sons, from the 1933, 1934, and 1940 acts. In our opinion, no showing has been made that H.R. 10 plans require any less investor protection that other securities. Under the bill, H.R. 10 plans would be statutorily exempt from the disclosure and antifraud provisions of these acts except upon affirmative action by the Commission.

In our view, these plans should be subject to the statute and exempted only if the Commission finds it in the public interest to provide an exception, and even in that event there should be no exemption from the antifraud provisions.

We appreciate this opportunity to appear before the committee to express our views and welcome any questions you may wish to ask. Mr. Moss. First, let me say that I would like to welcome you to your first appearance before the committee in your capacity as president of the National Association of Securities Dealers and extend good wishes to you for your successful term as president.

Mr. WALBERT. Thank you very much, sír.

Mr. Moss. On page 2, you footnoted the case at the bottom of the page. I would ask that you submit that to the committee for its information.

Mr. WALBERT. We will be very happy to.

(The case referred to was placed in the committee files.)

Mr. Moss. Mr. Walbert, I have no questions at this time. Mr. Keith? Mr. KEITH. Thank you, Mr. Chairman. I would like to have your comment as to whether or not you consider mutual funds' management companies are fiduciaries.

Mr. WALBERT. From my understanding of the term, I would. I think I would like to refer this to our counsel because it is touching on the legal aspects here. Mr. Derrickson.

Mr. DERRICKSON. I agree with you; yes, a management company would be a fiduciary.

Mr. KEITH. One of the basic questions that the committee is trying to get at is whether, in the public interest, further regulation of the fees paid to management companies are required or whether competition would take care of the question of compensation of management companies.

I think the industry position is that there is sufficient competition within the industry to take care of that factor.

There are those who feel that the advent into this business of banks and/or insurance companies would furnish a way for resolution of the problem by competition.

Mr. WALBERT. I think our basic attitude on this is that the conditions and reasons that prompted the passage of the Glass-Steagall Act were valid then and in our opinion, are just as valid today.

In all fairness, I think I should say that the abuses and conditions which existed within our own business which brought on the acts of 1933 and 1934 were valid, and we believe that they corrected many abuses in our area and that those corrections are still valid today. Mr. KEITH. Do any other members of your panel wish to comment on that observation?

I have no further questions.

Mr. Moss. Mr. Murphy.

Mr. MURPHY. I would like to know just how you feel about the regulatory provisions of the proposal. I know you heard the response

of Mr. Ferguson earlier, if the banks did get into this business, whether you feel the SEC or another appropriate regulatory agency should supervise their activity.

Mr. WALBERT. Our feeling would be that the McIntyre amendment, in effect, allows the banks to offer securities and, as such, they should have the same regulation or the SEC regulation that the present members of the industry have.

Mr. MURPHY. That is, the SEC should have the jurisdiction to supervise those funds?

Mr. WALBERT. Yes, sir.

Mr. MURPHY. I have no other questions, Mr. Chairman. Thank you. Mr. Moss. In view of the fact that there are no other questions, I want to express the committee's appreciation to you and your association for your appearance here.

I am sure the views you have expressed will be considered. It is the purpose of these hearings to undertake the establishment of an appropriate record on which the committee can base a decision.

The committee is very keenly aware of the responsibility in assuming an undertaking to amend laws which have long been a part of the investment system of this Nation and understanding the impact of some of the amendments that are proposed.

Best wishes to you in your present tenure.

Mr. WALBERT. Thank you, Mr. Moss. We appreciate very much being here.

Mr. Moss. The committee will now stand in adjournment until 10 o'clock tomorrow morning at which time we will hear first from the Investment Bankers Association.

The committee is now adjourned.

(Whereupon, at 12 noon, the subcommittee adjourned, to reconvene at 10 a.m., Friday, March 15, 1968.)

INVESTMENT COMPANY ACT AMENDMENTS OF 1967

Bank and Insurance Company Collective
Investment Funds and Accounts

FRIDAY, MARCH 15, 1968

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCE AND FINANCE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.O. The subcommittee met at 10 a.m., pursuant to notice, in room 2123, Rayburn House Office Building, Hon. John E. Moss (chairman of the subcommittee) presiding.

