Mr. BOGERT. Our membership, if I could amplify that, sir, is not only in the underwriting business. Many of our membrs are members of the New York Stock Exchange and act as brokers. Many of them act as underwriters of State and municipal bonds, large and small, and as I said earlier, many of our members distribute mutual funds. Also, a few underwriters of mutual funds belong to our organization. Seantor WILLIAMS. This is just a personal inquiry. Is a firm like Morgan Stanley part of the IBA?

Mr. BOGART. Very much so. In fact, one of my vice presidents this year is a partner of that firm.

Senator WILLIAMS. Do all of you in addition to your underwriting capacity and your brokerage capacity sell shares of mutual funds? Mr. BOGERT. Some do and some do not.

Senator WILLIAMS. I mean at this table.

Mr. REGAN. No, sir.

Mr. BOGERT. At this table, you asked, Senator Williams?
Senator WILLIAMS. Yes.

Mr. BOGERT. I would say that a majority of the table do with one exception. Merril Lynch has had a policy for many, many yearsSenator WILLIAMS. Mr. Regan, you represent Merrill Lynch. Does your firm have a policy against selling shares of mutual funds?

Mr. REGAN. NO. I would like to explain that, Senator Williams. We do not have a policy against selling open-end mutual funds. We do not recommend their sale actively. We have not signed letters with the distributing organizations.

From its earliest inception, Merrill Lynch has concentrated on the sale of individual securities to individual investors. And like anyone who gets started in a business which is profitable, we are sort of stuck to our last, as it were. We have not engaged in mutual funds. Over the years, we have taken a look at the mutual fund industry. We e were quite serious about going into it at a time when we first understood the SEC was going to have a major investigation of the industry. We waited for that patiently. That was the Wharton study. Then we waited rather impatiently for the next study of the SEC to make up our minds.

Then we heard there might be legislative recommendations. So we are waiting patiently now to see what legislative recommendations there may be. So currently, we are not advocating the purchase of open end mutual fund shares.

Mr. BOGERT. On the other hand, my firm, at least, Eastman Dillon, Union Securities, is one of the larger underwriting firms. We do an underwriting business.

We also are very active in the sale of mutual fund shares.

Senator WILLIAMS. Mr. Regan, you specified open end funds. Do you sell shares of other funds?

Mr. REGAN. Well, sir, we are members of the New York Stock Exchange and do a considerable amount of business on the exchange. And as you know, there are closed end funds which are listed on the New York Stock Exchange. And many of our customers do buy the closed end funds on the exchange.

Mr. BOGART. Senator Williams, we have spoken about two larger firms. It is a proportionately much more important part to the smaller regional investment banking firm. I would like Mr. McConnel for

Singer, Deane, & Scribner in Pittsburgh to comment with respect to their product mix in their firm.

Mr. McCONNEL. Well, speaking of our firm-and I think our firm is a normal example of a regional firm-we are members of the New York Stock Exchange and do investment banking. In the history of our organization, we have never sold more than 10 percent of our gross income in any 1 year in the mutual fund industry. Yet, this has a very severe impact on our earning power.

And I would like to call your attention to something that might develop that would be disturbing to me and I think to the industry and possibly to you.

If you reduce the maximum sales charge to 4.76 percent as has been said here today, the income that will come to a regional firm such as ours would approximate approximately 3 percent because there has to be a fee paid to the underwriter who makes the sales throughout the country to firms like ours, presents us with the selling information and gives us counsel on sales. And this is the normal practice in the business.

The profit to our salesmen will drop to approximately 1 or 1.25 percent.

There have been rumblings around the country-some of them, I have heard directly-that, if the 4.76 percent was the maximum, you might create many, many small mutual funds where two or three regional dealers would sell the funds through their own sales organization and collect the 4.76 percent which is commensurate with what they are collecting today and start their own funds where you would run the risk of having inadequate management. And you would take the business right back to where it was in 1933 with probably mutual funds of $3 to $5 million, and so on.

Last year, our firm sold $4 million worth of mutual funds. It is conceivable if we join together with two or three other firms that did the same range amount, we could have a mutual fund of $25 million in size, bypassing the large fund and obtaining the 4.76 percent that might be set by regulation.

