and which today, at least in the views of myself and of IDS, are no longer in issue.

When I previously appeared I discussed in my statement at some length the economic considerations applicable to the then proposed provisions for regulating the sales load. However, the provision in S. 34 relating to the sales load appears to me to be an appropriate resolution of the conflicting interests and problems involved.

SECTION 16 OF THE BILLS RELATING TO CONTRACTUAL PLANS

When I testified before the Committee two years ago the proposal then before the Committee was for the complete abolition of the front end load on contractual plans. At that time I expressed the opposition of IDS to a complete abolition. I described the type of contractual plan which had been initiated and offered by IDS since October 1, 1965, which represented a substantial modification of the conventional type of contractual plan.

The IDS plan accommodates itself to the provisions which are now contained in § 12 of S. 34 relating to the front end load. Our experience with such a plan has been, we believe, quite satisfactory and we have no difficulty with the provisions of S. 34 pertaining to contractual plans.

SECTION 8 OF THE BILLS RELATING TO MANAGEMENT FEES

I wish that I could now also say that I have no difficulty or concern with the provisions of § 8 relating to management fees. As the members of this Committee are aware, very diligent efforts have been made by many seeking means by which to resolve the conflicting views with respect to the management fee provision. Unfortunately, these efforts have not yet been successful and an honest difference of opinion remains.

When I testified before the Committee in 1967, I described the organization and operation of the present system at IDS and the results for IDS customers. Before commenting upon the provisions of the Bill, I would like to update the statistics which I gave before.

Under the operation of the present competitive system, the expense ratios of the IDS managed funds have been as follows:

The resultant actual cost to a typical customer with a $5,000 account in an IDS managed fund has been as follows:

The effect has been to reduce the cost per dollar of investment for an IDS customer from 1962 to date by over 45%. These reductions, in total, produced management fees in 1968 which were $15,200,000 less than they would have been on the basis of IDS' 1962 contracts.

A typical IDS customer with a $5,000 account, paying an annual management fee of $14.50 could not obtain the services provided by IDS-including diversification of risk and professional investment management-outside the mutual fund industry at anything approaching comparable costs.

Notwithstanding the effectiveness of the present system, Section 8 of the Bills would amend Section 15 of the Investment Company Act to provide that there be a statutory requirement that management fees be "reasonable," and that the courts, in a suit either at the instigation of the SEC or any fund

shareholder, be empowered to determine the reasonableness of a fee, in effect to set the fee.

I wish that at this time I could find it possible to also endorse this provision of the Bills. But I cannot in conscience do so because I sincerely believe that the management fee provision would be "bad law" and would be an unprecedented and undesirable innovation in our economic system.

At first blush the proposal may appear innocuous enough. Moreover, it places one who opposes it in the uncomfortable position of appearing to oppose reasonable fees. This proposal is, however, by no means innocuous.

I know of no responsible or competent business man-and the SEC has acknowledged that "on the whole, investment companies are managed by competent persons"-who believes his prices for goods or services should be or are unreasonable. But this proposal raises a serious question, the relevance of which extends beyond the mutual fund industry: Who is to have the power to set prices for the products or services, the business man himself or someone else not engaged in the day-to-day running of a business, who does not have the responsibility, who need not answer for the results and consequences of his actions?

This particular proposal constitutes a dramatic innovation in our economic system. I do not suggest that this alone determine in any way the question of whether the proposal is wise or unwise; but I do believe that awareness of that fact is important.

Throughout the history of our jurisprudence courts have always been reluctant to substitute their judgment on business matters for the business judgment of the businessmen responsible for the operation of the business, and the pricing of a product or service is certainly at the heart of any business operation. This proposal would reverse this tradition and direct the courts to substitute their judgment for that of those engaged in the business.

I do not question the competence of a court to determine the reasonableness of a price. Courts, and juries as well, have often been required to do so. They have done so, however, generally in situations where it was necessary to resolve a controversy between private litigants and where the determination would normally affect only the litigants and then only with respect to a particular completed transaction. The practical effect of the proposal in S. 34 and S. 296 is to put the courts in the business of industry-wide price regulation; it would in effect impose upon the courts the responsibility and necessity to fix prices at which an industry must offer its services in the future. This has never been regarded as the function of our judiciary.

