trust of the efficacy of disclosure, the presence of unaffiliated directors and the approval of shareholders." Another provision-one with vast economic implications-is the limitation of the sales load to 5% of the amount paid by the investor which is actually received by the issuer for investment. This translates into less than 5% of the purchase price. I have done some reading on the subject and have not found out where the 5% figure comes from. I claim no expertness in the economics of the investment company business. I respectfully question whether the Commission or the Congress is sufficiently acquainted with the economics of the investment company business to justify legislative fixing of a percentage ceiling on sales load. Any such legislative determination should be made on the basis, among other things, of an appraisal of (a) its fairness (e.g., relationship to cost of distribution, cost of training programs and opportunity on the part of the salesman to make a living), and (b) its effect on the business (e.g., continuation or abandonment of business conducted by small dealers, or significant shrinkage of the volume of public investment in securities of investment companies). In attempting to appraise these effects, one should bear in mind that the amount invested in investment companies has grown under a system which provides a maximum 9% sales load and in most cases pays an 8% commission, and that this compensation has been supplemented to an indeterminate extent by give-ups to brokers as a reward for successful selling effort, research reports, or both. I am not attempting to say whether or not the combined compensation is too high. The aggregate compensation, however, can be assumed to have had something to do with the growth of mutual funds since, generally speaking, mutual funds must be sold. A member of the public does not come into a dealer to buy them as he would groceries. The proposed legislation would substantially trim the customary sales load. Moreover, the Commission is considering using its regulatory power drastically to limit the use of give-ups. The combined effect would doubtless be to shrink drastically the financial rewards of those who participate in the process of selling mutual funds. What are the predictable consequences of such curtailment in terms of aggregate sales of mutual funds? Would it be to reduce them? Would that be good or bad? Would small dealers and salesmen, who depend on sales of mutual funds to sustain their business or to earn a living, be led to abandon their enterprises? Is there anything peculiar about the percentage of sales load on mutual funds which the purchaser cannot understand when he compares investment media, or compares the advantages of a mutual fund with a savings account, an “E” Bond, an annuity or a life insurance policy? Does the investor know what sales load he is paying? He can read it in a prospectus as he can read other facts which are much more complicated. The Commission, in its administration of the Securities Act of 1933, depends on the prospectus to disclose the underwriting spread on all registered public offerings of securities. The proposed limitation on sales load involves the Congress in making a precise economic judgment on what part of the total price should be allocated to the distribution function, knowing that that determination will have substantial but indeterminate economic results, both in terms of consequences to those engaged in the business and in terms of the relative position of mutual funds as an investment medium. In addition, it singles out the sales commission on mutual funds for special legislative treatment without any showing that the public is in need of special protection. I do not consider myself competent to speak on "fund holding companies”. I do not blame the Commission for requesting statutory authority to deal with this developing phenomenon with obvious broad economic consequences. The Congress has imposed on the Commission the duty both of reporting on the implications of size of investment companies and of recommending legislation. The Commission has been responsible for a deep, thorough and continuing study of the investment company business. I think it is a tribute to the investment company business and to the efficacy of the present statutory system and the Commission's administration of the same that the Commission's report is directed largely against "potential" rather than actual abuses and is admittedly designed 7 "On the other hand, as pointed out above, disclosure, the presence of unaffiliated direc tors, and shareholder approval do not, in and of themselves, provide adequate protection to a fund and its shareholders against the dangers of overreaching inherent in such situations." Public Policy Implications of Investment Company Growth, supra, nage 152. Adoption of the Commission's proposal would carry out its desire to overrule SEC v. Insurance Securities, Inc., 254 F. 2d 642 (CA-9), cert. den. 358 U.S. 823 (1958). to round out the regulatory pattern. It is natural for a regulatory agency having pervasive powers over particular business to suggest that the regulation would be more effective if the area of regulation were expanded. I suggest that the Congress should be somewhat more objective in this respect than the Commission. I think the Congress should recognize that there are limits to the ability to create legislatively in the business world such an antiseptic atmosphere that all temptation will be removed. I think the Congress should recognize that the legislative imposition of fixed commissions and expanded regulatory controls of management compensation do represent "a drastic overhauling of