The CHAIRMAN. Very well.

Senator McIntyre?

Senator MCINTYRE. I would like to thank Mr. Eggers and the Treasury Department for supporting these provisions. The questions I had were pretty much along the same line that you started developing Mr. Chariman, but I realize, sir, that the Treasury Department does not have the specialized experience to comment on those provisions of the bill dealing with purely mutual fund activities. There are provisions of this bill which deal with matters which will have a direct impact upon banking collective funds so I would like to just ask this question of you: Do you feel that subjecting bank trust departments to a strict standard of fiduciary conduct will in any way at all subject them to an unreasonable burden?

Mr. EGGERS. No, sir; I don't think so.

Senator MCINTYRE. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much.

Our next witness is Mr. Davidson Sommers, senior vice president and general counsel of Equitable Life Assurance Society of the United States.

The CHAIRMAN. Mr. Sommers, we are very glad to have you. We have your statement. It will be printed in the record. You testified at these hearings before, didn't you?

Mr. SOMMERS. We submitted a statement last year, and we testified in the House.

The CHAIRMAN. That's right.

STATEMENT OF DAVIDSON SOMMERS, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, ACCOMPANIED BY RICHARD J. CONGLETON, SENIOR VICE PRESIDENT OF THE PRUDENTIAL INSURANCE CO. OF AMERICA, AND LAWRENCE J. LATTO, OF WASHINGTON, D.C.

Mr. SOMMERS. My name is Davidson Sommers, I am senior vice president and general counsel of the Equitable Life Assurance Society of the United States, and I am appearing today on behalf of the American Life Convention and the Life Insurance Association of America. These two associations have an aggregate membership of 358 life insurance companies in the United States and Canada which have in force approximately 92 percent of the legal reserve life insurance written in the United States. These companies also hold over 99 percent of the assets attributable to insured pension and profitsharing plans in the United States.

I am accompanied by Mr. Richard J. Congleton, senior vice president of the Prudential Insurance Co. of America, and by Mr. Lawrence J. Latto, of Washington, D.C., who is acting as our special counsel. My testimony will relate to those provisions of the bills which deal with the funding of qualified pension and profit-sharing plans by banks and insurance companies. These provisions are described at pages 10 to 16 of the committee's print entitled "Investment Company Amendments of 1969, Analysis of S. 34," under the heading, Part B, 'Banks and Insurance Companies.'" Both S. 34 and S. 296 are identical, so far as these provisions are concerned.

I will not, however, be discussing all of the provisions described under that heading. Some of those provisions relate only to banks and not at all to insurance companies. These are the so-called "managing agency account" or "bank mutual fund" provisions. We take no position one way or the other with respect to these provisions. My statement concerns only the sections of the act that deal with qualified pension and profit-sharing plans, and these sections, I believe, are quite noncontroversial.

We strongly support the adoption of these provisions and urge that they be adopted in the form in which they now appear in the bills. For the record, let me list the sections of the bills to which I refer. They are sections 2(4), 3(b)(5), 27(a), 27(b), 28(a), 28(b), and 28(c).

In essence these provisions will give to life insurance companies exemptions from the securities laws that are now enjoyed by banks. A detailed explanation of what these provisions would accomplish is adequately set forth in the committee's printed analysis of S. 34. It may be useful, however, if I gave some background that would help explain why the adoption of these provisions is desirable and in the public interest.

CORPORATE PENSION FUNDING

The administration of qualified pension and profit-sharing plans in the United States is carried on primarily by banks and life insurance companies. They are in active and vigorous competition with each other. Often competitive bids will be solicited from both types of institutions and these bids will be analyzed in detail with the help of pension consultants and other exports. A bank administered plan is usually called a trusteed plan. A plan administered by an insurance company is referred to as an insured plan. Employers pay close attention to the performance of the funding agencies, and to the level of their respective operating expenses and charges.