In another respect this proposal is an even more far-reaching innovation. This industry is not a public utility. It enjoys no anti-trust exemption permitting a price-fixing agreement among mutual fund managers. It is a non-protected industry where free entry exists. I know of no statute in the history of the United States, absent war time, which gave either a federal agency or a court the power to prescribe the price for a product or service in a competitive industry, and thereby the power to regulate the profits of an industry in accordance with whatever in its judgment it deemed to be appropriate or reasonable. This Bill does just that, and it would be the first in our history to do so.

Moreover, not only the courts would be engaged in the business of fixing management fees. As a realistic matter this proposal would also give to the staff of the SEC the power virtually to set management fees through their power to recommend litigation and their control over proxy and prospectus clearances.

As I mentioned before, I do not suggest that the fact that this proposal is a significant innovation in our social and economic system determines whether the proposal is wise or unwise. I do submit, however, that there is imposed on the proponent of such legislation-the SEC-the obligation to provide at least some reliable indication of what the probable consequences of the innovation would be. The SEC has never undertaken to do so. It has given this Committee no evidence whatever of the probable consequences of its proposal, either to the industry or to the millions of people whom the industry serves. If this proposal is enacted, management fees, instead of being governed by the interplay of economic forces and negotiations, as now, would be set by the SEC or a court without the consent of those engaged in the business or who remain with the obligation and responsibility to provide the services. Here are some of the questions that arise.

If, as a consequence, management fees were reduced below what competitive forces would otherwise produce, what would be the results? Will the quality

of the service suffer? Will the entrance of new companies into the business be inhibited? Will the sponsorship of new funds by those management companies already in the business be deterred? Will newer entrants who have not yet achieved a profitable level of operations be discouraged from continuing? Will the development of new services for fund customers be retarded? Will there be endless litigation? Will absolute uniformity in both fees and services in the industry result?

Contrast these uncertainties with the known results of the present system. Concentration in the industry is diminishing. The variety and availability of services is increasing. The quality of the service is improving. And the cost of the service to the customer, the fund shareholder is decreasing.

I would urge you not to replace the dynamic force of a competitive system that is working with a new and untried system having unknown and unforeseeable consequences.

Thank you. I will be pleased to answer any questions you may have, or submit any additional information the Committee desires.

Senator MCINTYRE. Our next witness is Mr. Andrew J. Melton, first vice president, Investment Bankers Association of America.

Mr. Melton, we will include your entire statement in the record, and you can highlight it in any way that you want to. I don't want to infringe on your going ahead in any manner that you like.

(Mr. Melton's statement may be found at p. 202.)

STATEMENT OF ANDREW J. MELTON, JR., FIRST VICE PRESIDENT, INVESTMENT BANKERS ASSOCIATION OF AMERICA, ACCOMPANIED BY GORDON L. CALVERT, GENERAL COUNSEL OF THE ASSOCIATION, AND FRANKLIN R. JOHNSON, A VICE PRESIDENT OF THE KEYSTONE CO. OF BOSTON

Mr. MELTON. Thank you. I am Andrew J. Melton, Jr., first vice president of the Investment Association and chairman of the executive committee of Smith, Barney & Co., Inc. With me are Gordon L. Calvert, general counsel of the association, and Franklin R. Johnson, a vice president of the Keystone Co. of Boston and a member of the investment companies committee of the association.

I will summarize and will leave out the description of who we are as investment bankers, but I would like to tell you that we are here in support of S. 34 if two changes are made in it, because we believe that the provisions of the bill would improve regulation of the operation and sale of shares of investment companies. However, we believe that one of the provisions which we oppose, to authorize banks to issue and sell shares of investment companies, is detrimental to the public interest.

(1) Banks should not be authorized to issue and sell shares in mutual funds. Section 12 (h) of S. 34 at page 36 would add a new subdivision (h) to section 22 of the Investment Company Act to establish a broad exception for bank mutual funds from the prohibition of the GlassSteagall Act against banks engaging in the securities business.

We emphasize at the outset that we accept open competition by entry of new organizations into the securities business if (a) there is no public policy prohibition against their entry into this business and, (b) they comply with the same regulatory requirements applicable to the securities and persons engaged in the securities business. In the case of banks, we believe that the Glass-Steagall Act adopted a clear firm policy to prohibit banks from engaging in the corporate securities business.

