WASHINGTON -- The mutual fund industry is incensed over the brokerage industry's bid to open the door for securities firms to sell stocks and bonds to their mutual fund affiliates.
The Securities Industry Association submitted its proposal a few months ago to Sen. Phil Gramm, R-Texas, the new chairman of the Senate Banking, Housing and Urban Affairs Committee, who invited ideas for making securities markets more efficient. Mr. Gramm intends to cobble various groups' proposals into legislation titled the Securities Markets Enhancement Act within a few months. The committee also will hold hearings on the legislation.
Eliminate provision
The SIA wants to eliminate a nearly 60-year-old provision in securities law intended to prevent brokerage firms from dumping unwanted stocks and bonds onto their mutual fund affiliates. (In certain instances, money market funds may sell securities they can no longer hold to their brokerage affiliates.)
And securities firms are free to ask the Securities and Exchange Commission for exemptions from the prohibition.
While the SIA argues that eliminating Section 17(a) of the Investment Company Act of 1940 would reduce costs for investors by allowing mutual funds to buy stocks from their investment affiliates, the proposal would actually weaken shareholder protection, said John Collins, a spokesman for the Investment Company Institute, the mutual fund industry trade group.
In fact, Matthew P. Fink, head of the ICI, complained vigorously to Marc Lackritz, his counterpart at the SIA, about the latter's proposal in an April 28 letter: "I must inform you that the amendment to Section 17(a) is entirely objectionable to the mutual fund industry."
James D. Spellman, a spokesman for the SIA, said the association is trying to work with the ICI, but has no intention of backing off. Mr. Spellman also said SEC exemptions from the law apply only to a single transaction at a time; securities firms must apply for an exemption each time they want to conduct an otherwise prohibited transaction.
In the letter, Mr. Fink also griped about the SIA's failure to consult with the mutual fund industry before sending the proposal to Capitol Hill, and about stepping on the ICI's turf by offering a proposal that would affect mutual funds.
The ICI "would never, in the first instance, send broker-dealer amendments to Congress, and if for some unfathomable reason we found it necessary to do so, we would consult with the SIA in advance, rely heavily on your expertise and seek a common solution. It is regrettable that this did not happen in this instance," Mr. Fink wrote.
Objects to characterization
Mr. Lackritz, in a May 10 response, countered he felt compelled to "correct your mischaracterization (of the proposal) and the numerous other incorrect premises, erroneous reasoning, and misperceptions."
He also questioned whether the ICI "fully reflects the views of all funds that may be affected."
His letter contended investors pay "substantial costs" because of the provision in securities law, and suggested the "SIA and ICI should do all we can to 'protect' investors by reducing unnecessary costs they may incur."
The provision hurts mutual funds because it stops them from buying securities from affiliates, even when they are offering the best price, he wrote. He also noted the provision has outlived its usefulness because of the changes in the securities market since the law was enacted.
Mr. Lackritz also rebutted any suggestion the SIA proposal would allow mutual funds to buy securities underwritten by affiliates. The proposal "would not alter one letter or comma of Section 10(f) of the (law) which bars the purchase of any security, whether from an affiliate or any other person, during the existence of an underwriting syndicate in which the fund's adviser or an affiliate . . . is a participant," he wrote.
Mr. Lackritz ended the letter on a conciliatory note, apologizing to Mr. Fink for not giving the ICI advance notice about its proposal: "I would hope that your pique about this 'process' slip will not interfere with your evaluation of this proposal on its merits."
Other objections
The mutual fund industry is not the only group irked by the SIA proposal. Paul Roye, a top official of the Securities and Exchange Commission, broke the tradition of not commenting on proposals by obliquely criticizing the SIA proposal at the mutual fund industry's annual conference in Washington last month.
Mr. Roye, director of the SEC's division of investment management, called attempts to eliminate the investor protection as having the potential to "open the door to overreaching, self-dealing, and other abusive practices that prompted enactment of the statute."
He suggested concerns over the existing provision could be dealt with by the SEC through new rules, rather than changes in the law.
A spokesman for the Senate Banking Committee said staffers were still evaluating proposals the committee had received.
