Barbash Remarks at 1997 General Membership Meeting

Washington, DC, May 20, 1997 - Barry Barbash, Director of the SEC's Division of Investment Management, spoke on May 16th at the Institute's 1997 General Membership Meeting. His speech, entitled "Mutual Funds in the New Millennium: The Opportunity to Invent Their Future," examined issues facing the mutual fund industry as it enters the 21st century, focusing on technological developments, retirement planning, continued Commission effectiveness, and money market fund bailouts, and performance advertising.

Technological Developments
Barbash expressed his belief that technology, which has revolutionized the fund industry in the 20th century, will continue to do so in the new millennium. He predicted that this technology will spawn a new breed of mutual fund investors who will have access to more information than ever before, and who will react instantaneously to new information as it is presented. He also noted that it is imperative for the industry to provide investor education sufficient to enable investors to use wisely the tools of technology, adding that the challenge of the industry is to ensure that these new investors understand and appreciate the need for a long-term investment vision in the face of this technology.

The investor education efforts Barbash spoke of would include the Commission's recent fund profile and simplified prospectus initiatives, which he believes additional advances in technology would make more feasible. Such technological advances would also be important as the industry wrestles with the issue of determining whether and to what extent a mutual fund should provide its shareholders (i) personalized statements and (ii) more frequent updates concerning fund portfolio securities holdings.

Retirement Planning
With respect to retirement planning, Barbash questioned the effect on the mutual fund industry and on the market as a whole when, in the year 2011, the first wave of baby boomers turn 65 and begin retiring en masse. Noting the importance of investor education in this area, he added that the Commission and the Department of Labor have undertaken numerous initiatives designed to facilitate the education of plan investors.

Barbash next expressed concern regarding the regulatory schemes under federal securities laws and federal pension laws, acknowledging the frustrations experienced by industry participants with "overlapping, inconsistent, overly burdensome, or outdated regulations under ERISA and under the federal securities laws." Barbash noted that the challenge for the industry will be to "assess these claims responsibly and eliminate duplicative and inconsistent requirements that are deemed detrimental to retirement plan investors." He further emphasized the need for regulatory involvement, predicting that if the regulators fail to address these issues, Congress will step in.

Continued Commission Effectiveness
As the industry moves into the next century, Barbash expressed concern whether the Commission will continue to remain a strong and active regulator in the investment management area. He noted that recent passage of the Investment Advisers Supervision Coordination Act of 1996 should ensure that the Commission has sufficient resources to oversee the investment management business well into the 21st century. This will be important as the Commission continues to anticipate and address mutual fund matters before they become problems. Barbash also noted, however, that certain procedural requirements occasioned by Congressional regulations applicable to securities regulators (in particular, the Paperwork Reduction Act and the Small Business Enforcement Act) may diminish the Commission's effectiveness in regulating the conduct of mutual fund participants.

Money Market Fund Bailouts
Barbash next discussed money market fund bailouts and performance advertising-two issues that continue to confront the mutual fund industry, and which he believes will continue to do so in the 21st century. With respect to money market funds, Barbash expressed concern that recent bailouts by investment advisers have given investors the impression that money market funds are guaranteed. He noted that this is a mistake. He acknowledged the initiatives taken by the industry to correct this misperception, however, noting that certain industry participants are in the process of developing money market fund insurance. Although this solution may not be possible for every fund complex, Barbash encouraged the industry to continue to think of ways to address this issue.

Performance Advertising
Regarding performance advertising, Barbash expressed concern that some industry members have attempted to rely on an overly broad reading of the recent no-action letters concerning the use of prior performance. Noting that such broad interpretations were neither intended nor anticipated, Barbash cautioned against "overstating, overselling, and overdoing past performance." As a consequence, Barbash added that the staff will be looking closely at prospectus disclosure in this area and will be working with the industry and the NASD to consider the limits of performance presentations that can be used in fund prospectuses.

Barbash concluded his discussion with a challenge to the industry to take the opportunity to become more efficient and responsive to fund shareholders, and to continue to educate investors as the industry moves into the 21st century.