“[(II)] any interest or participation in any common trust fund or other pooled or collective fund maintained by a bank for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as trustee, executor, administrator, or guardian, or any collective fund maintained by a bank or separate account maintained by an insurance company consisting [solely] of assets of retirement, pension, profitsharing, stock bonus, or other plans or trusts which [are exempt from Federal income taxation under] meet the requirements of Section 401(a) of the Internal Revenue Code except any interest in any fund or separate account consisting of assets of retirement plans or trusts for self-employed individuals which [are exempt from Federal income taxation under] meet the requirements of said section [the Internal Revenue Code] and which the Commission determines requires the protection for investors of the provisions of this title;" [It should be noted that the proposed revision of Section 28(b) (which would become Section 28 (c) under our revision) is somewhat different from the proposed revisions of the other sections. Section 28(b), as it now reads, would amend Section 12(g) (2) of the Securities Exchange Act of 1934 to ensure, among other things, that registration would not be required, under that Act, of any interest or participation in any bank-established qualified collective pension trust. There was no need to provide an exemption from the broker-dealer registration provisions of Section 15 of that Act, since banks are already excluded from the definitions of "broker" and "dealer" by Sections 3(a) (4) and 3(a) (5). We suggest, accordingly, that Section 28(b) of H.R. 14742 (modified, as we propose, to include the appropriate references to separate accounts that hold qualified retirement plan assets) be changed to amend Section 3(a) (12) of the 1934 Act rather than Section 12(g) (2). If this is done, exemption from both Section 12(g) (1) and Section 15(a) (1) would simultaneously be provided. [The applicability of the anti-fraud provisions of the 1934 Act, Sections 10(b) and 15 (c) (1), would not be affected by this change since these sections apply both to exempted and non-exempted securities.] Mr. Moss. I want to thank you, Mr. Sommers, for a statement of considerable clarity and one which will be extremely helpful to the subcommittee in understanding the views of your industry. Mr. Keith? Mr. KEITH. In accordance with the pattern that has been established, I will waive questions at this time. Mr. Moss. Mr. Stuckey? Mr. STUCKEY. No questions at this time. Mr. Moss. I have no questions, Mr. Sommers. I want to thank you and your associates for appearing this morning. Now we have the Chairman of the Securities and Exchange Commission, Mr. Cohen. Mr. Chairman, I don't believe you need to be identified for the benefit of the committee, but for the benefit of the record, you may do so.. STATEMENT OF HON. MANUEL F. COHEN, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY PHILLIP A. LOOMIS, JR., GENERAL COUNSEL Mr. COHEN. Thank you, sir. My name is Manuel F. Cohen, Chairman of the Securities and Exchange Commission. On my left is Mr. Phillip A. Loomis, Jr., our General Counsel. Mr. KEITH. Mr. Chairman, would it be in order, before he proceeds, and since many of these men have not had a chance to find out how the market is behaving today, to have Mr. Cohen make just a brief observation in that respect. Mr. COHEN. I will be glad to do that, Mr. Keith, subject to the wishes of the chairman. Mr. Moss. If the Chairman wishes to respond, I will be most interested in his observations. Mr. COHEN. I think the market has been moving along pretty much as usual. In fact, gold stocks have dropped, if that is an indication of something. As far as I know, American securities here and abroad are firm and doing well. The market is off some. The volume is not greater, I don't think, than it was yesterday. It appears to be a typical Friday. So far as I know, and I have been in touch with all the people this morning, everything is pretty much as usual. Mr. Moss. Thank you. We will be pleased to hear your statement. Mr. COHEN. Thank you, sir. Mr. Chairman and members of the subcommittee: We are pleased to testify today on H.R. 14742, which would amend the Investment Company Act of 1940 and provisions of other Federal securities laws to deal with the problems raised by the dramatic growth and size of the mutual fund industry. The primary purpose of this bill, like its original version, H.R. 9510, is to provide fair treatment to the over 4 million Americans who own mutual fund shares and the uncounted millions who are likely to become mutual fund shareholders in the future. The subcommittee has already heard extensive testimony concerning the provisions of the bill relating to advisory fees and sales loads during the hearings on H.R. 9510 in the last session of Congress. While I would be pleased to answer questions on any aspect of the bill, my testimony here today will deal primarily with the provisions of H.R. 14742 which relate to the application of the Federal securities laws to bank collective funds. These matters were not before the subcommittee during hearings on H.R. 9510. At the outset, I should point out that these provisions of the bill raise the major policy question whether or not the banks should be allowed to enter the field of equity investments through the medium of collective investment funds. This issue was also before the Senate Committee on Banking and Currency on the McIntyre amendments to S. 1659, the Senate counterpart of H.R. 9510. The McIntyre amendments would amend the national banking laws to provide that nothing in those laws should be construed to prevent a bank from being affiliated with a collective fund for managing agency accounts. This bill does not amend the national banking laws; instead, it adds a new section 22(i) to the Investment Company Act for this purpose. We regard this difference as one of legislative technique, not substance. It does not change our view previously expressed in the Senate hearings on the McIntyre amendments, that the question of whether banks should be allowed to enter this field is a matter of national policy within the primary jurisdiction of the Congress and agencies of the Government other than the Commission. The Commission does not consider that its responsibility extends to this question and neither