Because the functions performed by these two classes of funding agencies in the administration of qualified retirement plans are essentially similar, there is general agreement that the securities laws should apply basically in the same manner and to the same extent to both. I believe this is the view, not only of the banking and insurance industries, but also of the Securities and Exchange Commission.

The Federal securities laws, however, as they now stand, and have been interpreted by the Commission, provide significantly greater exemption for trusteed plans than for insured plans. The explanation. is largely historical, and a full account of how this situation arose would not be warranted here. I shall attempt, therefore, only a very brief summary.

When the Federal securities laws were originally adopted, the Congress decided to make these laws inapplicable to the administration of qualified retirement plans, both by banks and insurance companies. Until the recent developments in the early 1960's that I am about to describe took place, therefore, the applicability of the securities laws was not affected by an employer's choice of funding agency. Regardless of whether a bank or insurance company was chosen, there were statutory or administrative exemptions that relieved both funding agencies from the necessity of compliance with those laws. These activities were, however, and still are, subject

to extensive regulation by Federal and State banking authorities, by State insurance departments, and by the Labor Department and Internal Revenue Service.

Prior to 1960, banks had the advantage of being able to invest accumulated plan contributions under a trusteed plan either in fixed-income securities or in equity securities, in whatever proportion the employer preferred. Life insurance companies, however, could offer only investment primarily in fixed-income securities. In consequence, although other factors may also have contributed, an increasing percentage of this business was placed with the banks. Within the past decade, however, life insurance companies have been authorized to broaden their services, in order to compete more effectively, to include facilities for investing the assets of retirement plans in common stocks or other equity securities and for allocating the investment results directly to those plans. This is accomplished through what is known as "separate accounts" which have now been expressly authorized by the legislatures of most of the States. These separate accounts are the life insurance company counterpart of the collective pension trusts of the banks.

Life insurance company separate accounts, however, which were not in existence or even contemplated when the securities laws were adopted, happen not to have been given the express statutory exemptions enjoyed by qualified pension and profit-sharing trusts, nor have they been given the same administrative exemptions from the securities laws.

I used the word "happen," because it is only by reason of the accident of time that the securities laws contain exemptions for the common stock investment services provided by banks in this area while they do not contain exemptions for comparable common stock investment services now offered by life insurance companies. This accidental difference would be removed by the adoption of S. 34 and S. 296.

Now, I will address myself to the question you put to Mr. Owens, to be answered later. We will address ourselves to that same question. We have, over the last 7 years, sought to obtain administrative relief from the Commission that would eliminate, or at least alleviate, the competitive inequality under which we have been operating. The Commission has been sympathetic, has devoted considerable time and attention to this area, and has adopted helpful exemptive rules in 1962 and in 1964.

In addition, only last month, an elaborate new proposal, rule 6(e) (1) to which you referred, was published by the Commission for public comment. Although we have welcomed the adoption of the earlier rules and are urging the adoption of the current proposal, we still do not think those rules go far enough, nor do they satisfy the policy of equal treatment of persons performing substantially the same functions.

Because the services offered by banks and insurance companies are so similar, differences that seem small are actually very significant. Employers are growing in sophistication, are increasingly advised by experts, and are interested in making maximum use of every dollar. Any added complication that impedes the operations of one funding agency but not the other, anything that causes delay or additional expense, constitutes a serious competitive disadvantage.

For these reasons, while we welcome the Commission's efforts to provide administrative relief, we think the best solution is for the Congress to decide what is basically an issue of legislative policy, and we believe the solution proposed by the pending bills is a sound one. That solution is to provide insurance companies with the same statutory exemptions from the securities laws for the funding of qualified retirement plans as are enjoyed, or will be enjoyed, by banks. These exemptions, of course, do not include exemption from the fraud provisions of the securities laws.

As pointed out above, this business will continue to be closely regulated by other agencies. All that would be done is the elimination of inequitable treatment. In this connection, I might point out that Congress has already recognized the principle that the two funding agencies should enjoy competitive equality when, in 1962, it amended the Internal Revenue Code to provide tax treatment for income and gains on qualified retirement plan assets held in separate accounts comparable to that applicable to income and gains on qualified retirement plan assets held by collective investment trusts of banks. The purpose of this amendment was clearly explained in the Senate report as correcting a competitive discrimination.

