For Mutual Funds, New Political Muscle
By: Edward Wyatt
The New York Times, September 8, 1996
Like the lanky adolescent who startles beach goers by turning into a
muscle-bound young man, the chief trade group for the mutual fund industry
has grown seemingly overnight into one of Wall Street's most powerful
forces in Washington. Instead of kicking sand in anyone's face, though, it
has been quietly working behind the scenes to shape legislation and doling
out big sums to key members of Congress.
The group, the Investment Company Institute, draws its power in part
from the American love affair with mutual funds, which has caused industry
assets to swell by 32 percent a year for the last decade. Now, the group
is preparing for what could easily be the most important piece of
legislation in its 56-year history and one of great importance to all
working Americans: an overhaul of the Social Security system. Several
proposals floated recently would send some portion of Social Security
money into stock mutual funds or accounts akin to them.
The fund group knows that any change may be years away, but it has
already put together a task force to figure out how its industry can
capture part of Social Security's enormous assets. "We're just seeing
the first stirrings of action on Social Security," said Matthew P.
Fink, president of the I.C.I. "I think the new Administration and the
new Congress will have to turn to this." With past legislative and
regulatory successes as its guide, deep financial resources and a strong
record of handling Americans' retirement money, the I.C.I. will be pushing
Congress to tackle a sensitive topic among voters. The test will be a big
one for a group that appears headed for some victories, albeit on a much
smaller scale. The fund group looks likely to succeed in its effort to
limit state regulation of funds and in its attempt to gain approval for
streamlined fund prospectuses for investors.
Part of the group's effectiveness comes from its willingness to accept
Federal oversight. The fund industry has also managed to avoid major
scandals, like Wall Street's problems with Treasury bond trading a few
years ago and the rogue brokers who have run amok at some financial
institutions. "Anything the I.C.I. says is treated like word from on
high on Capitol Hill," said Barbara Roper, director of investor
protection at the Consumer Federation of America. "They are treated
with a degree of respect that other groups don't necessarily have."
Along with a carefully cultivated image, the I.C.I. has a calculated
approach to political giving. Since 1994, its political action committee
has been the biggest contributor to Congressional candidates of all the
Wall Street trade groups, according to a study by the nonpartisan Center
for Responsive Politics, a Washington research organization. While many of
the other trade groups and PAC's affiliated with Wall Street firms devote
much of their money to the Presidential candidates, the fund group focuses
on Congressional races.
Through May, it had contributed $245,000 to individual members of
Congress for this two-year election cycle, several times the amount given
by the other securities industry trade groups. Among the big Wall Street
firms, only Merrill Lynch & Company devoted that much to Congressional
races. Including contributions to the parties' Congressional re-election
efforts, the fund group had given $421,000 through mid-August. If the
group wants to hire lobbyists and to commission studies, it has no
shortage of money for that, either. In the last three years, its annual
budget surplus has grown more than fivefold, to $4.7 million in the year
ended Sept. 30, and its cash reserve from membership dues and conference
fees has nearly doubled, to $13 million.
The Investment Company Institute grew out of a committee of executives
who worked with the Securities and Exchange Commission to fashion the
Investment Company and Investment Advisers acts of 1940, the two statutes
that govern what were then known as investment trusts but today are called
mutual funds. From its beginning, the mutual fund industry took the stance
that it was better to help write its own regulations than to fight what is
unavoidable. In signing the two mutual fund laws in 1940, President
Franklin D. Roosevelt said, "It deserves notice that the investment
trust industry insisted that the Congress grant to the Securities and
Exchange Commission broader discretionary powers than those contemplated
in the original regulatory proposals."
That recognition continues today. '"ew entrants to our industry
and outside observers often remark on how unusual it is for an industry to
call for strong regulation by government, and for even higher voluntary
standards," Mr. Fink said at his group's annual meeting in May.
