receiving of rewards for managing, there should be some meritorious service rendered. The proper competitive return to proper management should be compensation for the manpower and research facilities needed to provide adequate performance.

(7) In recent years there is some evidence accumulating that the Funds are beginning to outperform the Dow-Jones index. Now they welcome comparison with that index. But, as pointed out above, we should stick to the Stock Exchange or S&P index as a more proper comparison.

In recent years there is some evidence that many of the Funds are outperforming the S&P and Stock Exchange index. In the limited time available to me, I have not been able to calculate dividends that would have to be ploughed back into these two indexes to make them comparable with Fund portfolio performance. But I think more exact calculations would verify the following:

In 1967, and indeed for the last couple of years, more of the common stock funds have begun to outperform the comprehensive indexes of stock market behavior. The same is beginning to be true, I suspect, of larger institutional portfolio managers in general (those who handle large family wealth or pension and trust funds that are not handicapped by stringent safety requirements). For the first time, the general market is splitting up into a group of intelligent hard working professional security analysts and the remaining group of amateurs; and the professionals are increasing their relative share of the gains that accrue to the marketplace as a whole.

I do not know whether this trend will continue or not. It may come to be the case that there will be so many professionals competing with each other as to return us to the earlier competitive equilbrium in which the passive amateur could count on all bargains and boobytraps as having already been discounted away. (But of course within the professional group there will always be some quicker and smarter than the others and hence capable of greater capital gains.) (8) I will not try to give the reasons why there should have begun to be definte signs of actual good performance by professional investment managers. In part it may be because they have become "better sellers" of stocks than they used to be. In part it may be because they have been willing to assume greater risks than before; and of course if this is the major reason, we must entertain some reservations about the new trends. Nor shall I here go into some of the dangers that may be involved in the new "performance" consciousness (such as the possibility that the amateur half of the market is being conned into taking on the overvalued selloffs of the quicker professional half).

Also I should warn that, even if mutual funds can be shown to have been outperforming the market in the last few years, there is no guarantee that this will continue to be the case in the future. Furthermore, it is not easy to determine whether Funds as a group are displaying superior security selection. For by chance alone, some samples of stocks selected at random will do much better than the average and perhaps as well as the more successful funds, and one must control against this possibility.

I feel, however, that the Funds now are doing better than chance. Thus, some of them announced years ago that they would be aiming for higher capital gains; and if we examine all such funds, we do find that they have done better than the average fund and better than the comprehensive averages. Indeed this is so uniformly the case with respect to the so-called performance funds, that one is led almost to the conclusion that there is nothing especially meritorious in such records. If almost anyone who says he is trying for extreme gains, can achieve such gains in recent years, perhaps we have to attribute this result to their being willing to take greater risks and to nothing else. Remember we have been in a period of generally rising stock prices: one way that any fund could how superior performance would be to leverage its investment by borrowing money to buy stocks. This, few funds would want to do or be permitted to do by their rules; yet the same enhanced volatility can come from implicit-leveragng, secured during a period of rising prices by buying stocks that are inherently more volatile and risky.

(9) To conclude, let us consider the possibility that fund managers can consistently do better than the comprehensive averages. Does that justify sales ads in excess of, say, 5 per cent? Does that justify front-end loads? Does that ustify the high management earnings that the larger funds have been paying to heir managers? I think not. Really superior long-run performance does merit ome differential reward to management. But the good management that should e insisted upon by any fund should receive the normal cost-of-production reward eeded in a competitive market to reward it for the efforts of brains, com

puters, and clerks. The recommendations for reform by the SEC are quite consistent with this requirement. Critics of the present set-up of the industry, such as myself, have never argued that mutual funds do not provide a valuable service. (See my NEWSWEEK column of September 4, 1967.) On the contrary, I believe that they are an excellent investment vehicle for many investors. What we critics have argued is this: even though setting maximum load rates will prevent some people from being sold this valuable service, the benefits in reduced costs will be so great to so many other people as to make the setting of maximum rates a desirable and overdue Congressional reform.

The CHAIRMAN. Next we have a panel representing the Association of Mutual Fund Plan Sponsors, Inc.:

Mr. Cornelius Roach, chairman of the Association of Mutual Fund Plan Sponsors, Inc.

The Honorable J. Edward Day, former Postmaster General of the United States.

Mr. John D. Case, president, First Investors Corp.

Mr. John H. Kostmayer, vice president of the First Investors Corp. Mr. Raymond Grant, executive vice president of Investors Planning Corp. of America.

Gentlemen, will you take your places at the table?

Mr. Roach, are you going to be the leader of the panel?

Mr. ROACH. Mr. Kostmayer.

