[Congressional Record Volume 141, Number 65 (Friday, April 7, 1995)]
[Extensions of Remarks]
[Page E868]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


     INTRODUCTION OF THE INVESTMENT COMPANY ACT AMENDMENTS OF 1995

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                            HON. JACK FIELDS

                                of texas

                    in the house of representatives
                         Friday, April 7, 1995
  Mr. FIELDS of Texas. Mr. Speaker, today I introduce legislation 
amending the Investment Company Act of 1940. Entitled the Investment 
Company Act Amendments of 1995, this legislation will promote more 
efficient management of mutual funds. It will result in reduction of 
operating costs that will save investors money, and allow a greater 
percentage of the assets of the fund to work on their behalf. This 
legislation will also provide for more effective and less burdensome 
regulation of mutual funds by the Securities and Exchange Commission, 
and it will increase and improve investor protection.
  Enacted in 1940 and amended in 1970, the Investment Company Act built 
the foundation for a system that regulators and regulated entities 
alike agree has protected investors. For the most part it has not 
interfered with the development of new products and the creation of 
investment opportunities. There is a need, however, to reexamine the 
operation of the act, as our financial markets have expanded in size, 
complexity, and investment opportunities.
  The goal of this legislation is to revise the provisions of the law 
that no longer reflect the demands of modern markets. We must be 
vigilant in our efforts to relieve mutual funds of the remaining 
unnecessary and duplicative regulatory burdens that remain in the 
current law. The operating costs of mutual funds represent the 
expenditure of moneys that reduce the pool of assets owned by the 
shareholders, and a reduction in the capital that is at work earning a 
return for them. Government imposed regulations that do not increase 
investor protection fail the cost/benefit analysis to which all 
regulations should be subjected. They mandate the waste of potentially 
productive resources. They represent, in effect, an undesirable tax on 
capital, the most pernicious form of tax. Unnecessary regulations do 
nothing except reduce the wealth of American citizens.
  To this end, the Securities and Exchange Commission conducted its own 
review of the operation of the Investment Company Act. On the occasion 
of the 50th anniversary of the adoption of the statute, the SEC 
produced a comprehensive and valuable report. Entitled ``Protecting 
Investors: A Half Century of Investment Company Regulation,'' the 
legislation introduced today is based, in part, on a number of its 
recommendations.
  For example, the SEC report recommended amending the act to expand 
exemptions for private investment companies, pools of money from 
sophisticated investors, from its registration requirements. This 
legislation will do that, but in a way that will insure that only pools 
of the most sophisticated investors, people who are not in need of the 
protection of registration under the act, are exempted. Regulation 
imposes costs, and sophisticated investors not in need of or desiring 
the protection of the act should be free to voluntarily accept greater 
risk return for the opportunity of greater reward. Exemptions from 
registration and regulation, however, will not be made
 available for those products that will be sold, perhaps, to less 
sophisticated investors. There is no intention in this legislation to 
allow a generation of unregistered investment companies to be offered 
to the general public.

  This bill also proposes to implement the SEC recommendations for 
improving and modernizing mutual fund governance. This will include 
requiring a majority of the boards of directors of mutual funds to be 
composed of independent directors, and increasing the authority and 
responsibility of independent directors in running the fund.
  The legislation will also make mutual fund regulation more efficient 
by eliminating requirements that are expensive to comply with and which 
do not increase investor protection. This includes eliminating the 
requirements of the existing law for shareholder ratification of 
certain routine corporate actions, including approval of the selection 
of auditors.
  Provisions of this legislation will stimulate a reexamination of the 
rules governing investment company advertising. As introduced, it will 
break existing regulatory restraints on promotion and sales literature 
of investment companies. Current law requires the contents of fund 
advertising to be keyed exclusively to information which is either 
specifically or ``the substance of which'' is in the prospectus. This 
requirement is so inflexible it stifles the development of effective 
investor communications by those who market mutual funds. Although 
advertising puffery will never be tolerated in the sale of these 
important investments, and the antifraud provisions of the Act will 
remain in force and unchanged to govern statements made in connection 
with the sale of these investments, a new era of generally improved 
communications to mutual fund investors will begin with the enactment 
of this legisation.
  Finally, in 1970 Congress adopted restrictions on the investment in 
mutual funds by other funds. This arose from concerns about the 
possibility of investors paying duplicative expenses and layers of 
fees. Restrictions on ``fund of fund'' investments may not be necessary 
in the modern markets of the 21st century which include negotiated 
commissions, technological oversight of the markets, increased 
competition, and improved Government regulation of mutual funds.
  Reexamination of fund of funds restrictions is necessary because 
professional money management should be available to all investors, 
including those who themselves invest on behalf of mutual fund 
investors; that is, professional money managers. Fund managers may wish 
to benefit, on behalf of the investors in their mutual fund, from the 
expertise of other professionals in investments with which they 
themselves may not be familiar. With the opening of new markets around 
the world, and the constant development of new and often complex 
instruments for investment and hedging, it is unrealistic to believe 
that every fund manager can be knowledgeable in every product offered 
in every market. Fund managers should have available to them the 
opportunity to commit moneys to investments which are managed by 
individuals with particular expertise in certain instruments or 
markets. Mutual funds allow this to be
 done in a manner which provides for the diversification of risk. The 
decision of whether a mutual fund is a worthwhile investment should be 
left to the investor, whether individual or professional, and not be 
artificially restrained by statutory provisions the reasons for which 
may no longer be valid.

  The legislation introduced today is a work in progress, intended to 
stimulate discussion of these proposals for modernization. Our 
subcommittee will actively seek input from investors, regulators, and 
the financial service industry for additional reforms as this bill 
moves through the legislative process. Inevitably there will be 
refinements of the specific proposals of the bill as introduced.
  I encourage my colleagues, on behalf of their constituents, 
Government regulators, and the affected industries to offer their 
suggestions for improving the efficiency of the mutual fund market by 
removing unnecessary regulatory burdens. Efficient markets create 
additional opportunities for investors to earn returns on their 
savings. This is how the American people, a nation of investors, 
provide for their general welfare, the education and needs of their 
children, and the security of their retirements. The legislation I 
introduce today will help them accomplish their goals.


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