"But these are hallmarks of our industry, and keys to our
success." Another key to the industry's success has been its ability
to shape the rules that govern it. "They're not out there leading the
band," said Ms. Roper of the consumer federation. "They're
quietly working behind the scenes to make sure a bill is going to look the
way they want it to look." People who have worked with the group on
Capitol Hill echo that sentiment. "What I think they do awfully well,
and which raises issues itself, is bringing people in to help draft pieces
of legislation, giving support to the Congressional staffs," said
Elise Hoffmann, a money manager who from 1987 to 1994 served as counsel to
the House Telecommunications and Finance subcommittee, then headed by
Representative Edward J. Markey, Democrat of Massachusetts.
Compared with other trade groups, '"he I.C.I. is both more present
and more skillful at pressing their issues without being in people's faces
too much," Ms. Hoffmann said. "But I think the way they
insinuate themselves into the process raises ethical issues." Julie
Domenick, a senior vice president of the mutual fund group and its lead
contact with Congress, said that because much of the legislation on mutual
funds was technical in nature, "we are often invited to participate
in the process," either through testimony or written comments.
"We would never risk the perception that we are crossing an ethical
line," she said.
Few parts of the securities business have grown as fast as mutual funds
have in the last decade. In 1986, 1,840 funds invested $716 billion on
behalf of individual investors; today, more than 7,000 funds handle $3
trillion. As the fund industry has grown, so have the fees collected by
the I.C.I., which charges its members dues based on the amount of mutual
fund assets they manage. According to the institute, 98 percent of all
mutual fund companies are members. In the last two fiscal years, proceeds
from membership dues and assessments have risen at an annual rate of about
20 percent, to $27.2 million in the year ended Sept. 30. Total revenues,
including conference fees and interest and dividends on investments, grew
at a similar rate, to $33 million.
The group pays for a variety of activities, reflecting its multiple
functions: educating investors; representing its members in matters of
legislation, regulation and taxation, and serving as a clearinghouse of
information about the industry. A portion of its money covers the overhead
of its campaign contribution arm, the Investment Management Political
Action Committee, or Impac. The PAC's campaign money comes from people who
work in the industry as well as from other political action committees
affiliated with fund groups like John Hancock and Aim Management Group.
Noticeably absent from its list of biggest contributors is Fidelity
Investments, which is a member of the group but handles contributions
through its own PAC.
Of particular interest to some campaign watchdogs has been the timing
of the trade group's PAC contributions. In March and April, for example,
Impac gave $95,000 to campaign committees of members of Congress,
including $26,000 to those of House Commerce Committee members. At the
time, that panel's Telecommunications and Finance subcommittee was
considering a bill that would strip state securities regulators of their
authority over mutual funds. The fund industry has pushed for such
legislation for years. On March 7, the subcommittee voted to send the
bill, which was introduced by the panel's chairman, Representative Jack
Fields, Republican of Texas, to the full committee. On May 15, the
Commerce Committee sent the bill to the full House, which passed the
measure on June 19, by a vote of 409 to 8.
Nancy Watzman, the lead author of the Center for Responsive Politics
report, said there was no way to know whether the contributions influenced
any Congressman's vote. "But the two aren't necessarily mutually
exclusive either,' she said. 'It's hard to separate cause and
effect." Ms. Domenick of the I.C.I. said that the contributions were
not timed to coincide with action on the securities bill. "I
categorically reject the fundamental premise of the group, that the I.C.I.
gave money to influence legislation," she said. "It's simply not
true." She said the contributions were made in the spring because
that was when the members of Congress had scheduled fund-raising events,
often six weeks to two months in advance. She added that her group's
political giving was not large relative to that of groups like the
American Bankers Association or the Trial Lawyers Association. "We
have never led with our PAC contributions," she said. "Our
strength is in our substance and our credibility, and in being aligned
with what is good public policy."
