Chairman Budge testified briefly on this matter before a subcommittee of this committee on March 6 of this year. He testified at that time in support of S. 35—we support S. 35 now. As he said at that time:

Overall, it seems to me that the proposals which we advanced at the last session of Congress might more effectively insure fair treatment to investment company shareholders. On the other hand, enactment of S. 34 would accomplish a great improvement over the present situation and would constitute an important reform. Consequently, if this Committee prefers to accept S. 34, I would gladly accept that decision and support that bill.

As this committee is well aware, the Commission has bent every effort to reach an agreement with the industry. We and our staff have recently met several times with representatives of the Investment Company Institute. Their major concern at this point seems to be the management fee provisions of the bill.

I think that it is appropriate to point out that although S. 3724 and the present S. 34 contain significant modifications of the Commission's original proposals, this committee's report makes it clear that there remains a real need for congressional action in the areas of advisory fees and management compensation, sales loads, and contractual plan loads. That need was not only expressed in your report, but was also set forth in the floor debates. We have exhibited, I think, a willingness to meet industry objections. I regret that we cannot come to this committee with full agreement.

On management fees, which as I have said now seem to be the sticking point, as your report points out, mutual funds, with rare exception, are managed by external organizations which obrain fees. calculated on a percentage of net assets of the funds.

The mutual fund industry has grown from one-half billion dollars in net assets in 1940 to over $50 billion today. Much of this growth has been over the past 5 years. It appears that the industry is now growing at the rate of nearly $10 billion a year. This annual rate of growth is almost as large as the entire industry just 15 years ago. We now have billion-dollar funds and monthly fund sales of over $600 million.

Management fees have been reduced in recent years by adoption of sliding scales or by the triggering of existing scaled down schedulesbut these reductions have in many cases been less than significant. That is not to say that some funds have not benefited appreciably from fee reductions-whether caused by shareholders' actions or the attention given to the problem by the Commission and the Congress. Nevertheless, it is clear that a significant problem still exists and that legislative action remains appropriate.

On March 17, 1969, Chairman Budge wrote to Senators Bennett, Williams, and McIntyre providing figures as to net asset and advisory fee rates for the 57 externally managed funds, identified in our 1966 report, having net assets over $100 million. We have since obtained such data for the 87 funds which had over $100 million in net assets at June 30, 1968 and I would like to introduce that tabulation for the record. It is appended to this statement.

The CHAIRMAN. Without objection we are very glad to have it in the record. I know you have two different groups there. Does the larger group in any way include what you have in the smaller group?

Mr. OWENS. Yes. It is just more that have gone over the $100 million mark.

The CHAIRMAN. The second group includes the first group?
Mr. OWENS. Yes.

The CHAIRMAN. Very well, we are glad to have it.

Mr. OWENS. It shows that 68 of the 87 funds had effective management fees of 0.40 percent or over, 59 funds well over half-had effective rates of 0.45 percent or over, and 46, again over half, had rates of 0.50 percent or more.

Now, it is clear that it does not cost 10 times as much to manage a $1 billion fund as it costs to manage a $100 million fund. Fund investors have not benefited adequately from the savings in management costs per dollar managed which result from fund growth. I think that it is not seriously disputed that, with infrequent exceptions, fund directors have not been very effective in bargaining with fund managers for reduced fees. Their position in so bargaining with their fellow directors is, of course, a difficult one. It is also difficult to test these fees in the courts. Under the general rule of common law, advisory contracts ratified by shareholders or approved by a vote of disinterested directors may not be upset unless there is a showing of corporate "waste" or "gross abuse of trust." I think the statement in the Report of this committee summed the situation up very well:

Because of the unique structure of this industry, the relationships between mutual funds and their advisers are not the same as those that usually exist between buyers and sellers or in conventional corporate relationships. The forces of price competition or arm's-length bargaining do not work as effectively in the mutual fund industry as they do in other sectors of the American economy.

At the same time, it is difficult to test these fees in the courts. Under the general rule of law, advisory contracts which are ratified by the shareholders or approved by a vote of the disinterested directors may not be upset in the courts except upon a showing of "corporate waste." The fee must "shock the conscience of the court." Such a rule may not be an undue one when the protection of competition and hard bargaining is effective. But in the mutual fund industry where these marketplace forces do not operate as effectively, your committee believes that the standard of "corporate waste" is unduly restrictive and it should be changed.

One more item on this area. It is true that advisory fees are disclosed to the shareholder. This, however, is a federally regulated industry and that regulation goes beyond disclosure. That policy decision was made by the Congress in 1940-and with ample basis. The question now is what must be done, after almost 30 years of extraordinary growth and no new legislation, to make the existing regulatory scheme more effective.

I have not extensively discussed here the sales load or the frontend load proposals. This whole area has already been discussed before you at great length and there seems, at least at this point, to be no great industry opposition to the proposals in S. 34 on these matters although the people who sell contractual plans are concerned. I think that I can fairly represent to this committee that we have made every reasonable effort to reach an agreement on outstanding differences. We have been helped immeasurably by the efforts of your chairman and the members of this committee. As I have said, Š. 34 contains significant compromises-I respectfully submit that no further compromises in S. 34 are necessary.

