They point out under the Glass-Steagall Act-they say very wisely banks were taken out of unrelated industries and confined to banking, and that this seems to be some violation of the principles of that.

Now, this bill, as I understand it, repeals that section of the GlassSteagall Act and makes clear the court decision which would prevent banks from selling mutual funds is out and that the banks can do it.

In view of the availability of banks and the convenience of banks, I can see strong arguments for making it possible for people to buy mutual funds at banks. It's an efficient way to operate. We provide they can't make any sales charge. So it ought to be good from that standpoint.

But it would be very tough, maybe unfair, competition with mutual funds, and it does tend to violate the principle of the Glass-Steagall Act.

Would you like to give us your reaction to that?

Professor SAMUELSON. Let me first comment on Glass-Steagall. That was an act with many parts; and it had some very important reforms. It also, in the heat of the great depression, embodied certain features which subsequent time has suggested are not applicable.

So I won't accept it as a principle of legitimacy that anything that was passed in that emergency legislation is sacrosanct.

However, I do accept its general philosophy. There were some evils in the 1920's, and they did contribute in some degree to the collapse that followed black October of 1929.

There were banks which had a divided conflict of interest internally. They were both investment bankers and they were holders of deposits, ordinary commercial bankers, and sometimes their left hand a little bit influenced what their right hand was doing.

Now, that was not a good way to run the railroad, and it was necessary to introduce law. In some respects, the law went too far, in my judgment, and we have actually backtracked under Comptroller Saxon with respect to municipal bond flotation, and so forth.

But accepting that general spirit and philosophy, there is nothing in the banks providing the multisecurity investment function for small investors that in the remotest degree could lead to the particular conflicts of interest that were involved in what the Glass-Steagall Act was trying to correct.

Banks already are performing this function to a very large degree for wealthier people. It is all a question of what investment economical size is, and what securities can be commingled.

So if I were an absolute believer in the Glass-Steagall Act and its philosophy 100 percent, I could, with absolute good conscience, say it should not stand in the way of this particular reform feature.

And those New Dealers who were most incensed by the previous evils, none of them are part of the current testifiers against this reform. Now, with respect to whether banks would be in unfair competition, I do not know whether you were quoting or expressing your own opinion. I think that if an institution is well set up economically to do a job efficiently and at low cost, and if at the initiative of the investor himself he comes to the bank, so there is not a need for costly sales effort, it seems to me that the result is absolutely what we call fair competition.

I may also say it is not ruinous competition. The banks will not be doing a single thing that the no-load funds now are not already doing. Nobody is proposing legislation before this industry that I have heard yet that you ban the no-load funds. Think of how "unfair" those funds are! I cannot as a salesman sell something at 7 percent or 914 percent because "in discriminatory fashion' there is that rascal office which saves itself the expense of all salesmen and now sells a diversified group of securities at no load.

On the contrary, again, as part of the general philosophy of the American people, we take that to be part of the good game of competition.

Senator PROXMIRE. I just have one other question. In view of your testimony and your article entitled "Alibis, Alibis," in this week's Newsweek, all of which concern the

Professor SAMUELSON. When I wrote that, I did not know I was going to testify before this committee.

Senator PROXMIRE. Well, that is the trouble with being a prominent columnist-all of which concerns the lack of value of investment advice.

Am I correct in assuming you would favor the provisions of this bill calling for reasonable management fees?

Professor SAMUELSON. Yes, yes; and I would like to state in strongest terms that all that we know about corporate democracy and the problem of votes, when you have a large group of diversified holders, does not suggest that a management company and the so-called independent directors elected by the companies are in an effective, adversary, arms-length procedure so that you can count upon what they will do to achieve equity and efficiency without the force of law and of the SEC.

Recently I went through the testimony of the industry and looked at the various reductions that have been made, and then I recounted in my mind the various hearings that had been held and the various stockholders suits, and I looked almost in vain for automatic reductions which would have come within the industry if there had not been a public opinion, an important public opinion, which through the instrument of Government was bearing down upon them.