Along with its work on influencing Congress, the group spends much of
its time making its voice heard at the S.E.C., which governs day-to-day
operations of the fund industry. It files official comments on every
proposal that might even remotely affect the fund industry, and "is
always throwing a wish list over the transom at the S.E.C.," said
Kathryn B. McGrath, a Washington lawyer who served as director of the
commission's division of investment management from 1983 through 1990. The
results can be seen in an issue that appears headed for resolution: an
attempt to shorten the main fund disclosure document, called a prospectus.
In 1992, the S.E.C. issued a voluminous set of recommendations on how to
update the Investment Company Act. Among them was a proposal strongly
supported by the industry to allow investors to buy mutual fund shares
"off the page," or directly from a newspaper advertisement
without first receiving a full prospectus, which typically runs many
pages. Consumer groups objected, warning that investors would not have
adequate information about what they were buying, and the proposal
appeared dead in the water. Two years ago, however, as the S.E.C.
Chairman, Arthur Levitt Jr., cajoled fund companies to rewrite their
disclosure documents in plain English, the proposal re-emerged in the form
of the profile prospectus.
The fund trade group persuaded the commission to test a short-form,
summary prospectus of about two pages. While the summary would initially
be distributed with the full prospectus, the group hoped the profile would
eventually stand alone. Last March, Barry Barbash, director of the
commission's division of investment management, said he expected the
commission to recommend such a proposal this year. The short-form
prospectus could easily be reproduced in a newspaper advertisement --
giving fund companies what they had sought with the original proposal --
although no fund company has said it plans to do so. "The I.C.I. was
very careful all along to work with the S.E.C. and to support strong
limits on the content and format of the profile," said Ms. Roper of
the consumer federation, who has tracked the effort. 'They don't engage in
a lot of dramatic rhetoric. They make a case and build support for their
position." The group's methods, and the deference it receives, made
opposition difficult, Ms. Roper said. "I wish they didn't have so
much power," she lamented.
State securities regulators may feel the same way. For years, the fund
group has wrestled with the North American Securities Administrators
Association, a group of state regulators, to sort out what the I.C.I.
president, Mr. Fink, called a "crazy quilt" of regulation by
states on mutual fund registration. Last year, the fund industry turned to
Congress for help. Now included in the Securities Amendments of 1996,
which is before a House-Senate conference committee, are measures that
would exempt mutual funds from state regulation.
State regulators who have challenged the fund group on this issue say
the industry can bring significant pressure to bear on elected officials.
"The I.C.I. has got large members, like Fidelity or Twentieth
Century, who can have big impacts in some very big jurisdictions,"
said John Perkins, a past president of the state administrators group and
the former securities commissioner of Missouri. "They do good work at
the staff level, but then they can push the button and get their members
involved from all over the country," said Mr. Perkins, now a lawyer
in Jefferson City, Mo. That formula has won some big victories in
Congress, at the S.E.C. and at the state level, Mr. Perkins said.
In charge of implementing the I.C.I. strategy on Capitol Hill is Ms.
Domenick, who is the fund industry's most visible representative in the
corridors of Congress. "She is a very effective advocate, not an arm
twister but a good persuader," Ms. Hoffmann, the former House
subcommittee counsel, said. A 1968 graduate of West Virginia University,
Ms. Domenick taught school for two years before going to Washington.
During the 1970's, she served on the staff of the House Subcommittee on
Labor Standards, after which she established the Washington office for the
New York City Municipal Labor Committee, the bargaining unit for nearly
300,000 public-employee union members. Ms. Domenick joined the I.C.I. in
1981, and quickly became its leading legislative representative. Last
year, her duties were expanded to include oversight of all public affairs.
The group's face in front of the cameras and the committees, providing
testimony on bills of interest to the committee, is that of Mr. Fink, a
gregarious Long Island native who has spent 25 years at the group. A
graduate of Brown University and Harvard Law School, Mr. Fink became
president of the institute in 1991, after serving for 14 years as its
general counsel. Former and current Congressional staff members say Mr.
