you, Mr. Chairman.

I would like to explore a little bit the Investment Company Act of 1940 and whether or not any amendments may be needed to bring it up to date, or whether it's okay the way it is. I understand that in order to manage a mutual fund effectively that generally what's required is the SEC has to grant about eight to 10 exemptions from the Investment Company Act, and that many times the SEC may or does impose conditions of its own as a condition of granting those exemptions. Am I correct in that?

MR. DONALDSON: I didn't get the last part, Senator.

SEN. ALLARD: That you have imposed your own -- in addition to the eight or 10 exemptions to the Act, that you have your own conditions that you also place on the applicant and in the management of the mutual fund. Am I correct in that?

MR. DONALDSON: Yes, yes.

SEN. ALLARD: Okay. If so many exemptions from the present Act are required to do business, do you think the Act should be brought up to date to reflect present day realities?

MR. DONALDSON: Well, at the present moment we think we have the authority -- rulemaking authority under the Investment Advisors Act to do what we think needs to be done -- Investment Company Act, excuse me, but that could change.

But at this juncture we don't think we need --

SEN. ALLARD: The exemptions that you grant on a fair regular basis, are these the same exemptions time and time again -- the nature of the exemptions the same, or are they variable depending on --

MR. DONALDSON: Well, I mean a perfect example of that would be the rules that would allow the so-called fund of funds to not require individual no-action letter, would allow a mutual fund to buy another fund that might have a different objective. A mutual fund might own stocks and might want to buy a money market fund. And right now we give exemptions for that being done, and we are changing that now so that can be done without the --

SEN. ALLARD: Will they use the money market funds for more or less as a holding --

MR. DONALDSON: Right, right.

SEN. ALLARD: -- fund and then you have your investment fund over here.

MR. DONALDSON: Right.

SEN. ALLARD: The Investment Company Act gives the SEC explicit authority to sue investment company management for charging excessive fees, imposing a fiduciary obligation on the advisor with relation to receiving these fees. How many times have the SEC used this statutory authority?

MR. DONALDSON: I can't tell you that off the top of my head, but I'll get the answer to you, Senator.

SEN. SHELBY: Furnish that for the record.

SEN. ALLARD: We'd like to have that as a part of the record on the committee, if you would, please?

MR. DONALDSON: Sure.

SEN. ALLARD: Now, the same power is given to the shareholder -- to any shareholder of the fund and to the SEC to intervene in any such action, how -- and you may not know how often this has occurred, if you do, I'd like to have you share that with the committee now, if not we would like to have that as a part of the record also.

MR. DONALDSON: Be glad to give you that.

SEN. ALLARD: Okay, given the extensive enforcement powers provided to the SEC under the Investment Company Act, do you find the need for amendment of the Act to empower the SEC further? I think you answered that question earlier?

MR. DONALDSON: Yes.

SEN. ALLARD: And the answer was no, you're comfortable with what you have, is that correct?

MR. DONALDSON: Right.

SEN. ALLARD: Okay. That's -- I have one other area that I might explore a bit with you. Middle class and individual investors have seen a rapid expansion of the investment opportunities available to them, and particularly many more individuals are investing in mutual funds which can help them save for their children's college education and for their retirement. As the commission considers new initiatives regarding mutual funds, how important is the balance between individual investors and large institutional investors such as what was brought up here by the Senator from Maryland?

MR. DONALDSON: What do you mean by balance?

SEN. ALLARD: We have individual investors that are out here, and then you have the whole large mutual, sort of block investors, and how do you balance their interests?

MR. DONALDSON: Well, in -- there are sort of two parts to that question. One is the interest in terms of access to different source of investment vehicles if that's what you're talking about and I think that's a balance that we're -- is brought up in the hedge fund report by the staff in terms of the various safeguards there for minimum assets and earning power and so forth, there are individual investors getting into the quote, "hedge fund kind of vehicle." I think you're talking about the issue as you move from retail into larger and larger purchases, there are discounts allowed and you know, trying to make sure that people are protected as they get to be larger investors by the discounts they get for buying more. That's one whole side of your question.

The other side is the protection of individual investors in the market place itself, trying to buy and sell stocks versus large institutions trying to buy and sell stocks. And I think the hallmark of our system, has been the protection of the individual investor. The protection that allows the individual investor to compete but to compete fairly with people who have more muscle. And that gets to market structure, it gets to issues such as price improvement, and it gets to the way the central marketplaces are organized and that's what we're working very hard on, to make sure that the individual investor is protected.

SEN. ALLARD: Thank you, I see my time expired, Mr. Chairman. It's amazing how fast it runs when I have questions.

SEN. SHELBY: Well, we appreciate --

SEN. ALLARD: Well I'm sure it's balanced. But I just want to thank you for holding this hearing and reemphasize what some of the members of this committee have said previously, and you know, we have to maintain the confidence of the investor, that's what it's all about, and if we don't do that we all suffer. So, thank you, Mr. Chairman.