My worst fear is that a compromise bill would be passed by this committee, that Congress then would turn away its attention for many years, and the heat would then be off, and all progress to which one could point with real pride would be slowed down from that time on. I would almost rather see no legislation.

Senator MCINTYRE. I have just one last question, Mr. Chairman. Professor, the basic argument which we keep hearing again and again is that regardless of the high cost of buying and keeping mutual fund shares, the funds have performed so well the shareholders are satisfied.

Now, I respond that this is a fortuitous response, because the market generally had been performing well over the past 15 years or so. We have to legislate now for possibly 10, 20 years to come.

Do you think the chances of the stock market performing well over that period are so great that we can be justified in passing legislation on the assumption that the market will keep going up and up and up? Professor SAMUELSON. I will not go on record with stock market pre

dictions. But there is a great deal of economic law which says that the world is not a one-way street and that you must provide in prudent legislation for both ups and downs.

I don't think that we would consider the use of illegitimate methods to be free from criticism just because of the happenstance that in an age when price levels have since 1939 moved as they have that there hasn't been a pecuniary loss.

You would have had to be an idiot and would have had to have even grosser mismanagement than is defined in existing law to have lost money in the stock market in the period since 1942.

Now, I have a few friends who qualify [laughter] but they are in the minority. And I don't think that is a relevant consideration as to what constitutes effective competition and what constitutes socially desirable regulation.

Senator MCINTYRE. Thank you very much for your answers here this morning and for being here.

Senator PROXMIRE. Thank you very much, Professor Samuelson. You made an extremely useful contribution. We very much appre

ciate it.

Our next witness is Mr. Reese Harris, executive vice president of the Manufacturers Hanover Trust Co., and I understand you are representing the American Bankers Association.

STATEMENT OF REESE H. HARRIS, JR., EXECUTIVE VICE PRESIDENT, MANUFACTURERS HANOVER TRUST CO., NEW YORK CITY; ACCOMPANIED BY LEO HERZEL, SPECIAL COUNSEL, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

Mr. HARRIS. The trust division. Former president of the trust division.

Senator PROXMIRE. You are appearing for the ABA, the American Bankers Association?

Mr. HARRIS. That is right. I am appearing for the American Bankers Association.

Senator PROXMIRE. Fine. We are delighted to have you and you may proceed.

Mr. HARRIS. Thank you.

Senator PROXMIRE. I understand there are some technical corrections in the statement, and you can either read the statement or summarize it.

Mr. HARRIS. I would like to read it.

Senator PROXMIRE. All right, sir.

Mr. HARRIS. My name is Reese H. Harris, Jr. I am executive vice president of Manufacturers Hanover Trust Co., of New York City, N.Y.

I am accompanied today by Mr. Leo Herzel of Chicago, Ill., who is serving as special counsel in this matter. I formerly served as president of the trust division of the American Bankers Association.

Mr. Chairman, and members of the Senate Committee on Banking and Currency, the American Bankers Association is indeed grateful to this committee for having scheduled this hearing on a subject of great importance to the banking and trust industry.

We are delighted to have this opportunity to present our views in support of Senate bill 34 introduced by the distinguished Senator from Alabama, Mr. Sparkman, a bill currently before this committee which proposes certain important changes in the Federal securities laws, and on S. 296 introduced by the distinguished Senator from New Hampshire, Senator McIntyre, which is identical with S. 34 with respect to its banking provisions. Our remarks will be addressed to S. 34.

S. 34 relates in part to bank collective investment funds, which are created by the pooling of assets held by a bank in trust or other fiduciary capacities. It is one of the general purposes of the bill introduced by Senator Sparkman to resolve through legislation some existingand perhaps potential-questions concerning the legal status of certain bank collective investment funds under the Federal securities laws. In addition, the bill proposes certain clarifications in the Federal banking laws made necessary by a recent Federal district court decision. Three specific types of collective investment funds are covered by the bill. They are:

(1) Common trust funds, exempt from taxation under Section 584 of the Internal Revenue Code, which are comprised of assets held by a bank as trustee, executor, administrator, or guardian. (2) Collective funds comprised of the assets of qualified trusts (within the meaning of section 401 of the Internal Revenue Code), which would include trusts established for employee pension, welfare, profit-sharing, and bonus plans, as well as trusts for selfemployed retirement plans under the Smathers-Keogh Act.

