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 spending.

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 of investors.

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.