Securities Industry Association Drops Proposal on Affiliated Transactions
June 21, 1999
The Investment Company Institute has prevailed in its dispute with the Securities Industry Association over a proposed change in the law which prohibits transactions between a broker/dealer and its affiliated mutual funds.
The SIA has withdrawn proposed legislation which would have amended section 17(a) of the Investment Company Act to permit broker/dealers to buy from and sell to their affiliated funds readilytraded securities. The SIA had contended the change ultimately could save mutual fund shareholders money.
The SIA made its move because of strong opposition to the proposal, said James Spellman, a spokesperson for the SIA early last week. The SIA decided to concentrate its efforts on legislative changes which have a better chance of passage in Congress rather than fight for the amendment to the affiliated transactions prohibition, Spellman said. SIA executives told the staff of the Senate Banking Committee and the ICI two weeks ago about their decision, Spellman said.
Sen. Phil Gramm, R-Tex., chairman of the Senate Banking Committee, announced plans in March to draft legislation which would eliminate what he described as out-dated securities laws. The SIA responded with a proposal to cut back the prohibition against affiliated transactions.
In April, the ICI objected to the move, saying such a change would jeopardize the integrity of the mutual fund industry. Paul Roye, director of the SEC's Division of Investment Management, last month also came out against the proposal (MFMN 5/31/99). These and other critics warned that permitting transactions between affiliated funds and broker/dealers would subject the fairness of those transactions to endless second-guessing and would generate litigation.
ICI and SEC representatives with knowledge of the SIA's move were not available for comment.
The timetable for consideration of the securities legislation, called the Securities Markets Enhancement Act, is uncertain, said Christi Harlan, a spokesperson for the Senate Banking Committee. The committee staff has made no recommendations regarding particular proposals and is unsure what types of provisions the Banking Committee may endorse as part of the Securities Markets Enhancement Act, Harlan said.
The SIA and the ICI have common members and often work with one another on legislative proposals. Public disputes between the two trade groups have been rare. The falling-out over affiliated transactions shows how complex the relationships and competing interests in the securities and mutual fund industries are becoming, Spellman said.
The SIA hopes to work with the SEC and the ICI on possible regulatory changes which can address difficulties arising out of the prohibition against affiliated transactions, Spellman said. The prohibition against affiliated transactions may have the effect of increasing costs for mutual fund shareholders, Spellman said.
Barry Barbash, a lawyer at Shearman & Sterling in Washington and former director of the SEC's Division of Investment Management, said it was regrettable that the discussion over the prohibition against affiliated transactions has been portrayed as an all or nothing proposition.
"There is a legitimate public policy question," Barbash said. "Some provisions (of the existing law) are broad and may cut too deeply."
There are occasions when it would seem to be in the best interest of mutual fund shareholders to permit funds to conduct transactions with an affiliated broker/dealer, Barbash said. But, the SEC is best able to deal with those special circumstances through exemptions to the existing law and interpretive advice, he said.
"The job of dealing with the limits of 17(a) is primarily that of the SEC" rather than Congress, Barbash said.