The CHAIRMAN. We will be glad to hear from all of you. We have your statements, and they will be printed in full in the record.

STATEMENT OF CORNELIUS ROACH, CHAIRMAN, ASSOCIATION OF MUTUAL FUND SPONSORS, INC.; ACCOMPANIED BY J. EDWARD DAY, FORMER POSTMASTER GENERAL OF THE UNITED STATES; JOHN D. CASE, PRESIDENT, FIRST INVESTORS CORP.; JOHN H. KOSTMAYER, VICE PRESIDENT, FIRST INVESTORS CORP.; AND RAYMOND GRANT, EXECUTIVE VICE PRESIDENT, INVESTORS PLANNING CORP. OF AMERICA

Mr. KOSTMAYER. Mr. Chairman, members of the committee, my name is John Kostmayer. I am an officer of First Investors Corp. My company is a member of the Association of Mutual Fund Plan Spon

sors.

I am also the coordinator of the association's committee that has concerned itself with the SEC legislative proposals.

Before introducing our first panel speaker, I would like to say that Professor Samuelson has written that with the life insurance salesmen it is a long time between signups. With the contractual plan salesman it is a long time between signups also. And we believe that unless he has the commission incentive to go out and make the calls necessary to create these signups that people will not come in to buy instead. I would like to introduce as our first spokesman the chairman of this association, Mr. Cornelius Roach.

Mr. ROACH. Mr. Chairman and members of the committee, my name is Cornelius Roach, and I am vice president and general counsel of Waddell & Reed, Inc., national distributors of the United Funds group of mutual funds and also the sponsors of certain contractual plans for the accumulation of shares of certain of those mutual funds. I have been continuously engaged in the mutual fund business for 16 years.

I am chairman of the board of the Association of Mutual Fund Plan Sponsors, Inc., an organization whose members conduct approximately 70 percent of the business in contractual plans.

At the end of 1965 there were 47 sponsors offering the shares of some 61 mutual funds through contractual plans, and there were 1,548,427 planholders holding plans that called for aggregate payments of $7,304,689,000, of which $3,083,626,000 had been paid.

Our statistics indicate that since passage of the Investment Company Act in 1940, something in excess of 2 million contractual plans. have been sold in this country and that 83 percent of those plans have made profits for their investors while simultaneously accomplishing their primary objective as well; that is, putting aside savings amounting to billions of dollars which those investors would otherwise have spent as disposable income.

It is this business that the SEC has asked the Congress to destroy. I use that term advisedly and with its full implications. It is not merely an exaggeration of a complaint about some minor increase in restrictions.

As you have been informed, the contractual plan is an arrangement for investment in the shares of a mutual fund by the periodic payment of small sums of money over a term of years.

In accordance with the provisions of the Investment Company Act of 1940, up to 50 percent of the first 12 payments may be deducted for sales charges. This is the so-called front-end load. The balance of the sales charges is spread over the remainder of the term. In the aggregate, sales charges upon completion of a plan are not any higher than the usual sales charges on the shares of the underlying fund.

The SEC asks that you prohibit the future sale of plans with a front-end load. That means a complete prohibition of the sale of contractual plans and the consequent destruction of our business.

You can understand, therefore, why we consider it most important that this committee be fully informed about our business and about this proposal and about its effect upon us and the securities business generally; and we are most grateful for this opportunity to furnish this information and to present our view.

However, we know that your time is limited and we do not want unduly to tax your patience. Accordingly, while we have prepared statements of 10 witnesses, including myself, and all of these but one are here with us today and available, if you wish, to answer any questions with respect to their statements, we shall, with your permission, limit ourselves, for the purposes of oral presentation, to a statement of Mr. John D. Case, president of First Investors Corp., a statement of Mr. J. Edward Day, of the law firm of Sidley & Austin, who will testify today as an expert witness, and a brief catalog and outline by me of the statements of the witnesses who are not testifying orally. I now offer for inclusion in the record these statements, together with their various exhibits.

The CHAIRMAN. Without objection, they will be printed in the record.

(The statements and exhibits referred to appear at p. 402.)

Mr. ROACH. The statement of Mr. Rowland A. Robbins, who is chairman of the board of First Investors Corp., New York, N.Y., and president of the Association of Mutual Fund Plan Sponsors, Inc.,

demonstrates the highly favorable results which have been achieved by the overwhelmingly majority of contractual planholders.

The statement of Mr. George J. Solomon, who is associate counsel and secretary of the Association of Mutual Fund Plan Sponsors, Inc., and a partner in the law firm of Poletti Freidin Prashker Feldman & Gartner, reviews the legislative history of those sections of the Investment Company Act of 1940 which pertain to the contractual plan and summarizes data which were then available to and used by Congress when it enacted the law.

