“Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence”

Testimony of Paul Schott Stevens
President and CEO, Investment Company Institute

U.S. House Committee on Financial Services
Subcommittee on Capital Markets and Government Sponsored Enterprises

June 24, 2011

Thank you, Chairman Garrett and Ranking Member Waters. We welcome today’s hearing because of the central role that mutual funds and other registered investment companies play in helping some 91 million Americans achieve their most important, long-term financial goals. Today, fund assets total some $13.8 trillion, representing nearly one-quarter of the financial assets of U.S. households.

As these figures suggest, the U.S. fund market is vibrant and highly competitive. One leading indicator of that competition is the cost of fund investing. Since 1990, average fees and expenses paid by mutual fund shareholders have decreased by more than half, as a percentage of assets, for both stock and bond funds. Over the same period, the range of services investors receive has increased just as dramatically.

Key to the industry’s success is the comprehensive regulatory framework in which funds operate. This framework grew out of the great financial crisis of the 1930s and has proven its worth for over seven decades. Its distinctive features include:

• market valuation of fund assets each day;
• tight limits on leverage;
• unrivalled transparency;
• strict custody of fund assets;
• detailed prohibitions on transactions with affiliated parties; and
• strong governance, overseen by independent directors.

Fund regulation, and the fiduciary culture of our industry, helped assure that funds were not at the center of the latest crisis. Nor were funds the focus of the Dodd-Frank Act.

Nonetheless, funds and their advisers remain concerned about how the Financial Stability Oversight Council will exercise its authority under Dodd-Frank to designate nonbank financial institutions as “systemically important” and subject them to heightened regulation. As we explain in our written statement, funds already are among the most highly regulated and transparent financial companies in the nation. They simply do not present the kind or extent of risks to financial stability that would merit SIFI designation.

Moreover, quite apart from SIFI designation, there is ample regulatory power in Dodd-Frank and other existing laws to address risks identified by the FSOC, and regulators should turn to those tools first.

Money market funds are a good case in point. Regulators not only have authority they need over these funds—they’ve already put that authority to use.

After the financial crisis, our industry supported, and the Securities and Exchange Commission adopted, comprehensive amendments to its rule governing money market funds. Those amendments:

• raised standards for credit quality;
• shortened maturities;
• improved disclosure; and
• for the first time, imposed explicit, minimum daily and weekly liquidity requirements.

As a result, prime money market funds today have a minimum of $660 billion in highly liquid assets. This far exceeds the $370 billion in outflows during the week of Lehman Brothers’ failure.

We have come a long way in making money market funds more resilient. And the fund industry remains open to ideas to strengthen these funds further, including ways to enhance liquidity and minimize the risks of a fund “breaking a dollar.”

Any further proposals, however, must preserve the utility of money market funds for investors. They also must avoid imposing costs that would make large numbers of advisers unwilling or unable to continue to sponsor these funds. Violating either of these principles will undercut the important role that money market funds play in our economy. Bear in mind that these funds hold more than one-third of all commercial paper and more than half of all short-term municipal debt. The funding they provide is part of the lifeblood of jobs and communities—and in today’s economy, we can ill-afford to disrupt it.

One disruptive idea is the notion of “floating” the value of money market funds—forcing these funds to abandon their stable $1.00 per-share price. Our investors—institutions and individuals alike—have stated clearly that they cannot or will not use funds that fluctuate in value for management of cash.

As Treasury Secretary Timothy Geithner recently noted, any further changes to money market funds must be made “without depriving the economy of the broader benefits that those funds provide.” We agree.

Lastly, let me note our concerns about conflict and duplication that can arise when multiple regulators oversee the same entities.

One compelling example is the CFTC’s sweeping proposal to amend Rule 4.5 and subject hundreds of mutual funds to regulations that duplicate or directly conflict with those of the SEC. Why this is necessary, the CFTC has not adequately explained. Nor is it clear why the CFTC wants to expand its regulatory reach now—when it says it doesn’t have enough resources to do its job under Dodd-Frank.

This committee has addressed the need to promote regulatory coordination and avoid market disruption by passing H.R. 1573. ICI supports the policy goals of that legislation.

Mr. Chairman and Ranking Member Waters, my written testimony touches on a number of other issues, any of which I will be happy to discuss with you and your colleagues. Thank you for your attention, and I look forward to your questions.

Find the written testimony here.