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Regulatory Outlook for 2002


Looking ahead to 2002 there are several issues both with mutual fund regulation and proposed legislation that will likely reach some conclusion this year. Late last year, the Securities and Exchange Commission sent out a letter seeking comment on the development of actively managed exchange-traded funds. Those comments are due in January 2002, and Alan Rosenblat, an attorney with Philadelphia-based law firm Dechert, expects that the SEC will release guidelines about that over the course of this year.

"The SEC has been very open minded on actively managed ETFs and new technology is makes them quite possible," said Marianne Smythe, a partner at Wilmer, Cutler & Pickering. "I have every reason to believe that the SEC is going to be very responsive to the industry's comments next year."

Another issue that the SEC is likely to address is that of alternative investment regulation. Throughout 2001, the ICI lobbied the SEC to examine wrap products, folios and separately managed accounts and regulate them like mutual funds. The ICI had little success in convincing the Commission that such products were fund-like in nature and should be regulated under the same rules. However early last month, Paul Roye, the SEC's director of investment management, suggested in a speech that the Commission would examine the rules, Rosenblat said. It is not clear what will come of the examination, but the mere fact that Roye made the point of addressing it was significant, he said. While the ICI believes that alternative investment regulation is necessary, not everyone agrees.

"The ICI should give up on this one," Smythe said. "There has not been a single suggestion that there has been any abuse in this area. The mutual fund industry offers a wonderful product, but it's not for everyone. There's no need to revisit [that] rule."

On the legislative front, there are two bills before Congress that will likely be decided on this year, according to industry lawyers. In June 2001, House Rep. John Boehner (R-Ohio), who chairs the Committee on Education and the Workforce, introduced the Retirement Security Advice Act. The bill seeks to amend the Employee Retirement Income Security Act (ERISA) to allow 401(k) investors to receive advice from employer-sponsored financial planners. Last month, the House of Representatives approved the bill, it has won the support of the Department of Labor and the Investment Company Institute, and it will go in front of the Senate next year.

But not everyone is supporting the bill. Opponents say it poses a potential conflict of interest because firms could be advising clients about their own products. Adding fuel to the opposition was an entirely new bill introduced by Sen. Jeff Bingaman (D-N.M.) two days before the House approved the Boehner bill.

The Boehner bill has a good chance of getting passed, but is far from the most pressing item in front of Congress, said Barry Barbash, an industry lawyer and former director with the SEC. Also, the recent problems at Enron and its pension plan might dissuade those on the hill from implementing any liberalization to retirement plans, even though the Boehner bill addresses concerns unrelated to Enron, he said.

Finally, in February 2001, House. Rep. Jim Saxton (R-NJ), chairman of the Joint Economic Committee, introduced legislation that would allow a mutual fund shareholder to defer up to $5,000 of mutual fund capital gains distributions from being taxed if the gains were automatically reinvested. In September, Saxton asked President Bush to consider reviewing the issue as part of the Administration's ongoing economic stimulus plan. Early last month, 90 mutual fund industry leaders sent a letter to Congress supporting legislation that would allow shareholders to defer tax on reinvested gains, and it is the ICI's highest priority for next year, Collins said.

The ICI has lobbied for this in the past with little success, but Saxton's legislation gives the ICI a great deal of hope that the issue will be addressed next year, said Collins. Also, the Joint Economic Committee recently put out a paper that argued that allowing investors to defer capital gains taxes might even generate excess money for the government, which has drawn more attention to the issue, Collins said.

"I don't know if it will pass, but it should and I think it has real promise next year," Collins said.