Fink has adopted a more hands-on approach than his predecessors, meeting
regularly with members of Congress and state securities regulators, both
in and out of Washington.
The I.C.I., led by Mr. Fink and Ms. Domenick, have begun to focus on
Social Security and will step up the effort after this year's election.
The keynote speaker at the fund group's annual meeting in May was Senator
Bob Kerrey, Democrat of Nebraska. , He was co-sponsor of a bill last year
with Senator Alan K. Simpson, Republican of Wyoming, to allow individuals
to direct a portion of the current payroll tax to an account much like an
individual retirement account. Two days after the speech, the I.C.I.'s
political action committee contributed $2,000 to Senator Kerrey's
re-election campaign -- scheduled for the year 2000. Ms. Domenick said the
timing of the contribution was unrelated to Mr. Kerrey's appearance.
Nevertheless, members of the House and Senate panels that oversee the
Social Security system have been the largest beneficiaries of the PAC.
Unlike those of many PAC's, the fund industry's contributions go to
legislators in both parties. Through midyear, members of the House Ways
and Means Committee received more than $90,000 from the political action
committee in the 1995-96 election cycle -- one-third of the group's
Members of the Senate Finance Committee received campaign contributions
totaling $32,000, including $9,000 to Max Baucus, Democrat of Montana, and
$6,000 to Larry Pressler, the South Dakota Republican. "The
committees that deal with Social Security also have a ton of other
business" that affects mutual funds, like writing tax and pension
laws, Mr. Fink noted. But to understand just how important Social Security
changes could be to the industry, one merely has to consider the
staggering numbers. If all workers could direct 2 percent of their wages
to their own retirement accounts, as Senator Kerrey has proposed, that
would give individuals discretion over $60 billion that now goes into the
Government coffers each year.
The mutual fund industry already controls about 40 percent of the
nation's retirement assets, Mr. Fink estimates. Assuming that about half
of all working Americans took advantage of the investment option in the
beginning and that 40 percent of that money went into mutual funds, the
industry could get a surge of $12 billion a year -- equal to about 10
percent of its net cash flow last year. And that sum could grow
significantly as more people joined the program. Another idea, floated by
a Presidential committee, would have the Federal Government direct up to
40 percent of the 12.5 percent Social Security payroll tax to
"personal security accounts." That could provide a much bigger
windfall for the fund industry -- close to $125 billion a year.
The fund group says it favors giving individuals more control over how
their retirement assets are invested, and its task force will weigh in
with recommendations to the next Congress around the time a Presidential
task force makes its own suggestions. Though the initial proposals to put
more Social Security assets in the stock market met with considerable
skepticism when they were introduced, Ms. Domenick said: "I don't get
the feeling you'll see the same knee-jerk reaction after the election.
This may be the best chance to deal with the issue, and certainly we will
interject ourselves" into the debate. Jumping into the debate on the
future of Social Security will put the group in a much bigger arena -- one
in which every American worker will have a stake, not just the 30 percent
or so who now own shares in mutual funds.
That worries some critics, who say that the fund industry's effort to
speak with one voice might leave one important voice -- the consumer's --
unheard. "They would certainly tell you they have an interest in the
consumer and in keeping the markets safe," said Mr. Perkins, the
former state regulator. "But when their members decide they need to
be doing something on a particular issue, there is often no one on the
other side." THE I.C.I.'s latest annual report lists three
independent directors, who are not employed by the fund management
companies, among the 45 members of its board. Mr. Fink said the number of
independent directors had since risen to six. "That's not the only
way the industry hears from consumers," Mr. Fink said, adding that
the trade group conducted focus groups and other research with
shareholders and that the fund companies themselves relayed the interests
Regardless, a voice that certainly will not be missing from the
discussion on Social Security's future is that of the fund industry. And
if past is prologue, a few years from now, a chunk of the system's money
may be working its way into the fund industry's coffers.
Global Action on Aging
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