The increased competition among money managers when the Glass-Steagall Act is dismantled will have a positive, if muted, impact on institutional investors.
Plan sponsors can look forward to getting their investment management services cheaper, thanks to those competitive pressures, should the final version of H.R. 10 and S. 900 make it to the president's desk and receive his signature later this year. The bills have passed their respective houses and now are in conference committee.
Because investment management activities will continue to be regulated largely by the Securities and Exchange Commission under both versions of the legislation, many observers, including officials at the Investment Company Institute, said they expect money management to be little affected by the reforms.
What might change is the number of players.
Brokers to benefit
Brokers are likely to be the biggest beneficiaries of financial services reforms, since most have shied from banking activities because of regulatory uncertainties.
Under the new law, many brokerages such as Merrill Lynch & Co. Inc. and Goldman Sachs & Co. will be able to more freely acquire bank affiliates and link them seamlessly nationwide, said Sarah A. Miller, managing counsel, government relations, at the American Bankers Association, Washington. Ms. Miller said brokers likely will use their new banking platforms as springboards into more asset management activities, which "can only be helpful to plan sponsors."
Ms. Miller expects that the Treasury Department, the Federal Reserve and the SEC will forge more collaborative and consultative ties as their oversight of the banking and securities activities of these multiservice companies overlaps.
Better collaboration among federal regulatory agencies will "help open up the industry by eliminating some of the uncertainties that kept companies out of certain markets, literally where they were fearing to tread," said Liz Liess, vice president and director of retirement plans at the Securities Industry Association in Washington. Banks, for example, "are very good at offering low-cost services to very low asset level customers -- like retail checking accounts," said Ms. Liess. "And they may be tempted, once the regulatory lines are clearer, to go after the small pension plan market, for example."
Part of the increased competition likely will come from mergers of insurers, banks and brokerages into single, one-stop shops, primarily to benefit retail consumers. But those megamalls of financial services might not be as appealing to institutional investors, said David Tittsworth, executive director of the Washington-based Investment Counsel Association of America.
"These bills are written primarily for the 10 largest banks, insurers and brokerages. There's a real competitive question: To what extent will gigantic mergers of financial service companies effect the traditional money manager? Will these mergers hinder a sponsor's ability to get services they want?" Mr. Tittsworth said.
"But this could lead to some opportunities for more traditional investment managers, because there may be some institutional investors who will want plain vanilla investment management and independent advice. Sponsors may shy away from the large firms because they may feel they are paying for a lot of infrastructure they aren't going to use," he added.
Ms. Liess said the savings for sponsors on plan administration costs, as well as investment management, "could be in the billions."
Banks offering 401(k) plan investment and administration might have more problems under the bill than other financial services companies.
The bills each repeal certain provisions of the Glass-Steagall Act, the Bank Holding Company Act and other provisions that have restricted the ability of banks, insurance companies and securities firms to affiliate. In exchange for receiving broad affiliation powers, including the power to underwrite and distribute mutual funds, banks no longer will be automatically exempt from the definition of broker-dealer under the Securities Exchange Act of 1934. Any bank that engages in brokerage activities, as defined by the SEC, would have to register as a broker-dealer and be subject to SEC regulation.
One such brokerage activity, as defined by the SEC, is the processing of the investment allocations of defined contribution plan participants. Banks now have a blanket exemption for these activities or get around the regulation by processing investment instructions through a registered trust company.
Under the House bill's provisions, a bank has to be acting as a fiduciary for investment purposes to avoid registering as a broker, said Roberta Ufford, an attorney with the Groom Law Group in Washington.
H.R. 10 also would require a trust institution serving as a 401(k) plan custodian and directed trustee to register as a broker to continue processing 401(k) investment transactions. Record keepers that have alliances with trust institutions would restructure their agreements with trust institutions that do not register or register themselves, Ms. Ufford said.
But even Ms. Ufford acknowledged many larger trust companies already have a broker, and they are willing to route 401(k) investment transactions through their broker. Still, either the bank or the record keeper might have to register as a broker, she said.