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Mutual Funds Take Issue with Financial Overhaul

Source: WSJ

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Posted on 24 May 2010

Financial-services legislation approved by the Senate must be improved to address several issues that could adversely affect mutual funds and their investors, said Paul Schott Stevens, president and chief executive of the Investment Company Institute (ICI).

The ICI, the mutual-fund industry's trade group, said it supports efforts to modernize financial-services regulation, but the bill "could subject mutual funds to unworkable forms of bank-like regulation in the unlikely event that regulators deem a mutual fund [to be] a source of systemic risk," Mr. Stevens said.

The bill also raises concerns for funds that are creditors of a nonbank financial company undergoing orderly liquidation as outlined in the bill, Mr. Stevens said. That's because the Federal Deposit Insurance Corp. "would have the discretion to treat similarly situated creditors differently and because financial contracts such as repurchase agreements would not be promptly enforceable," he said.

"Congress deserves credit for tackling the difficult and timely issue of financial regulatory reform," Mr. Stevens said. "The sweeping legislation that emerges from this process will impact financial services and the financial markets for generations, and it is imperative to get it right."

Burton Greenwald, a Philadelphia-based consultant to mutual-fund and asset-management companies, said, "I think the main concern of the mutual-fund industry is that in the event of a major breakdown in the financial system, the proposed legislation could conceivably result in mutual funds being subject to regulatory constraints designed with bank structures in mind rather than taking into account the unique safeguards that funds operate under within the 1940 Investment Company Act."

Geoff Bobroff, a mutual-fund industry consultant in East Greenwich, R.I., said it seems the ICI is still concerned that the legislation's language isn't clear, and that funds could somehow be considered a systemic risk and thus be subject to some regulatory oversight. "They're continuing to push on that point," he said, "to make sure that the language is clearly written."

In addition, funds are concerned that they could inadvertently be affected in an orderly liquidation because of their ownership of paper issued by an entity being liquidated, Mr. Bobroff said.

The impact to funds will ultimately depend on the final reading of the legislation, he said.

In addition, the mutual-fund industry, like other investors, is likely concerned about its investments in financial-services companies, Mr. Bobroff said. "Any reform legislation like we've seen is going to impact the investments a company is making in financial services," he said. The question all investors are likely asking, he said, is whether a financial-services company will be as profitable after the legislation as it was before.

That said, lawmakers representing fund-heavy Massachusetts made haste to assure the sector won't get sideswiped by the rules aimed at stopping banks from becoming too big to fail.

Sen. Scott Brown of Massachusetts became a key Republican addition to Thursday's bill-passing vote after getting assurances from House Financial Services Committee Chairman Barney Frank (D., Mass.) that big companies wouldn't be exposed to more regulation simply due to their large size. They are looking after some big firms in their state, like Fidelity Investments, that manage vast sums of money but don't want to be viewed as posing the same risks to the broader economy as banks.

A Legg Mason Inc. spokeswoman said the Baltimore company doesn't see much industry impact at this time, since the legislation is focused on banks. But there are also many details to be ironed out down the road, she noted, such as potential new rules and regulations concerning money-market funds.

Wall Street seemed to agree that fund companies won't be severely impacted, with stocks rising across the fund industry Friday.


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