To me, this would be a tragic thing because I do not think that you can provide adequate management service and liquidity in a small fund of this character.

Senator WILLIAMS. The chairman of our committee has developed a line of inquiry on how the self-regulation of the New York Stock Exchange commissions was working.

Am I right on that, Mr. Chairman?

The CHAIRMAN. That is right.

Senator WILLIAMS. Is it proper to inquire as to how these gentlemen feel about that?

The CHAIRMAN. Well, the first question I put to Mr. Bogert had to do with that.

Mr. BOGERT. I think, sir, perhaps my letter to you on June 15 covered our position on that.

Senator WILLIAMS. Is it a long letter? I do not want to take the committee's time to read it here.

The CHAIRMAN. I asked him this-this might shorten it: I asked Mr. Bogert if his viewpoint coincided with that expressed by the gentleman who preceded him.

Senator WILLIAMS. In other words, is it working well?

The CHAIRMAN. Well, I think they are pleased with it, and they would be willing to enter into a cooperative arrangement, following an in-depth study as recommended.

Mr. BOGERT. With certain very definite reservations, subject to studies and so forth in depth.

Senator WILLIAMS. That is the next step. I was just wondering how the self-regulation of commissions within the exchanges is working. Is it working, and has it worked?

Mr. BOGERT. Yes.

Senator WILLIAMS. And the next question was yours, Mr. Chairman, why could not this same concept apply to mutual funds?

The CHAIRMAN. And their answer is provided the studies justify it. Senator WILLIAMS. This will postpone Merrill Lynch, Pierce, Fenner & Smith's[Laughter.]

Mr. BOGERT. Senator Sparkman, I would like to ask Mr. Calvert to speak to that.

Mr. CALVERT. Senator Williams, to be sure the record does not indicate that we agree to a system of self-regulation of mutual fund charges on the same basis as the regulation of stock exchange commission rates, we want to make our position clear. Under section 19 (b) of the Exchange Act, which provides for SEC oversight of the regulation by the exchange of the commission rate structure on the stock exchanges, the SEC has authority after a hearing to establish a commission rate structure. We would not subscribe to such regulation of mutual fund sales charges.

If the SEC had that same authority under some new provision of the statutes, it would mean that if the commission were not satisfied with the rate structure established by the NASD the commission could establish whatever rate structure it saw fit. In view of the SEC report, that rate presumably would be 5 percent which we obviously think is not proper.

So, to summarize, yes, we would subscribe to self-regulation if your committee concludes that the present rate structure on a competitive basis has provided rates which are excessive or unreasonable. But we would not subscribe to self-regulation if it were on the same basis as the regulation of the stock exchange commission rate structure.

Senator WILLIAMS. I see.

In other words, you do not want to be on all fours with the law, the regulations, the practices, as they apply to members of the exchanges?

Mr. CALVERT. That is correct because there is quite a difference on the exchange where the SEC has authority to supervise the commission rate structure. The conduct of business on an exchange is limited to its members so that you have there a quasi-utility type of regulation.

Whereas in the mutual fund business, there is no limit to the entry into this business. As Mr. McConnel points out, any firm that sees fit to establish a mutual fund can. And as a result, you have a growing number of funds entering this business.

Senator WILLIAMS. I do not have anything further. Thank you very much.

The CHAIRMAN. Senator Percy.

Senator PERCY. Between all the members of your association, you represent possibly every single public company in the United States as underwriters and writing out national requirements and so forth. I wonder if you could look ahead for a minute: if the mutual industry stays as successful in the future as it has been in the past, its growth trend is going to be on the spectacular side. Representing these companies, are you concerned with the economic power that these mutual funds will possess and hold, the quantity of stock that they will have in their hands, the effect that the sales or purchase of those stocks could have, and the economic power they have over the companies that you represent as investment bankers?

I specifically ask this question, recognizing that even just recently, the president of a prominent midwestern electronics manufacturing company, addressing a group of security analysts, was frank and honest about conditions in the industry. He stated that mutual funds fell over each other dumping shares and stock prices dropped dramatically when they did so. I do not know whether it is justified or not. I have not looked into the question, but here was a tremendous economic power that these funds exercised.