Any question whether interests in certain types of commingled investment acounts managed by banks are "securities" within the prohibitions of the Glass-Steagall Act were resolved by the U.S. District Court for the District of Columbia on September 27, 1967, in Investment Company Institute, et al. v. Camp, Comptroller of the Currency when it held that the commingled acocunt under consideration there was "an equivalent investment vehicle to a mutual fund and that the units or participation are in fact securities."

Section 12 (h) clearly would exempt from the prohibitions against banks engaging in the securities business any registered bank investment company or any bank collective trust fund which would be exempt from the amended definition of "investment company" under section 3(c) (11). After careful review of the experience of bank affiliates in the securities business, Congress in 1933 in the GlassSteagall Act concluded to divorce the banking business from the security investing business. Rather than repeat the many reasons which were stated at that time for such a divorce of banking from investment securities, we simply include in our statement an extensive quotation from the decision of the court in the recent ICI case, referred to above, summarizing some of the reasons for excluding banks from the securities business.

(a) The potential conflict of interest. A bank-sponsored investment company would permit a bank to acquire through its investment company large holdings of equity securities in all types of corporations. While limitations on the amount of shares which may be acquired in any one company might avoid control of companies whose stock is acquired, we believe that many of the same dangers would exist here that are the subject of concern with respect to bank-holding companies. We believe that there would be inevitable conflicts of interest between performance by a bank of its proper banking functions and an inclination to favor those companies whose securities the bank's investment company owns. A report by the staff of the House Committee on Banking and Currency, "The Growth of Unregistered Bank-Holding Companies; Problems and Prospects," published on February 11, 1969, pointed out certain dangers with respect to companies whose securities would be in the portfolio of bank-sponsored investment companies.

(b) Concentration of economic power. The study, "Commercial Banks and Their Trust Activities: Emerging Influence on the American Economy," a staff report for the Subcommittee on Domestic Finance of the House Banking Committee, published July 8, 1968, indicated that total trust assets of banks invested in stocks aggregated about $161.7 billion as of April 1, 1968. That amount was close to 19 percent of all outstanding stock as of December 31, 1967, as reported in the Federal Reserve Flow of Funds. If banks were permitted to control additional large holdings of equity securities, through their investment companies, we believe that there could be an extremely undesirable concentration of control in American industry and our economy. The influence of banks would be tremendous in electing corporate directors and thereby increase bank control in corporate affairs. Congress last year expressed concern over the growing institutionalization of the securities markets and adopted legislation directing the

SEC to conduct a study of the effect of institutions in the securities market.

(c) No lack of competition. One reason which has been given in support of permitting bank entry into the mutual fund business has been that it would provide additional competition and thereby benefit investors. We believe that the evidence previously submitted to this committee at hearings in 1967 on S. 1659 demonstrated that there is vigorous competition in the sale of mutual funds in the availability of more than 500 different funds, aside from investment opportunities in securities of individual companies and other investment media. However, if there is any question on the vigorous competition between hundreds of mutual funds, we suggest that there be included in the record of these hearings a copy of the Mutual Fund Directory printed in the Investment Dealers Digest in 1969.

For these reasons, we urge the committee to eliminate section 12 (h) so that it will not repeal the protection afforded to bank depositors and the economy generally in prohibiting banks in the securities business.

(2) Reasonable compensation for management. Section 8 (d) of the bill, beginning at page 24, would amend section 15 (d) of the Investment Company Act to require that all compensation for services paid by a registered investment company to an investment adviser, officer, director, controlling person of, or principal underwriter for, such investment company shall be "reasonable," taking certain factors into account. It would also authorize that court action be brought by shareholders to enforce the standard of reasonableness if the SEC has refused or failed to bring such suit within 6 months after a request by a shareholder.

The IBA firmly believes that compensation for management of registered investment companies should be "reasonable"; but we oppose as a matter of principle 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. Is not this new concept really "overkill"? We suspect that these provisions would be an open invitation to a multitude of suits attacking the reasonableness of management compensation, even though shareholders generally are fully satisfied with the reasonableness of such compensation. We would find acceptable the approach by Senator Bennett last year, which would help provide protection against "strike" suits by barring suit under the statutory standard of reasonableness if the compensation is approved by two-thirds of the outstanding voting shares of the fund and by 100 percent of its independent directors.

With respect to S. 296, we simply attach as appendix A that portion. of our testimony before the committee in August 1967, where we concluded that section 22(d) promotes fair pricing and competition. We urge that 22(d) be retained for the reasons stated in that appendix.