By Sam Mamudi
The mutual-fund industry is unhappy with elements of the
financial overhaul bill passed by the House of Representatives last
week, claiming that the proposals would go too far in their reach
over funds.
The industry's trade group, the Investment Company Institute,
took issue in particular with the part of the bill that would push
mutual funds under the scrutiny of the Federal Reserve Board in
cases where the funds are thought to pose systemic risk.
"It is wholly inappropriate to impose bank-like prudential
standards on a mutual fund," wrote ICI to House leaders in a letter
sent after the bill's passage. "We strongly object to granting the
Fed sole authority to impose such standards even if...the Fed has
discretion not to apply capital requirements--a fundamentally
inappropriate construct for mutual funds."
The provision refers to "a financial holding company" and, in
essence, states that regulators should keep a close eye on such
companies with a view to clamping down on those that pose "a grave
threat to the financial stability or economy of the U.S." As
worded, the provision would include mutual funds.
This means that Pimco Total Return Fund (PTTAX), which has
almost $200 billion in assets under management according to
Morningstar Inc., could for example be considered a threat because
of its size and thus come under the supervision of the Fed. Under
the bill, the Fed could then prevent the fund from offering more
shares for sale, or force it to sell some of its portfolio
holdings.
Despite ICI's concerns, the bill still leaves it up to
regulators to decide what would fall under their oversight.
"The Federal Deposit Insurance Corp. has the discretion to
determine what assets a firm has under management that are owned by
somebody else," said Steve Adamske, communications director, at the
office House Financial Services Committee Chairman Barney Frank
(D., Mass.), architect of the bill.
Adamske said that since the House bill was passed last week, any
recourse that the fund industry would want would need to be sought
in the Senate. The upper chamber has yet to put forward its own
version of the bill.
Not everyone is persuaded by ICI's arguments.
"The ICI's position on systemic risk is not credible because of
its position on money-market funds," said Mercer Bullard, associate
professor at the University of Mississippi School of Law and
president of Fund Democracy, an advocacy group for mutual fund
shareholders.
"No one could seriously deny that money market funds are subject
to "bank-like prudential standards" and that they pose systemic
risk," added Bullard. "The ICI is correct that non-money market
funds, which have demonstrated extraordinary resilience in the face
of extreme volatility, do not pose systemic risk, but ICI's
unwillingness to distinguish money market funds undermines their
credibility. It suggests that they do not know what systemic risk
is and should be ignored on this issue."
ICI wouldn't comment on the issue beyond the letter, saying it
continues to work with Members of Congress.
ICI is also critical of other measures in the bill, notably a
provision that would require financial companies with more than $50
billion in assets to contribute to a Dissolution Fund that would be
used if the government was required to step in to unwind a failing
firm.
The industry objects to having to pay for the Dissolution Fund
because it says the Fund will never be used to help mutual fund
shareholders.
Morningstar data shows that there are 13 mutual funds with more
than $50 billion in assets -- seven funds from American Funds, four
from Vanguard Group, Fidelity Contrafund (FCNTX) and the Pimco
fund. The 13 funds have combined assets of about $1.2 trillion. The
industry's view is that the bill is essentially creates a tax on
the assets of investors in these funds, and provides nothing in
return.
"Mutual funds cannot 'fail' in a manner requiring systemic
resolution and their 90 million shareholders should not be at risk
of having to foot the bill for those firms that can and do," said
ICI's letter.
-By Sam Mamudi, 415-439-6400; AskNewswires@dowjones.com