A regulatory body for mutual funds?

The stock market has an agency to regulate itself. So does the commodity market. Now, the chairman of the Securities and Exchange Commission (SEC) has suggested that the mutual fund industry have one, too.

In a speech before the annual general meeting of the Investment Company Institute, the Chairman, Harold M. Williams, suggested to the industry that it set up such a self-regulatory body, which "would allow the commission to generally limit its operations to an oversight mode." Mr. Williams noted that it would be particularly helpful to the commission, since it is already stretched to the limits of its budget.

The industry's response to Mr. Williams's speech, given May 14, has been notably lukewarm. Warren Greene, a member of the board of governors of the No-Load Mutual Fund Association, suggests that "this is a topic that really should be considered by the Investment Company Institute [ICI]." He notes the No-Load Association hasn't considered the topic.

At the ICI in Washington, a spokesman says, "The commissioner's suggestion raises a variety of issues, including the scope of any self-regulatory body and how it would be financed; there is also the issue of its relationship to the SEC and how any self-regulatory agency would be identified."

So far, however, the institute has yet to form a committee to take up the issues, although the spokesman says, "We wouldn't want to suggest we don't consider this important. It is one of a number of fundamental questions to be decided."

One of the reasons the ICI and the No-Load Association are not eager to discuss the issue is that its members are not clamoring for such a body. David S. Lee, vice-president of Scudder, Stevens & Clark, says, "We would question whether it's worth yet another layer regulation." He notes that the National Association of Securities Dealers already has some regulatory influence over the industry and that the SEC watches the association very closely. "It seems to me ," he says, "that if one of the objectives of the commission is to simplify life , I'm not sure if adding another self-regulatory body isn't going to do just the opposite."

Mr. Greene, speaking for the American Investors Corporation, a mutual fund he heads, voices some of the same concern. "I'm skeptical it could actually function from an administrative standpoint," he says. "If we have self-regulation plus the SEC, we might just have duplication without any material benefit to the investors."

Howard Stein, chairman of the $11 billion Dreyfus Corporation, is one of the few industry leaders who have publicly endorsed Mr. Williams's suggestion.In a recent speech before the Financial Communications Society, Mr. Stein noted that the proposal has been met with "extreme restraint" by costs involved, an industry group could help maintain the high standard of regulation by taking over much of the detailed work from the overburdened SEC staff.

In return for setting up a self-regulatory organization, Mr. Stein would like the SEC to sponsor legislation that would provide the mutual fund customer with account insurance similar to that now used by commercial and savings bank depositors, customers of stock exchange firms, and members of credit unions. "Although losses to a customer due to the failure of a mutual fund have been negligible," he told the society, "we are the only major financial industry that does not have federally sponsored account insurance." In its advertising, the savings industry sometimes emphasizes this fact.

One of the reasons Mr. Williams suggested the industry consider self-regulation is that the mutual fund industry has increased in size so rapidly. In two years it has added $50 billion to the assets it manages. Most of this has come from the money-market funds, which now have $77 billion invested in them. Equity-oriented funds also have $50.5 billion of investments, giving the industry its largest asset base ever.

If this massive amount of funds were run by a self-regulated industry, Mr. Williams says that it might be beneficial to the industry, since it is rare for an industry to impose unreasonable burdens on itself. He also notes that if a major scandal were to break out while the industry was growing, and if there were no such self-regulator in place, the incident could "undermine the reputation of the entire industry."

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