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Fund Industry Leaders Testify at Hearing on Fund Industry Practices
Washington, DC, March 12, 2003 - The House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises held a hearing on “Mutual Fund Practices and Their Effect on Individual Investors.”
Financial Services Committee Chairman Michael Oxley delivered an opening statement in which he stated that the purpose of the hearing was to determine whether investors are “getting a fair shake.” He stated that rapid growth in the fund industry was “unquestionably a positive development,” noting that funds provide the opportunity to invest small sums of money in diversified portfolios of stocks, bonds, and other securities. Nevertheless, Oxley indicated the Committee’s desire to examine fund industry practices.
ICI Chairman Paul G. Haaga, Jr., Executive Vice President of Capital Research and Management Company acknowledged in his testimony that the last few years have been challenging ones for mutual fund investors.
He said investors have felt the impact of market downturns, and mentioned the egregious corporate and accounting scandals that have broadly impacted investor confidence. He added, however, that throughout these difficult times, the comprehensive regulatory scheme under which mutual funds operate has served the interests of fund investors well. He pointed out that while mutual funds were not the cause of the scandals or abuses, the fund industry’s responsibility to serve and protect the interests of fund investors makes it imperative that the industry work to devise and support solutions. For this reason, he said, the industry strongly supported the Sarbanes-Oxley Act and many other reforms to the financial reporting and oversight system.
Mr. Haaga also testified on the issue of mutual fund fees. He pointed out that an overwhelming majority of stock fund purchases by investors from 1997 to 2001 involved funds that had expense ratios below the industry average. He stated that “[t]he fact that the typical shareholder who holds mutual funds today is paying far less than the average fund charges is compelling evidence that our industry’s practices – the funds we offer, the services we provide, and the fees we charge – are serving tens of millions of fund investors faithfully and effectively. In particular, it is apparent that the market readily enables investors to find lower cost mutual funds.”
He concluded by stating that the industry’s “challenge of educating investors—about diversification, asset allocation, various types of risk, the impact of fees and taxes, the need for realistic expectations and a long-term focus—is a constant responsibility and an essential element of reinforcing confidence in our markets.”
James S. Riepe, Vice Chairman, T. Rowe Price Group, Inc., noted in his testimony that funds have done a good job educating investors on the cost of investing in mutual funds by providing net performance, unlike many other financial products, including certificates of deposit. He also pointed out that management and shareholder interests are aligned in that both want good performance and good service at a reasonable cost. Mr. Riepe responded to criticism that the infrequency of firings of fund management companies indicates that fund directors are not doing their job. He stated that investors do not expect boards to replace fund managers because by choosing to invest in a particular fund, they have chosen to invest in a fund managed by that particular firm.
A summary of the hearing, including witness testimony and other statements submitted for the record, is available on the House Committee on Financial Services website. Besides Haaga and Riepe, the following witnesses also appeared at the hearing:
- John C. Bogle, Founder, The Vanguard Group; Harold Bradley, Senior Vice President, American Century Investment Management;
- Gary Gensler, co-author of The Great Mutual Fund Trap and former Under Secretary of the Treasury;
- John Montgomery, Founder and President, Bridgeway Funds; and
- Wayne H. Wagner, Chairman, Plexus Group. House Financial Services Committee Chairman.