Mr. Moss. The subcommittee will be in order.

The hearings today are a resumption of those that were held yesterday on legislation contained in H.R. 14742.

Our first witness this morning is Mr. W. Bruce McConnel, Jr., vice president for governmental relations, Investment Bankers Association of America.

Mr. McConnel, will you introduce for the record and for the benefit of my colleagues on the committee the gentlemen accompanying you. STATEMENT OF W. BRUCE MCCONNEL, JR., VICE PRESIDENT FOR GOVERNMENTAL RELATIONS, INVESTMENT BANKERS ASSOCIATION OF AMERICA; ACCOMPANIED BY FRANKLIN R. JOHNSON, CHAIRMAN, INVESTMENT COMPANIES COMMITTEE; AND GORDON L. CALVERT, EXECUTIVE DIRECTOR AND GENERAL COUNSEL

Mr. McCONNEL. I will, sir. On my right is Franklin R. Johnson, chairman of the IBA Investment Companies Committee and senior vice president of the Keystone Co. of Boston, a mutual fund.

On my left, Gordon L. Calvert, executive director and general

counsel of IBA.

We have presented a statement to your committee but in order to save time I would like to summarize my statement and request that the full text be included in the printed record of the hearing.

Mr. Moss. Without objection, the full text of the statement will be included in full at this point in the record.

Mr. McCONNEL. Thank you.

(The statement referred to follows:)

STATEMENT OF W. BRUCE MCCONNEL, JR., VICE PRESIDENT FOR GOVERNMENTAL RELATIONS, INVESTMENT BANKERS ASSOCIATION OF AMERICA

INTRODUCTORY

The Investment Bankers Association of America (IBA) has a membership of approximately 675 firms in the United States and Canada. These firms have about 2,200 registered branch offices located in all parts of the United States. They collectively underwrite, deal in and act as brokers in all types of corporate and state and municipal securities. Our membership includes about 120 commercial banks which, through investment or bond departments, underwrite and deal in government and state and municipal bonds.

A large percentage of the firms which are members of IBA sell shares of mutual funds and the compensation from such sales is an important factor in the business of many firms engaged in underwriting, dealing in and acting as brokers in corporate securities and state and municipal bonds.

In previous testimony before this Committee on October 12, 1967, on H.R. 9510, representatives of the IBA summarized the functions and structure of the securities business and emphasized the serious effects which certain of the proposals in H.R. 9510 might have on investors, markets, small business and the securities industry. The record of that testimony is before the Committee, and we will not repeat it today.

To simplify our comments on H.R. 14742, we divide provisions of the bill into three groups:

(A) Four proposals which were in H.R. 9510 which we vigorously oppose. (B) Certain new proposals to authorize banks to create and sell commingled investment accounts.

(C) Provisions from H.R. 9510 which are not opposed and certain revised provisions of H.R. 9510 which are not opposed.

(A). Four Objectionable Provisions Retained from H.R. 9510

H.R. 14742 includes four objectionable proposals which are in H.R. 9510 against which we expressed strong opposition in our testimony on October 12, 1967, for reasons stated in detail at that time. To save the time of the Committee today. we simply identify those four proposals and summarize the reasons for our opposition to them:

(1) Proposed 5% Ceiling on Sales Charge for Investment Company Shares Sections 12(a) and 12(b) of H.R. 14742 would delete the present section 22(b) of the Investment Company Act, which gives the NASD rule-making authority to prohibit "unconscionable or grossly excessive" sales charges, and would delete that portion of section 22 (c) which gives the same rule-making authority to the S.E.C.

Section 12(c) would provide a new section 22(c) which would prohibit a registered investment company from offering securities issued by it if their publie offering price includes a sale charge of more than 5%. Section 17 would amend section 28 to provide a ceiling of 5% on sales charges on face-amount certificates. (a) This is clearly a proposal to impose on the highly competitive securities business a utility-type regulation of charges which is appropriate only when a restricted few are permitted to engage in that business, Such regulation of sales charges would be particularly unfair when competing industries are not subjected to similar restrictions in undisclosed sales charges.