the regulatory pattern". I think the Congress should recognize that the Commissioner is a busy agency with much to do in defining and enforcing the disclosure and anti-fraud requirements and the anti-manipulative provisions of the securities acts generally. I think it should take a long careful look at this piece of proposed legislation and ask "How much of it is really necessary?" MUTUAL FUND LEGISLATION OF 1967 WEDNESDAY, AUGUST 2, 1967 U.S. SENATE, COMMITTEE ON BANKING AND CURRENCY, The committee met, pursuant to recess, at 10:08 a.m., in room 5302, New Senate Office Building, Senator John Sparkman (chairman of the committee) presiding. Present: Senators Sparkman, Proxmire, Mondale, Spong, Bennett, Tower, and Percy. The CHAIRMAN. Let the committee come to order, please. Our first witness this morning is Prof. Paul A. Samuelson, Department of Economics, Massachusetts Institute of Technology. Mr. Samuelson, will you come around, please. May I say that Senator Brooke wanted very badly to be here at the time you testified, but, as you know, he has been named to this very important Commission on our civil strife and is not able to be present. But he did want you to know that he joins us in welcoming you to the committee. Mr. SAMUELSON. Thank you. The CHAIRMAN. We have your statement. May I say for the benefit of those here today and who will testify, witness statements will be printed in full in the record. You may read them, summarize them, or present your case orally. We are glad to have you, Professor Samuelson. STATEMENT OF PROF. PAUL A. SAMUELSON, INSTITUTE PROFESSOR, MASSACHUSETTS INSTITUTE OF TECHNOLOGY Mr. SAMUELSON. Thank you. I am very glad to appear here as an independent academic economist, who has considered and reviewed the opposing arguments of the securities industry and the SEC, and who seeks improved performance of the mutual fund industry. Recognizing that investment companies do provide valuable functions to individual investor and to an efficient capital market, I conclude that certain reforms are long overdue. 1. Resale price maintenance, in which the Government enforces monopoly markups of funds' share prices, should be abolished. One share of General Motors is a fungible commodity like another. It's like No. 2 Kansas Red wheat. One share of Dreyfus Fund is a fungible commodity like another. It a conscious competitor can buy such shares and sell them in bulk to a buyer at a markup that comes to 2 percent over asset value rather than at 83% percent over market value, then all believers in the virtues of market competition should welcome this fact. But that cannot now be done under present law. My recommendation, therefore, is that Congress should repeal the provision in section 22(d) of the Investment Company Act of 1940 which prohibits a broker from selling mutual fund shares to the public at less than the public offering price. All monopoly is bad. Private monopoly is bad. The worst kind of monopoly is when the Government comes into the picture and serves as the policeman to police monopoly. I may say that as an alternative to this recommendation, if desired, Congress could give the SEC certain powers to set minimum and maximum markups in a secondary market, so the industry could adjust gradually to the new competitive structure. I should also add that in no sense would such a change necessarily put to a competitive advantage the captive sales forces of those mutual fund organizations which have their own sales staff, because it is part and parcel of my recommendation that their shares are also fungible commodities and would not be protected from free market pricing in a secondary market. That is my first recommendation. 2. My second recommendation is that the minimum commission structure of the New York Stock Exchange and other stock exchanges which works out in fact to be the maximum structureshould be drastically modified, so that large dollar transactions involving multiples of round lot sales should have commissions that are much lower in percentage terms than under existing schedules. The present schedules do not reflect the true competitive costs of transactions. Under vigorous competition that causes commissions to reflect actual costs incurred-and that competition is now not possible for any stock exchange member-100 shares sold of a $100 stock would involve a much lower percentage commission than would 100 shares of a $20 stock. And this is actually now the case with the present schedules. But 500 shares of a $20 stock, even if it involved the same bookkeeping and other costs of all brokers involved, must now involve exactly five times the commission that 100 shares would involve; the result is a much higher percentage commission on $10,000 of sales of a $20 stock than of the same total dollar sales, that is, $10,000 of a $100 stock. And no competitor can do anything about it if he is to stay in good standing with the New York Stock Exchange. The results of monopolistically maintained commission schedules that do not reflect competitive costs of the service rendered are many and bad. In particular, there results the unsavory practice of commission "giveups." "Giveups" exist because there is something to be given up which would not exist under effective competition. The owners of a mutual fund are being taxed so that the sellers and advisers of it can benefit by having part of the commission charged the stockholders go as "giveups" to encourage brokers to sell shares of the fund in question. Were it not for the lopsided structure of the imposed stock exchange commission structure, shareholders would benefit; conflicts of interest would be avoided; hidden promotional costs of fund selling would |