(3) Collective funds comprised of assets of managing agency accounts created by an agreement authorizing the bank (as agent) to exercise investment discretion in managing the assets of the principal. It is this managing agency fund which has become popularly described as a "bank mutual fund."

Our appearance today marks the third occasion in which the American Bankers Association has been privileged to testify before this distinguished committee in support of legislation designed to clarify the legal and regulatory status of bank collective investment funds under the Federal securities laws.

The provisions of S. 84 in many important respects reflect a marked--and we believe a highly constructive departure from bills previously submitted. Clearly the bill seeks to produce a reasonable compromise, which will accommodate the essential and legitimate interests of all parties- both public and private.

The contesting legal arguments which underlie the problems, here sought to be solved, have continued for a number of years. Speaking for ourselves, the American Bankers Association has no desire to cling fervently to old positions or give further sustenance to this prolonged debate.

S. 24 includes provisions which accept positions we have presented in the past; and they contain provisions which flatly reject some of our prior positions. We are perfectly happy to accept this result. We are earnestly interested in solving problems so that we may get on with the business of providing fiduciary services to the public, and we believe that S. 34 offers a rational and reasonable means for attaining that objective.

Senator BENNETT. Mr. Chairman, I have to interrupt Mr. Harris. I have got to go to another appointment. I have a question that I would like to submit to be answered in writing.

Senator PROXMIRE. Why don't you go ahead and ask the question? I am sure it is all right.

Senator BENNETT. It is a little involved, and he might want an opportunity to study it.

Senator PROXMIRE. All right.

Senator BENNETT. May I ask that it be put in the record at the end of his statement with the understanding that the answer may be supplied before the hearing is closed?

Senator PROXMIRE. Without objection, that will be done (see p. 85). Mr. HARRIS. I will continue with my prepared statement. Before discussing the specific purposes and effects of the proposed amendments, it might be helpful if we touch briefly on the history and development of bank utilization of collective investment funds.

Banks have for generations been administering or managing funds and other assets held by them in a trust, agency, or other fiduciary capacity. However, it has only been in the past 30 or so years that banks have used pooling or collective investment procedures for the administration of certain trusts and fiduciary accounts.

The motivating purpose for adopting collective investment procedures has been to achieve more diversified, as well as more efficient, investment of fiduciary accounts than would be possible were these same accounts to be managed and invested individually. The pooledfund procedure has proved to be particularly useful and beneficial in the investment management of small- or moderate-sized accounts.

In addition to balanced funds, banks have developed specialized collective funds such as common stock funds, State and municipal bond funds, and fixed income funds.

Both the growth in the number of pooled funds and the number of banks maintaining such funds has been quite dramatic in recent years. The trust division of the American Bankers Association conducts an annual survey of collective investment funds. According to the 1961 survey, there were 288 banks operating 421 pooled funds. By 1969 those figures had grown to 497 banks operating 1,916 pooled funds.

Now, let us proceed to a review of the pending amendments, giving special attention to the particular treatment which is proposed to be given to each of the three types of bank collective investment funds under the Federal securities laws.

This type of collective fund is maintained for the pooling of assets held by a bank in the capacity of a managing agent of a number of customers. This is a relationship created by an agreement in which an individual, as the principal, places funds or other assets in the physical control of a bank and authorizes the bank as agent to exercise its discretion in the management and investment of those assets for the benefit of the principal.

Pooling these funds further affords the small investor the opportunity to make use of the investment services of his bank. He needs professional management of his funds and the continuous fiduciary responsibility to the individual investor.