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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 over 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. We emphasize particularly that, in our opinion, many individuals who otherwise would invest directly in the shares of individual corporations might be induced by the availability of a bank sponsored mutual fund to invest in that fund, with a resulting growing institutionalization of security holdings in bank trusts and bank investment companies.

(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 demonstarted that there is vigorous competition in the sale of mutual funds in the availability of more than 300 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 Funds Directory printed in the Investment Dealers Digest in March of 1969.

For these reasons, we urge the Committee to eliminate Section 12 (h) and retain the protection afforded to bank depositors and the economy generally in present prohibitions against banks engaging 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 advisor, 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 vigorously 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 removal of investment advisory and underwriting contracts, and vigorous competition from many simi investment companies. We believe that the proposed 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.

Finally, with respect to provisions on regulation of sales charges for the sale of mutual funds: Section 12 4 S. 34 (beginning at page 32) would amend Section 22(b) of the Investment Company Act to provide that rules prescribed by a securities association shall provide that the public offering price "shall not include an excessive sales load but shall allow for reasonable compensation for sales personnel, broker-dealers, and underwriters, and for reasonable sales loads to investors." It would also authorize the SEC to alter or supplement the rules of a regulatory association to effectuate the purpose of this section. We believe that this additional authority for self regulation (with the SEC oversight) of sales charges on mutual funds is unnecessary because the sales charge is fully disclosed to each purchaser on the cover of the prospectus which must be delivered to him; there is vigorous competition between funds; the present general level of sales charges is not excessive in comparison with charges in other comparable fields of activity such as life insurance; and there is existing statutory authority for the NASD to prohibit "unconscionable or grossly excessive sales charges". However, we have confidence in self-regulation and review by the SEC and do not object to these provisions in section 12 of S. 34.

With reference to S. 296, one provision which is not included in S. 34 is Section 12 (a) to repeal Section 22(d) of the Investment Company Act of 1940. To simplify the record of this hearing, 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.

Some of the bank members of our Association are interested in issuing and selling mutual funds and would disagree with our recommendation to keep the present prohibition against banks engaging in the issuance and sale of such securities. However, our position was adopted pursuant to the regular procedures of the Association and represents the strong feeling of practically all of our nonbank members.

In conclusion, we support adoption of S. 34 if:

(1) Section 12(h), which would repeal the prohibitions of the Glass-Steagall Act against banks engaging in the issuance and sale of mutual funds, is deleted; (2) Section 8(d), authorizing suits for determination of the reasonableness of management compensation, is deleted.

We appreciate the opportunity to submit these views and recommendations to the Committee and would welcome the opportunity to present any additional information which might be helpful.

SECTION 22 (d) PROMOTES FAIR PRICING AND COMPETITION

Section 22(d) of the Investment Company Act provides that no registered investment company shall sell any redeemable security issued by it except either to or through a principal underwriter for distribution or at a current public offering price described in the prospectus and, if such security is beng currently offered to the public by or through an underwriter, no principal underwriter of such security and no dealer shall sell any such security to any person except a dealer, a principal underwriter or the issuer, except at a current public offering price described in the prospectus.

The S.E.C. press release regarding S. 1659 (p. VIII of the Committee Print dated May 1, 1967) states that "As a result, in part, of the resale price maintenance scheme provided in Section 22(d) of the Investment Company Act, which the mutual fund industry regards as important for the preservation of the existing pattern of distribution of such shares, competition has not operated to reduce sales loads."

Section 22(d) has not prevented competition to operate to reduce sales charges and there have been significant reductions in sales charges of many funds.

More than 250 different mutual funds, each free to set competitive sales charges, compete vigorously with each other and with a wide variety of other investment media. The effects of such competition are demonstrated both in the wide range of sales charges for different funds and reductions in sales charges. For example, an analysis of sales and commissions on fund shares representing about 85% of total industry sales shows that the overall sales charge rate declined between 1956 and 1966 from 7.00% to 5.73%, a decline of 18.2% during a period of sharply rising costs of doing business. The general decline in the overall rate of sales charges is due largely to the progressively more liberal scales of quantity discounts to the increasing number of purchases which qualify for such discounts, and to the recent development of quantity discounts on purchases over an indefinite period of time, even over a lifetime.

