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Seven Questions for ICI Chair Greg Johnson

Gregory E. Johnson, President and CEO of Franklin Resources, was elected Chairman of the Investment Company Institute in October. In a year of heightened regulation and investor concerns, Johnson spoke with Editor Lee Barney about his priorities for his one-year term.

MME: The ICI is addressing a number of critical regulatory issues this year. As Chairman, how are you prioritizing these key issues for your first term?

Gregory E. Johnson: I cannot think of a time when ICI faced more top-tier issues that could directly affect mutual fund investing.

There's legislative or regulatory activity on dozens of issues-including money market fund regulation, the Department of Labor's work on the definition of fiduciary duty, the application of the Volcker Rule, and the ongoing implementation of the financial reform law, just to name a few.

Each issue is important and deserves attention.

The Institute is up to the challenge and has the expertise and resources to continue to educate policymakers and regulators about mutual fund investing and the impact various proposals could have on shareholders.

We are working to ensure that any regulations put in place strengthen the financial system and protect investors without imposing unnecessary costs or burdens on funds or their investors.

ICI chair Johnson

MME: How concerned is the industry over the effects of dark pools on market structure and volatility?

Johnson: Funds have long been significant users of dark pools, which bring many benefits to funds as investors in the financial markets.

Dark pools provide a way for funds to execute orders without having to display the full scale of a fund's trading interest. For funds that frequently must execute large orders, these benefits are extremely valuable as they lessen the cost of implementing trading ideas and reduce the risk of information leakage about fund orders.

The confidentiality of information regarding fund trades is of critical importance to funds and cannot be discounted; any premature or improper disclosure of this information can lead to front-running of a fund's trade that can negatively impact the price of the stock that the fund is buying or selling.

We recognize that while dark pools bring certain benefits to funds, there are concerns about their impact on, among other things, the price discovery process, market fragmentation, and market volatility.

Ideally, funds would like as many orders as possible to be executed in the displayed markets-for example, on the traditional exchanges. We believe, however, that it is imperative that dark pools remain available to funds and that any new regulations facilitate their continued use. Regulators therefore should take a measured approach to any responses they feel appropriate and necessary to address concerns regarding dark pools.

If regulations are too restrictive, they may unintentionally impede funds' use of new and innovative trading venues such as dark pools.

MME: Do you expect 12b-1 reform will still be a concern to the SEC in the coming year?

Johnson: Eileen Rominger, the Director of the SEC's Division of Investment Management, has made it clear that 12b-1 reform remains on her radar. The SEC is right to take stock of how a rule of this kind is working, and whether it can be modernized to work better.

That said, it seems clear from the comments the SEC received that its 2010 reform proposal was overly ambitious. We would hope that before the Commission takes any action on that proposal, it very seriously considers the economic impact of the proposed reforms, and makes sure that the benefits to shareholders justify the costs.

We also hope that the Securities and Exchange Commission looks at this rulemaking in conjunction with other current initiatives that relate to the way fund shares are sold, like the imposition of fiduciary duties on brokers, and new point of sale disclosures.

At the end of the day, the Commission's rules should address these issues in a coordinated way.

MME: Any other priorities or goals as ICI Chairman you would like to mention?

Johnson: Another area that I'd emphasize is the Investment Company Institute's mission of improving public understanding of funds.