This difference in tax treatment is damaging, however, not only to the life insurance companies, but also to the smaller employers who generally cannot assume the risk or administrative expense of establishing a small pension trust.

To provide tax equality for these segregated pension accounts with the tax-exempt pension trusts, it is necessary that the investment income and capital gains credited to policyholders in these segregated accounts be free of tax in the same manner as is already true in the case of the noninsured pension trusts.

Your committee's amendment is designed to remove this competitive discrimination. Senate Report 2109, 87th Congress, second session (1962), pages 8-9.

RETIREMENT PLANS OF SELF-EMPLOYED PERSONS

The proposed statutory pattern is somewhat different for activities of banks and insurance companies in connection with the administration of qualified plans established by self-employed persons. The 1940 act would be made inapplicable but there would be no exemption from the registration requirements of the Securities Act of 1933 or from the Securities Exchange Act of 1934. Section 27(d) of the bills would transfer to the Federal banking authorities regulatory jurisdiction over the participating interests in collective trust funds established by banks which result from contributions under Smathers-Keogh plans. The Securities and Exchange Commission would continue, however, to enforce all of the provisions of the 1933 act applicable to the comparable activities of insurance company established separate accounts.

I have revised the next two sentences. As to Smathers-Keogh plans, both bills would give the regulatory agency authority to grant exemptions from the registration provisions of the 1933 act.

The bills would similarly authorize exemption of insurance companies from the provisions of the 1934 act from which banks are already exempt by statute. We believe that these are desirable provi

sions. We urge, however, that if several agencies are to be assigned the responsibility for administering the securities laws in connection with H.R. 10 plan funding, there should be a congressional directive that the objective should be to achieve uniform treatment for trusteed and insured separate account plans and that differences in regulatory requirements should be permitted only to the extent that the form of organization or method of operation justifies a difference in treatment.

Our position is simply that an accidental discrimination in the law should be corrected. There is no principle more firmly ingrained in our jurisprudence than equal treatment under law. That is all we are asking here. The Congress has consistently encouraged the creation of private retirement plans which have now grown to the point where they cover over 30 million people. The adoption of these provisions will give employers a choice of funding agency for their retirement plans that will be made on the basis of the nature and quality of the services rendered, and will return us to the situation as it existed prior to 1960, when the choice was not affected by unwarranted differences in regulatory requirements.

I should like to thank the committee for its courtesy in giving us the opportunity to present our views, and we will be glad to furnish any additional information or assistance that may be thought necessary or desirable.

Thank you.

The CHAIRMAN. Thank you, Mr. Sommers. That was a fine, helpful, straightforward statement.

I want to ask you the same question that I asked the Treasury representative, Mr. Eggers, a few minutes ago.

Section 8 of this legislation provides that mutual fund management fees should be reasonable and it gives shareholders the right to sue in court in order to have a determination of the reasonableness of the fee.

Could the insurance industry continue to operate its variable annuities and other type mutual funds under this doctrine, or does the insurance industry raise the same objections to this section as the mutual fund industry?

Mr. SOMMERS. No, sir.

As we advised Senator McIntyre last year, we accept the principle of reasonableness as a test of management fees and have not interposed any objection to this provision.

We are not expert on all the details. We have not been part of the negotiations on this subject, but

The CHAIRMAN. I am not asking you to comment on any industry except your own.

Mr. SOMMERS. We are not raising an objection to this provision. The CHAIRMAN. Thank you very much.

Your statement was very clear. I don't know of any question I want to ask you.

I appreciate your appearance, all three of you gentlemen, and thank your statements.

you for

That concludes the hearings for today. We will go over until 10 o'clock Thursday morning.

Committee stands adjourned.

(The complete prepared statement of Mr. Sommers follows:)