One of the unique features of the open-end investment company is guaranteed redemption, permitting a fund shareholder to sell back his shares to the fund at net asset price. This redemption can be met from the fund's uninvested cash, by liquidation of its portfolio or from the proceeds of sales of shares. Available cash is often limited. Forced liquidation of portfolio might work against the interests of the fund's shareholders and, if at a time of market stress, would aggravate market conditions. Therefore it is important that there be an orderly distribution system to provide a flow of new funds to maintain orderly redemption. Repeal of section 22(d) would disrupt orderly distribution and might force mutual funds to liquidate at a time when such action would force unwise investment decisions and destabilize an unsettled market. Furthermore, section 22(d) provides two important protections for investors:

(i) Fair Pricing for the Unsophisticated Investor. Section 22(d) assures that the unsophisticated investor will pay the same price for shares of a particular mutual fund that every other investor pays for them, even if he buys from a dif

ferent dealer. If there were no fair price requirement but a statutory maximum, the unsophisticated buyer might be charged the maximum while a sophisticated buyer might pay a lesser charge for the same number of shares of the same fund. (ii) Stimulates Competition from Other Types of Securities and by Many Investment Companies. Investment companies which distribute their shares directly through their own salesmen are not affected by section 22(d) and if it were repealed the salesmen of such companies would continue to offer the shares of their company at one price with the same sales charge. However, for investment companies which distribute through many independent securities dealers repeal of 22(d) might mean cut-price sales of their shares which would diminish the incentive for securities dealers to sell their shares. The result might be that many investors would be contacted only by salesmen for a few investment companies which sell directly, losing the benefits of competition by salesmen selling not only a wide variety of mutual funds but also other types of securities.

Repeal of section 22(d) might cause many investment companies which presently distribute through independent securities dealers to shift to direct sales through their own salesmen so that their shares could be sold at one price with a sales charge which would provide sufficient incentive to stimulate aggressive sales of their shares. This would mean the demise of many small securities dealers who rely on mutual fund sales as the margin for profitable operation causing detrimental effects on investors, markets and small companies.

MAY 5, 1969.

Hon. THOMAS J. MCINTYRE,
Senate Office Building,
Washington, D.C.

DEAR SENATOR MCINTYRE: When Andrew J. Melton, Jr., First Vice President of the Investment Bankers Association, testified before the Senate Banking Committee on these bills on Friday April 18, you asked if the Association would furnish for the record examples of any cases where mutual fund sales charges had been reduced in recent years.

The testimony of John R. Haire on behalf of the Investment Company Institute before the Senate Banking and Currency Committee on S. 1659 in 1967 stated (pg. 304 of the printed hearing) that:

"As shown in Exhibit 10, an analysis of sales and sales charges on fund shares representing about 85% of total industry sales shows that the overall sales charge rate declined between 1956 and 1966 from 7.00% to 5.73%, a decline of 18.2%."

Mr. Haire's testimony also included (pg. 306) a tabulation showing the dollar amount for which the first reduction in sales commission is effective for a group of mutual funds as follows:

Dollar amount of investment for 1st reduction in commission:

$2,000

$2,500

$5,000

$10,000

$12,000

$12,500

$15,000

$25,000

$50,000

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I hope that this information is helpful in response to your question. We respectfully request that this letter be included in the printed record of the hearings.

With best regards,

GORDON L. CALVERT.

Senator MCINTYRE. Thank you very much. I am sorry, time kind of pushed us along a little bit. Our next witness is Mr. Cocchi of the Independent Broker Dealers' Trade Association.

Mr. Cocchi, come right down front to the microphones. I have your statement, and I am hopeful you are willing to submit the statement for the record and then if there are any particular points which you

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wish to stress or make clear-I say this only in the interest of time— but I want you to feel that you have had a full opportunity.

STATEMENT OF RAYMOND W. COCCHI, CHAIRMAN, INDEPENDENT BROKER DEALERS' TRADE ASSOCIATION, ACCOMPANIED BY JAMES C. BUTTERFIELD, TREASURER

(The statement may be found at p. 211.)

Mr. COCCHI. If I might just skip over this, if this would be all right with you. My name is Raymond Cocchi, and I am the president of the Independent Broker Dealers' Trade Association and the vice president of Oxford Securities, Inc., a small broker dealer firm located in Massachusetts. With me is James C. Butterfield, who is the treasurer of our association, and the president of James C. Butterfield, Inc., a small broker dealer firm located in Michigan.

