This is the second in a series of conferences to explore the regulation of mutual funds. Mutual funds are only one form of collective investment vehicle regulated at the federal level. Other categories include bank common trust funds and collective investment funds, both of which are exempt from the Investment Company Act of 1940 (the ’40 Act) and regulated by the Office of the Comptroller of the Currency, the supervisor of national banks. Federal savings-and-loan associations, regulated by the Office of Thrift Supervision, may also sponsor collective investment vehicles under virtually the same rules as national banks. In this conference, we will discuss how these bank-sponsored collective investment vehicles are regulated, and how this regulatory structure differs from the SEC’s regulation of mutual funds under the ’40 Act.
| 9:15 a.m. | Registration | |
| | | |
| 9:30 | Introduction | Peter J. Wallison, AEI |
| 9:45 | Presentation: | Martin E. Lybecker, Wilmer, Cutler, Pickering, Hale, & Dorr LLP |
| | Discussants: | Melanie L. Fein, Goodwin Procter LLP |
| | | James D. McLaughlin, American Bankers Association |
| | | |
| | Moderator: | Peter J. Wallison |
| | | |
| 11:15 | Adjournment | |
October 2005
Is There a Better Way to Regulate Mutual Funds?
This October 24 AEI conference was the second in a series of conferences to explore the regulation of mutual funds.
Peter J. Wallison
AEI
In exploring the regulation of mutual funds, it is appropriate to consider how other collective investment vehicles are regulated. This event considers bank common trust funds, which are regulated by the comptroller of the currency. In certain ways, trust fund regulation resembles that of mutual funds. Bank customers and mutual fund investors hold funds in collective investment vehicles; the bank customers’ funds are managed by a bank and the mutual fund investors’ by a registered investment adviser. Both the bank and the investment adviser have fiduciary duties, and both face similar conflicts of interest. Because banks and advisers seek higher profits, they are at odds with the investors’ chief interest--to obtain the highest possible risk-adjusted yield on their invested funds.
In mutual funds, some conflicts are resolved by outright prohibitions on things such as selling securities to or borrowing money from the mutual fund. Other conflicts are supposed to be resolved by the board of directors, which are independent and expected to look out for the shareholders’ interests. We are interested in exploring whether simply subjecting an investment adviser to fiduciary obligations, as occurs in the comptroller’s regulatory regime, would be as effective in addressing the adviser’s conflicts of interest as a board of directors.
Martin E. Lybecker
Wilmer, Cutler, Pickering, Hale, and Dorr LLP
The full text of Martin Lybecker's presentation is available here as an Adobe Acrobat PDF.
James D. McLaughlin
American Bankers Association
In general, common trust funds have less complex regulation and are simpler and more cost-effective than mutual funds. Whereas mutual funds are valued every day, many common trust funds reduce costs by making their valuations either weekly or monthly. Another cost-saving feature of common trust funds is that although they must be audited annually, regulation does not require an independent CPA audit. The auditors are only responsible to the bank’s board of directors.
Melanie L. Fein
Goodwin Procter LLP
The most fundamental differences between mutual funds and common trust funds are: (1) banks cannot advertise and promote their common trust funds, and (2) banks generally charge no fees to common trust funds. The fees are bundled with the trustee fees paid to the bank that is acting as trustee. Currently, banks can charge a fund management fee provided they can justify it to the Office of the Comptroller of the Currency (OCC) by offering a higher level of service. Prior to the mid-1990s, the OCC did not allow common trusts to charge any management fee. However, today many common trust funds still do not charge management fees to avoid the process of justifying fees to the OCC.
AEI staff assistant Dan Geary prepared this summary.