Are you concerned about this as the growth trend continues?

Mr. BOGERT. I think that each fund is limited to the percentage of the equity of any particular corporation.

Senator PERCY. Čumulatively, 169 funds can count on quite a bit. Mr. BOGERT. All selling at once?

In looking at the assets of major institutions and financial intermediaries, mutual funds have substantially less than $50 billion, whereas savings and loan associations, life insurance companies, and commercial banks each have in excess of $100 billion.

Senator PERCY. But considering the growth rate in looking 10 years ahead

Mr. REGAN. Senator Percy, I do not believe that the mutual fund industry will ever get into that position of dominance. Pension funds currently are growing at a faster rate and currently buying more securities on the New York Stock Exchange than mutual funds.

In addition, there are other types of large-asset holders coming up, life insurance companies and State pension funds.

For example, California has recently passed legislation enabling its fund to buy common stocks. The number of funds registered on the New York Stock Exchange are increasing each year also.

So I think this is a case of the hare and the hounds. And I am not sure in this particular case that you ever would get that absolute dominance by the mutual funds of American industry.

Senator PERCY. In your judgment, is the sales incentive too great in the mutual fund industry, resulting in too much pressure in seeking out new customers?

Mr. BOGERT. No, sir, Senator Percy. I think there is a real place. I alluded in my statement to people's capitalism, the broad investment of many, many millions of people in securities, contributing to the growth of our country. And this is a medium that is ideally set out, we think, for the smaller investor.

Senator PERCY. Lastly, I am not sure that I really understood the Merrill Lynch position. If I were an investor and I dealt traditionally with Merrill Lynch and I put the question to you, why should I not

buy an open-end fund, what kind of a policy answer do I get back from Merrill Lynch?

Mr. REGAN. Without trying to be equivocal, Senator, we would go into a rather lengthy dissertation with you on that subject, taking into consideration all your assets, your investment objectives, your current holdings, things of that nature.

Senator PERCY. Would you give the same dissertation to everyone? Mr. REGAN. Everyone. It is not so much size.

Seantor PERCY. To anyone regardless of assets?

Could you nub down without the lengthy dissertation a summary of exactly why it is, why you would not recommend to your customers the open-end fund?

Mr. REGAN. That, again, is very difficult. In the course of last year, Merrill Lynch dealt with 1,200,000 different people-a million two hundred thousand different people of all sizes, shapes, economic background, and the like. If you want an answer, specific answer, to that, I will be glad to go into conference with you or anyone else for that matter. But I could not generalize, frankly, without knowing the individual circumstances.

Senator PERCY. But you give the same dissertation to everyone? Mr. REGAN. We do not believe there is an all-purpose investment. Can I put it that way? And we do not think there is any one investment that you can say everyone can buy. We think each individual should tailor his investments to his own requirements and backgrounds.

Senator PERCY. Thank you, Mr. Chairman.

The CHAIRMAN. Senator McIntyre.

Senator MCINTYRE. Just one question.

Mr. Regan, did I understand your answer to Senator Percy's question relative to the continual growth of the mutual funds and you added the pension funds to mean that you foresee no possibility of difficulty for the securities markets as these funds continue to grow? You foresee no problem?

I think you said it is the hare and the hounds.

Mr. REGAN. I think, Senator, in this particular case, in answering that question, what I referred to was the foreseeable future. We would have to define what is the future and how far ahead.

There have been many economic studies forecasting what would happen, how many shares will be traded, how many shares there will be in the hands of the public, how many shares in the hands of institutions over a period of years. I am in no position at this point to speculate on what might happen well into the future.

Senator MCINTYRE. You probably agree with Mr. Cohen's statement earlier this week in which he said he was not here with that problem today, but he and the Commission were keeping a close eye on it.

Mr. Regan. Yes, sir I would agree with that.

Senator MCINTYRE. I want to thank Mr. Bogert and his colleagues here for a fine statement, particularly in references to the small business area which I am particularly keen on. It is well documented. And I hope to get a chance to go through it.

Thank you very much.