expresses nor implies any views thereon. Our testimony will, therefore, be confined to those provisions of the bill which deal with the regulation of bank collective investment funds under the various securities laws. It is, of course, subject to the determination of the basic question by the Congress. As the subcommittee is aware, trust departments of banking institutions for many years have offered investment management services to individuals, pension and profit-sharing plans and other clients both separately from and as a part of their services as trustees, executors, administrators, or guardians of trusts and estates. Banks, like other financial institutions, however, have shown a growing interest in equity investment, and in recent years they have sought to offer investment management services to a broader segment of the public. The banking industry is seeking a clarification and modification of the application of the Federal securities laws and the banking laws in this area to the activities they seek to engage in. So far as we are concerned, we have always understood the policy of Congress, as expressed in the Federal securities laws, to permit any qualified person or organization to enter any phase of the securities business. The Commission has no exclusive franchises to grant. The only qualifications under the securities laws for entry into the securities business relate to technical competence and the absence of a record of violations. of law. The provisions of the securities laws are intended to and should apply equally to all persons and organizations who offer securities to public investors. That is our concern. Questions have been raised as to whether the Federal banking laws permit banks to engage in their proposed activities and, as I have stated, whether those questions should be resolved in favor of permitting such activities in any respect or to any extent is a question of policy for the Congress upon which we do not comment. Insofar as the policies of the Federal securities laws which we administer are concerned, we believe that anyone entering the mutual fund business should be required to do so essentially on the same basis and subject to the same rules applicable to other persons. In some instances we believe that the proposed amendments to our bill give banks special treatment under Federal securities laws and are not justified under the basic principle of equal access subject to equal investor protection. We also have a number of suggestions for dealing with various technical problems raised by the present draft of the bill. These are contained in a memorandum which I will submit for the record. I should interpolate here, Mr. Chairman, to say that that memorandum is not available this morning, but we will submit it promptly after it has been completed. Mr. Moss. Without objection, the record will be held open to receive that statement at this point in the record. Mr. COHEN. Thank you, sir. (The document referred to follows:) SECURITIES AND EXCHANGE COMMISSION MEMORANDUM OF MARCH 25, 1968, WITH RESPECT TO CHANGES IN THE PROVISIONS OF H.R. 14742 DEALING WITH BANK COLLECTIVE INVESTMENT FUNDS This memorandum is submitted by the Securities and Exchange Commission to the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce. It presents the recommendations of the Commission with respect to changes in the provisions of H.R. 14742, which deal with bank collective investment funds. The recommendations are designed to implement the views of the Commission as presented by the testimony of Chairman Manuel F. Cohen. They also would resolve a number of technical difficulties in the language of the bill as presently proposed. Attached to the memorandum is a comparative draft of provisions of the bill showing the changes that would be made by these recomendations. This memorandum also covers the recommendations of the Commission with respect to the amendments to the bill proposed by the life insurance industry in their statement of March 15, 1968 to the Subcommittee and appendices thereto and in that regard would carry out the views of the Commission as expressed in Chairman Cohen's second statement to the Subcommittee. Section 2 (a) (35) [Section 2 (4) of the Bill] Section 2(4) of the bill would amend the definition of "security" in Section 2(a) (35) of the Investment Company Act1 to state expressly that any interest or participation in a bank collective fund for managing agency accounts is a "security". This amendment is unnecessary and undesirable. The present definition has been deemed broad enough to include such interests and participations, and the amendments to Section 10 of the Act granting certain exemptions for bank funds for managing agency accounts also will make this clear. Any amendment to the definition of security dealing only with bank funds for managing agency accounts may raise the unwarranted implication that interests or participations in other collective fund sponsored by banks, insurance companies or others are not securities. Section 3 (c) (13) [Section 3(b)(6) of the Bill]2 This proposed amendment is designed to codify the Commission's basic position that bank collective trust funds which consist solely of assets of employees' plans which meet the conditions of Section 401 of the Internal Revenue Code are entitled to the exemption contained in Section 3 (c) (13) of the Act for "[a]ny employees' stock bonus, pension, or profit-sharing trust which meet the conditions of Section 165 [401] of the Internal Revenue Code, as amended." The Commission's position has been based on the fact that the bank fund is a trust which itself meets the requirements of Section 401 of the Code. The amendment, as presently drafted, however, uses the term "collective fund." Accordingly, the Commission recommends that the amendment be modified to read "collective trust fund." Section 10 [Section 5(d) of the Bill] This section of the Bill would exempt a bank collective investment fund for managing agency accounts from existing provisions of the Act which require that a majority of the directors of such fund be persons who are unaffiliated with the fund's principal underwriter, any investment banker or any one bank. However, it would also exempt such funds from Section 10(a) of the Act, which requires that 40 percent of the persons performing the functions of directors of such funds to be persons who are not