I would like to give you a brief outline, if possible, with your permission, of what our organization is, what we are attempting to do. Our organization is made up of independent broker dealers that are registered with the NASD and the SEC and various States. Our members are generally small businessmen who provide regional and local securities facilities for investors in nonmetropolitan areas.

Most of our members have a substantial interest in the continuing health and soundness of the mutual fund industry. We provide an important part of the national securities distribution system that exists in this country to serve the approximately 26 million shareholders in almost 26,000 publicly owned companies. We believe that many of the provisions of S. 34 will increase investor protection and will encourage investor confidence in the securities industry. There are some features of the bill, however, which we believe are not workable in practice and are to some extent inconsistent with the basic principles of free enterprise and corporate democracy.

Our most serious objection to the bill involves section 12, amending section 22 of the Investment Company Act of 1940 to provide that the NASD may by rule prohibit its members from offering mutual fund securities at a price which includes "excessive" sales loads and that the Commission may independently alter or supplement any action of the NASD. In other words, the SEC will have the same "oversight" authority respecting NASD determinations as to sales loads as it has under the SEC Act of 1934 respecting the various stock exchanges.

It seems clear to us that the purpose of section 12 is to reduce the existing level of sales loads in the mutual fund industry. This will have an immediate and serious impact on the earnings of securities salesmen, particularly those who specialize in the sale of mutual fund shares. We do not believe this committee or the SEC has before it any substantial evidence that the earnings of mutual fund salesmen are excessive. As we understand it, the average salesman earns less than $9,000 a year, which is not more than most of the secretaries in the offices here in the Congress are paid. It is less than one-fourth of the salary of a Member of Congress under the new pay schedule recently passed. It is less than the salary or income of most other professional or semiprofessional persons performing services of a similar nature.

To reduce the income of salesmen in this industry by reducing the sales commissions simply takes bread out of the mouths of their families in order to save a few dollars for investors who have a choice not to purchase the product to begin with. We fail to see the logic or equity underlying section 12 of S. 34 and strongly oppose this feature of the bill.

We also oppose section 16 of S. 34. Under the present law, sales commissions on contractual plans to purchase mutual fund shares on a periodic or installment basis by investing small amounts of money at monthly or periodic intervals is limited to 9 percent, of which the selling firm can deduct up to 50 percent from the investor's first year's payments. This is the so-called "front-end load." It is closely akin to the sale of insurance policies, where the contract runs over a period of years and the salesman is compensated with a "front-end load" that is from 65 percent to 120 percent of the first year's premium.

Mutual fund companies and salesmen work in a competitive world. Sales commissions are set at the lowest figure consistent with the necessary incentives for salesmen to distribute the product. Free competition in the industry insures that the sales load comes to rest at the lowest point necessary to accomplish sales. The SEC argues that most sales loads are around 9 percent, and there is no competition. We disagree. It simply means that 9 percent is probably too low a ceiling, and sales loads are held by law now at a point below which consumer demand and competition would fix them in a free market. We think that the provisions of H.R. 8980, introduced by Congressman Bill Stuckey of Georgia, on March 13 of this year, now pending in the House, treat these problems more realistically. That bill provides for hardship refunds within 1 year and a "stretchout" for investors who involuntarily withdraw from a contractual plan.

The SEC also argues that investors do not read the prospectus written. The sales load is set out clearly on the first page by law. Or, if they read it, they do not understand it. We disagree. The important thing is that the investor has the opportunity to read the prospectus, if he is interested, and has the knowledge that there is full disclosure. Congress cannot assume that every investor is deaf and dumb, or illiterate. Nor should Congress compel the investor to read the prospectus at the peril of having the SEC read it and substitute its. judgment for his. Does the SEC have any evidence that investors do not read and understand the prospectus? We think they read it, understand it, and then decide to invest or not to invest on the basis of the quality of the product and its management, not the price of management or the cost of sales. Free men in a free society should be allowed to decide whether a sales load is too high-they have a choice-no load, not to buy, or to seek a lower sales commission.

The SEC further argues that the mutual fund shares are some special kind of sophisticated consumer goods justifying Federal decisionmaking and ratemaking. To this we say, so is the insurance policy. We think mutual fund salesmen are entitled to the equal protection of the law.

We oppose sections 12 and 16 of S. 34 because we think they deprive mutual fund salesmen of adequate and fair compensation without

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