We have considered S. 296 which would substitute complete repeal of section 22(d), the act's retail price maintenance provision, for the proposed NASD jurisdiction over sales loads. It would also eliminate the front-end load. It is somewhat inconsistent for the industry to

favor governmental interference in maintaining sales loads, while rejecting government interference to control these loads. Nevertheless, we do not think that we should move to such a change until we have tried the method now contained in S. 34.

On elimination of the front-end load, the Commission supports the compromise contained in S. 34 as a significant improvement of the present situation.

I would like to close by thanking this committee for its great patience and dedication to the interests of investors throughout this entire effort. You have sat through many days of hearings, participated in extended debate, exchanged numerous letters and memorandums with us and given unstintingly of your time and energy in this effort to enact the first significant piece of mutual fund legislation since 1940. I have every hope that we shall achieve this important objective this

ADVISORY FEE RATES AND EXPENSE RATIOS OF EXTERNALLY MANAGED MUTUAL FUNDS WITH JUNE 30, 1968. NET ASSETS OF $100 MILLION AND OVER FOR THEIR FISCAL YEARS ENDED JULY 1, 1967-JUNE 30, 1968 1

ADVISORY FEE RATES AND EXPENSE RATIOS OF EXTERNALLY MANAGED MUTUAL FUNDS WITH JUNE 30, 1968 NET ASSETS OF $100 MILLION AND OVER FOR THEIR FISCAL YEARS ENDED JULY 1, 1967-JUNE 30, 1968 1-Continued

1 Not including four funds (Fletcher Capital Fund, Inc., Putnam Equities Fund, Inc., Putman Vista Fund, Inc., and Second Fiduciary Exchange Fund, Inc.) which were in operation for less than the entire fiscal year.

2 Average net assets (approximate) for fiscal years ended July 1, 1967, to June 30, 1968, calculated by dividing operating expenses by the expense ratio appearing in col. (4).

3 Ratio to average net assets for fiscal years ended July 1, 1967, to June 30, 1968, on the basis shown in the Commission's Report on the Public Policy Implications of Investment Co. Growth, table 111-3, P. 98.

The fee is a combined investment management, administrative, and trusteeship fee of 0.50 percent of the aggregate amount which the investor pays or agrees to pay into the fund. As a percent of net assets, this arrangement results in a lower rate if the net asset value of the investment increases and a higher rate if such value decreases. Includes a performance fee.

Includes investment management and recurring fees paid to the trustee.

7 Includes investment supervisory fee and administrative service charge paid to the investment adviser.

Includes management fee paid to the investment adviser and a continuing fee paid to the principal underwriter, which is closely affiliated with the adviser. Includes both the fees paid to the fund's investment adviser and to its business manager.

The CHAIRMAN. Thank you very much.

As you say, we have gone over and over this whole field many different times but as I understand from your statement and from the testimony that Judge Budge gave to the Subcommittee on Securities on March 6, your Commission still feels that your original recommendations were correct. However, in view of the action taken by this committee and by the Senate you are endorsing S. 34 even though it falls short of your complete recommendation?

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Mr. OWENS. That is correct, Mr. Chairman. We think it is a satisfactory compromise. We can live with it and we think it brings about meaningful and necessary areas of reform.

The CHAIRMAN. Fine.

Now one other thing. I am disappointed that an agreement has not been reached with the industry. You may recall on the Senate floor last year I announced when it became apparent that the House would not act during that session that I intended on the first day I could introduce bills to introduce a bill which would be identical with the bill that the Senate voted out by voice vote.

Mr. OWENS. I was there. I recall it very well.

The CHAIRMAN. S. 34 is just that, isn't it?

Mr. OWENS. Yes, sir.

The CHAIRMAN. The reason I say I was disappointed is because I did have conversations with some of the leaders of the industry subsequent to the opening of this session and I was given to understand that they were very near agreement and that it was almost certain that agreement would be worked out. I am disappointed that this was not done.

Mr. OWENS. So are we. I would like to say in this regard that it is not because we didn't try to abide by your wishes in this matter. We opened lines of communication. They have been open. As a matter of fact they are still open.

Just as recently as last week we held informal discussions with representatives of the industry. We have come to one point which seems to be the impasse and we can't we just can't come up here before this committee and make a recommendation which seems to be the sticking point that would let the SEC retreat from its statutory and traditional responsibilities as policeman of the marketplace, from being able to bring lawsuits where it felt there were overcharges in the management fee area.

The CHAIRMAN. Now I have two questions here that Senator Bennett, since he could not be here today, has asked be propounded to you. I will read the first one.

At the bottom of page 7 you say, "We have exhibited, I think, a willingness to meet industry objections ***." Could you provide the committee with specific proposals which the Commission offered in your willingness to meet the industry objections so that we might also be interested in considering them?

Mr. OWENS. Yes, sir. I can tell you.

In our negotiations we were told by industry that one of the great fears that they had in connection with the establishment of a standard of reasonableness in the Federal statute was the fear that this would open the floodgate, so to speak, to strike suits by-on behalf of promoters more or less for their own benefit.

It was pointed out there were a number of suits pending in the courts, about 63 or 64, but anyway we can see the fact there is real fear in this area. One of the tinings that was suggested by the industry was a recommendation that before such a suit could be brought by-in a representative capacity that 1 percent of the shareholders or $250,000, whichever is less, would have to be represented before such a suit could be brought.

But even with this proposal, and it looked like we might make some headway on it, there still was an insistence that the SEC can