He concludes that the data now available are not so different or so much more compelling as to warrant the fundamental and sweeping change in the legislative pattern which the SEC has proposed.

The statement of Mr. Clare A. Johnson, regional manager of Waddell & Reed, Indianapolis, Ind., discusses the major differences between the contractual plan and the so-called voluntary or "level-load" plan, and points out that the two are vastly dissimilar in basic characteristics, method of selling, actual utilization by investors, and results achieved.

Mr. Johnson points to the SEC statement that voluntary plans “can be used" for the same purpose as contractual plans although it provides no statistical or practical basis for that statement, and he demonstrates that voluntary plans actually are not used for the same purpose and do not in actual fact produce the results that are achieved by investors in contractual plans.

The statement of Mr. Thomas J. Herbert, who is president of Financial Programs, Inc., Denver, Colo., vigorously refutes the SEC statement that "the front-end load provides incentives responsible for undesirable high-pressure selling practices."

Mr. Herbert demonstrates that such practices are not shown to exist: that the SEC conclusion is based solely on outdated sales training material that was never in extensive use; and that the result is a remarkable lack of complaints about selling practices in the field of contractual plans, as demonstrated by letters from State securities administrators which are filed as exhibits to his statement.

Dr. Herbert Arkin, who is professor and head of the Business Statistics Division of the Bernard M. Baruch School of Business and Public Administration, New York, N.Y., analyzes the survey of mutual fund investors made for the SEC in 1962 by certain professors at the Wharton School, and demonstrates, with his full professional authority, that the survey methods employed were both improper and inadequate and no sound conclusions can properly be based upon that survey, which the SEC uses as the sole source of its information about contractual plan investors, their financial problems, and their reactions in the field of investments.

Prof. Murray E. Polakoff, the only witness unable to be here today. who is professor of economics and chairman of the Department of Economics of the School of Commerce of New York University, discusses the importance of equity investment in planning for old age, the value of the contractual plan in providing for a systematic accumulation of equity capital, and the necessity for its preservation as a choice for the investor.

Finally, Mr. John H. Kostmayer, who is vice president of First Investors Corp., who has already spoken, shows that of the small percent

age of investors who terminate their plans in the early years of the term, many have achieved substantial profits, while the losses suffered by the few are relatively insignificant, and that of those persons who incurred a loss as a result of early termination, more than half did so voluntarily, and not due to financial emergencies.

Now, there is also with us Mr. Ray Grant who is president of the Investors Planning Corp. They are not members of the association, and he is appearing here individually. But we again take this opportunity to invite him to become a member of the association. The CHAIRMAN. Very good.

Who is your first spokesman?

Mr. ROACH. Mr. Chairman, with your permission, we will welcome Mr. J. Edward Day as our first spokesman.

The CHAIRMAN. Mr. Day, we are glad to have you before us again. We have seen you up this way before.

Mr. DAY. Yes, sir.

I appear here today as an expert witness retained by the Association of Mutual Fund Plan Sponsors to support their opposition to S. 1659 and particularly their opposition to the proposed abolition of the so-called front-end load.

My remarks will be devoted principally to the close analogy of the contractual plan sales and sales compensation pattern to the longestablished, highly successful commission system for merchandising life insurance.

First, let me summarize my professional qualifications to discuss this life insurance aspect.

From 1950 to 1953 I was insurance commissioner of Illinois in the cabinet of then Governor Adlai Stevenson. During that time I was. elected vice chairman of the Life Insurance Committee of the National Association of Insurance Commissioners and also served as chairman of that association's midwestern zone.

Following my term as insurance commissioner, I became a senior officer of Prudential Insurance Co. of America, one of the two largest life insurance companies in the world, first, for 4 years, as one of the top members of their law department and thereafter, for another 4 years, as senior vice president in charge of their 13-State western region. In the latter capacity my responsibilities included direction of life insurance sales with supervision of over 4,000 life insurance agents. I have written a number of published articles on life insurance subjects, and am a member of the board of directors of several insurance companies.

Now, you may well ask: Why do you talk so much today about life insurance?" I would like to answer that question before I go on in my statement.

If the Congress of the United States takes the position that the front-end load principal is immoral and indefensible, it has implications far beyond this bill. It strikes at hundreds of thousands of salesmen who earn their pay under front-end load plans. A major portion of these salesmen are life insurance men.

If Congress says this type of compensation is improper and unjustifiable, other regulatory agencies including those having jurisdiction over insurance are liable to decide that they need to take action.