officers or directors of, or otherwise affiliated with, the bank managing such a fund. As Chairman Cohen indicated in his testimony on November 16, 1967 before the Subcommittee, the Commission in the First National City Bank case found it inappropriate under the standards of Section 6(c) of the Act to grant the exemptions from Section 10(a) requested by First National City Bank and would prefer that the requirements of Section 10(a) be retained in legislation relating to collective funds for managing agency accounts. For this purpose, the attached comparative draft contains a new Section 10 (e) to be added to the Investment Company Act in lieu of the amendments to Section 10(d) of the Act now proposed by the Bill. We emphasize that these suggested changes would be relevant only if the federal banking laws should be construed or changed to permit the operation of bank collective funds for managing agency accounts. Proposed Section 10(e) contains provisions differing from the provisions of the present Section 10 (d) of the Act in other respects. Section 10(e) (1) incorporates the provisions of the first phrase of Section 10(d) (6). The remainder of Section 10 (d) (6) imposes a 1 percent limitation on the management fee charged by the investment adviser. Because the Bill would provide that management fees charged by an investment adviser be subject to a reasonableness standard, it seems neither appropriate nor necessary to include a specific limitation in the proposed amendment, particularly one as unrealistically high under present day conditions as one percent. Section 10(e)(3) restates the provisions 1 Section 2(2) of the bill redesignates Section 2(a) (35) as Section 2(a) (36). of Section 10(d)(8) to avoid reference to interests in a commingled managing agency account as "shares" of "stock." It should be noted also that Section 5(d) of the Bill would exempt bank commingled agency accounts from Section 10(b) (3) of the Investment Company Act. Section 10(b) (3) provides that at least a majority of the board of directors of an investment company shall be persons who are not affiliated with any investment banker. It may be expected that many, if not all, banks wishing to establish commingled agency accounts would be deemed investment bankers for purposes of Section 10(b) (3) since they participate in syndicate underwritings of United States government and municipal bonds. Section 10(f) of the Act would prohibit a bank collective fund from acquiring securities being distributed by an underwriting or selling syndicate of which the sponsoring bank is a member, during the existence of the syndicate. In the First National City Bank case, the Commission, in granting an exemption from Section 10(b) (3), imposed a condition, to which the Bank had consented, extending the prohibitions of Section 10(f) to include any period after termination of an underwriting syndicate during which members of the syndicate still held unsold allotments of the security underwritten by them (Investment Company Act Release No. 4538, at pp. 10, 14). We recommend that in this connection a condition be included in the proposed legislation similar to that imposed by the Commission in the First National City Bank case. This is even more important in the case of the proposed legislation than in the situation before the Commission in that case. It was the stated policy of the collective fund for managing agency accounts of First National City Bank that investments would normally be made principally in common stocks and securities convertible into common stocks. However, the proposed legislation would grant an exemption from Section 10(b) (3) to bank collective funds for managing agency accounts without regard to their investment policy, which in many cases might permit investment of all or part of the assets of the fund in United States government or municipal bonds. And it should be noted that the problem of conflict of interest with which Section 10(b) (3) is intended to deal may arise more acutely where unsold allotments are still held by members of an underwriting or selling syndicate when the syndicate is terminated, since the holding of such allotments indicates that the securities concerned have been difficult to sell. Accordingly, our suggested substitute "Section 10(e)" contains an additional subparagraph (4) aimed at preventing such conflicts. Section 17 (g) [Section 9 (a) of the Bill] This proposed amendment to Section 17(g) of the Investment Company Act would codify a position taken by the Commission in the First National City Bank case to permit an officer or employee of a bank collective fund for managing agency accounts to have access to assets of the fund held in the custody of the bank if such access is "solely through his also being an officer or employee of a bank." Solely as a matter of style, the Commission recommends that the phrase "position as" be substituted for the phrase "also being." New Section 22 (h) [Section 12 (e) of the Bill] This proposed amendment would prohibit a registered investment company which is a common trust fund or other pooled or collective fund maintained by a bank for the collective investment and reinvestment of assets contributed thereto by such bank in its capacity as managing agent from offering or selling through a principal underwriter or otherwise, any security issued by it at a public offering price which includes a sales load. The language of the proposed amendment expressly limits the prohibition to situations where a bank is acting in its capacity as managing agent. The Commission believes that this scope of the prohibition against the imposition of a sales load should not be limited by the legal form of the relationship between a bank and investors in its collective fund but should extend to all situations where a bank is offering interests in an investment vehicle subject to registration as an investment company under the Act. Accordingly, the Commission believes that the language limiting the scope of the prohibition should be deleted. The life insurance industry proposals would amend Section 3(b) (6) of the bill to grant to separate accounts for pension and profit-sharing plans which meet the requirements of Section 401 of the Internal Revenue Code and for certain other separate accounts the same blanket exemption from the Investment Company Act which the bill would provide for bank funds meeting the |