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Modernization Act Would Spark Mergers

If the Financial Services Modernization Act of 1999 is enacted, mutual fund companies will buy insurance and banking companies while at the same time becoming acquisition targets of those same firms, industry consultants say. The bill would spur a race to offer clients a wide array of investment products, they say.

It would also permit banks to distribute and underwrite mutual funds themselves, saving them the cost of outsourcing these functions, they say. And this would lead to greater oversight of banks by the SEC, they say.

"Although it is currently possible for asset managers to buy trust companies and banks, the bill would make it a lot easier for a Fidelity or a Putnam to acquire a trust company," said Burton Greenwald, president of B.J. Greenwald & Associates, a mutual fund consulting firm in Philadelphia. "With extended trust powers, they would have leverage in the high-net-worth market. It will give them a lot of tools that are valuable in the transfer of assets that will come as boomers age."

"The brokerage and the insurance industries will experience the first of many acquisitions," said Geoffrey Bobroff, president of Bobroff Consulting of East Greenwich, R.I., a mutual fund research and consulting firm. "Once these large distribution networks are in place, these supermarkets will look to mutual funds for product to sell, stimulated by the baby boomers and the wealth transfer."

"It's all about assets under management and getting assets under management, so this bill would cause a whole takeover phase," said Reuben Brewer, manager of mutual fund research at Value Line, a financial research firm in New York.

The bill might also prompt mid- to large-sized banks to begin underwriting or distributing funds themselves instead of out-sourcing these functions, said Nick Filippo, senior vice president of mutual fund services at SEI Investments of Oaks, Pa. Setting up these divisions would initially cost banks money, but in the long run, it could save them the cost of out-sourcing these functions, he said.

As more banks begin selling mutual funds, the Securities and Exchange Commission could begin overseeing their compliance with the Investment Company Act of 1940, said John Pachkowski, an analyst with CCH, a banking and business law research and publishing company in Riverwoods, Ill.

The SEC would like the modernization legislation to include provisions that would give it the power to enforce bank compliance with the act, according to testimony by Arthur Levitt, the chairman of the SEC, last spring. Congress has not so far included such powers but the Senate banking committee was debating whether to do so last week.

"The Commission advocates adding a new section to H.R. 10 in order to protect mutual fund investors from banks that engage in misconduct," Levitt said in testimony before the House of Representatives on May 5. "During recent examinations of bank mutual funds, Commission examiners have had difficulty gaining access to key documents concerning the securities advisory activities of banks. The Commission cannot vigorously protect the integrity of U.S. markets and adequately protect investors with one hand tied behind its back."

Specifically, Levitt asked Congress to empower the SEC to have full access to bank records and to be able to regulate bank advertising and performance fees. Levitt also asked Congress to include a provision that would allow the SEC to disqualify a bank from serving as an investment adviser if the bank had engaged in misconduct or had violated the law while serving as an adviser. Levitt said that the SEC can disqualify registered investment advisors, broker/dealers, transfer agents or other entities that improperly process or sell mutual funds but that banks are excluded from this oversight in the 1940 act.