(b) Sales charge is fully disclosed and competitive alternatives are available. The prospective investor can choose from over 250 competitive mutual funds about which information is readily available with a range of sales charges, including even many no load funds (no sales charge) if that is what the investor wants.

(c) Section 22(b) of the Investment Company Act already authorizes a securities association (such as the N.A.S.D.) to prohibit its members from charging an unconscionable or grossly excessive sales load in the ordinary distribution of redeemable shares of a registered investment company. Section 22(e) of the Act authorizes the Commission to impose the same restrictions by rules and regulations applicable to principal underwriters of, and dealers in, the redeemable securities of any registered investment company.

(d) On comparative acquisition costs for the small investor who wants to invest only $100 from time to time, the comparison is quite different from that presented in the S.E.C. Report. An investor with $100 buying five shares of a

$20 stock listed on the New York Stock Exchange would pay an odd lot differential of 63¢ and a commission of $6.00, an investment cost of 6.63% one way or 13.26% for purchase and sale compared with an assumed investment cost of 9.3% on investment of a like amount in shares of an investment company.

(e) The "sales load" actually includes compensation for the underwriter, the retail dealer and the salesman. If the underwriter continues to retain about 2%, if the proposed 4.76% maximum sales load were adopted, less than 2.76% would be available for the retail dealer and his salesmen. The salesman's share would be about 14%.

(f) Effects of the proposal would be detrimental to investors, markets and small companies (halting the growth of "people's capitalism," reducing depth and liquidity of markets and impairing the mechanism for providing capital).

(2) Reasonable Compensation for Management of Registered Investment Companies

Section 8(d) of H.R. 14742 would amend section 15(d) of the Investment Company Act of 1940 to provide expressly that all compensation for services to a registered investment company received by an investment adviser, officer, director or controlling person of or principal underwriter for such investment company and any affiliated person of such persons shall be "reasonable." The "reasonableness" of compensation would be enforceable in U.S. district courts through injunctive suits instituted by the Commission and section 23 would also authorize the Commission to intervene as a party in any private action for that purpose.

The IBA firmly believes that compensation for management of registered investment companies should be reasonable; but we vigorously oppose as a matter of principal the introduction of this new concept, to authorize the Commission to institute injunctive proceedings and to authorize a Court to determine what shall constitute "reasonable" compensation in an area where there is full disclosure of compensation, approval at least annually of renewal of investment advisory and underwriting contracts, and vigorous competition from many similar investment companies.

(3) Sales of Management Organizations

Section 8(e) of H.R. 14742 would add a new subsection (g) to section 15 of the Investment Company Act to prohibit any sale of the assets of or a controlling block of stock in an investment company management organization if the sale, or any express or implied understandings in connection with the sale "are likely to impose additional burdens on the investment company, or limit its freedom of future action or otherwise is inequitable to such investment company." The Commission could institute actions to enforce this prohibition and would be authorized to intervene as a party in any private action brought for that purpose.

The IBA agrees fully that shareholders should have a remedy against an unfair arrangement in the sale of management organizations, but we question the inadequacy of present provisions and whether the proposed recommendation is a good remedy if present provisions are inadequate.

If the present remedy is inadequate, we believe that the proposal to prohibit sales of management companies if the sale "is likely to impose additional burdens on the investment company" or is "inequitable" is far too broad because it would prohibit any sale imposing additional burden on the investment company (i) regardless of the amount of the burden and (ii) even if there would be additional benefits to the investment company. We believe that such a sweeping statutory prohibition is patently undesirable and should not be adopted.

(4) Broader S.E.C. Authority for Injunction Action

Section 36 now authorizes the Commission to bring on action in a U.S. District Court to enjoin any officer, director, advisory board member, investment adviser, depositor or principal underwriter of investment companies from acting in such capacities if the court finds that such person has been guilty of "gross misconduct or gross abuse of trust." Section 20 of H.R. 14742 would amend Section 36 to eliminate the requirement of finding guilt of gross misconduct or gross abuse of trust and to authorize the Commission to seek injunctive or such other relief as the court deems appropriate if such persons have engaged or are about to engage "in any act or practice constituting a breach of fiduciary duty" in respect of a registered investment company.