evidence whatever of the probable consequences of its proposal either to the industry or to the millions of people whom the industry serves.

If this proposal is enacted, management fees, instead of being governed by the interplay of economic forces and negotiations, as now, would be set by the SEC or a court without the consent of those engaged in the business. Here are some of the questions that arise.

If, as a consequence, management fees were reduced below what competitive forces would otherwise produce, what would be the results? Will the quality of the service suffer? Will the entrance of new companies into the business be inhibited? Will the sponsorship of new funds by those management companies already in the business be deterred? Will newer entrants who have not yet achieved a profitable level of operations be discouraged from continuing? Will the development of new services for fund customers be retarded?

The results of this proposal are no clearer than is the way it would operate. Judge Friendly in his statement submitted to this Committee has said that after a few cases are decided, and any conflict is ultimately resolved by the Supreme Court, all management fees would inevitably conform to the fee so set. Chairman Cohen has said, contrary to Judge Friendly, that in his judgment each case would be decided on an ad hoc basis without precedent value for others.

If Chairman Cohen is correct would not this mean endless and chaotic litigation? If Judge Friendly is correct will deadly rigidity in both fees and services settle upon the industry, stifling further growth and innovation? Neither result is desirable.

Contrast these uncertainties with the known results of the present system. Concentration in the industry is diminishing. The variety and availability of the services is increasing. The quality of the service is improving. And the cost of the service to the consumer, the fund shareholder, is decreasing.

Section 16 of the Bill Relating to Contractual Plans

Section 16 of the Bill would amend Section 27 of the Investment Company Act to prohibit the so-called front-end load on installment payment plans for the accumulation of fund shares.

I have previously described the IDS accumulation plan and the reason why IDS designed and commenced distribution of the plan in 1965. In brief, it was to serve a market which IDS had found it could not otherwise reach.

If this proposal becomes law, it would mean the end for the IDS plan. We have studied the impact of the proposal. We estimate that with our 20% frontend load, an IDS plan must be in force for three years before IDS recovers its costs and begins to make a profit. If the SEC's proposal were in effect IDS could never make a profit on this operation.

IDS has been distributing its accumulation plan for less than two years and our experience is, therefore, limited. The persistency so far has been very good. We are not happy that some loss, however small, has been borne by any of our customers. IDS believes that close supervision of sales practices, strict adherence to its sales policies, and the design of the plan itself have contributed greatly to minimizing losses due to the front-end load.

When IDS began the distribution of its accumulation plan it believed that the potential benefits to the public far outweighed any potential harm. This Committee must weigh the same question. We urge you not to abolish a system of distribution necessary to make the mutual fund form of investment available to a large market for which it is particularly suitable.

The CHAIRMAN. Mr. Robert A. James, Florida Securities Dealers Association.

May I say we still have five witnesses to hear from. The Senate is going into session in about a minute. I don't mean we have to quit in a minute, but I am sure that all of us have obligations. I would therefore like to finish these hearings before lunch if we can.

Senator HICKENLOOPER. Mr. Chairman, do you expect to finish this list before lunch?

The CHAIRMAN. I say I would like to. I don't know. We may have to have an afternoon session.

Senator HICKENLOOPER. A very distinguished citizen of my hometown and a close friend of mine is on this list and I want to hear him testify.

The CHAIRMAN. We will do our best.

STATEMENT OF ROBERT A. JAMES, PRESIDENT, RAYMOND JAMES & ASSOCIATES, ST. PETERSBURG, FLA.

Mr. JAMES. I am Robert James, president of Raymond James & Associates, broker-dealer firm in St. Petersburg, Fla. We have offices around the State and have more than 100 registered representatives, mainly selling mutual funds. Our market in Florida is one that is predominantly retired people and as a result we have found that mutual funds are well accepted, are a fine field for the investments of retired people.

I particularly wish to make a few statements regarding the proposed 5-percent commission. Our sales representatives represent quite a high level of general intelligence. We employ a psychologist to review their qualifications in getting into our field and we find that practically all of them are in the upper 10 percent of intelligence of the population, some in the upper 3 percent.

Our earnings average for these people is $5,500 per year, but admittedly this is low, because many of our sales people are of a semiretired nature, although they are full time in our business, so I would say the average is $10,000 to $12,000 for a younger representative.. Now the services that they perform take quite a bit of time. They must get to know people, they have got to go over their objectives and needs, they have got to explain the investments that they feel are best for people, and then after any sale is made in mutual funds, the amount of time given to service, in giving them the information and dividends, takes information at the end of the year, and answering all of their questions is considerable.

If this particular provision of 5 percent were put in it would place our firm in the position definitely of a loss. Firms which are smaller than ours would undoubtedly go out of business and I believe we

would too.

We feel, of course, that the present commission sale which has not gone up to us in years, is certainly not too much, considering the time. and the intelligence that we bring in advising people what they should have for their particular purposes.

Second, the firm is not unusually profitable. I find that dealers are not making a great deal of money in this endeavor. In fact, there is one dealer in St. Petersburg who exists selling mutual funds and church bonds, and he helps place individual church issues after he reviews them carefully, and he also gets most of his income from the sale of mutual fund shares other than the church bonds.

If the commissions were cut, he told me that he would definitely be out of business within a month. So the first point I believe is that your grassroots retail salesman, who dedicates his life to meeting the public and attempting to fit their investments, this cut to 5 percent would definitely put many of them out of business.

Now if this were done, where would they go? We have many people in Florida who come from the life insurance industry and come

into the mutual fund business because of the character of our market, the retired people. There is not as much need of life insurance and therefore they feel that they can serve better in selling mutual funds to people. If these commissions were cut, they would obviously have to go back into life insurance and we could not compete to have highly qualified sales personnel in helping the public.

The other point, there has been much said about contractual programs and I want to give you my own experience. Years ago when contractuals first came out, I resolved I wouldn't sell one, because it was against my feeling to collect a commission in advance, before all of the money got in. I think in my experience back years ago I only sold one and I had about 20, of a standard systematic investment program. After a few years I took a look at this, and 85 percent of the people who did not pay a front-end load canceled out and the one that was in the contractual stayed.

I feel that there are very definitely advantages to the contractual program for people. The fact that there is a penalty keeps them in and is to their advantage. When they are on a voluntary program, they are much more likely to buy a new car and stop this program of savings and investment for the future.

Regarding the management fee, I would like to report that with the public we hardly ever get a question on management fee. It is revealed to them, but I have never had many people say they thought it was too high. In recent years the management fees we have noticed have been consistently going down, and the fact that the funds themselves have reduced the fee as they get over so many million dollars in assets. Therefore I think that the public has definitely accepted the schedule of management fees as it exists.

We do not get any grassroots objections to it. And I think it would be a mistake to think that management, with the talent which they bring to it, the time, the responsibilities, it would definitely be in error to think it would be too high as it stands. That is mainly it, Senator.

The CHAIRMAN. Thank you, Mr. James.

Senator Hickenlooper?

Senator HICKENLOOPER. Mr. James, do you have a comparison in your area of the general fees charged in the sale and supervision of these funds as compared to what banks charge for looking after estates or what insurance companies pay?

Mr. JAMES. I don't have any study locally on these charges; I am

sorry.

Senator HICKENLOOPER. Do we have any studies on that, Mr. Chairman?

The CHAIRMAN. We had some testimony given a comparison. I think it is generally accepted that management fees, on the basis of the amount of money supervised, is higher for banks than for mutual funds. I am told that the SEC claims it is lower, but I am sure that in the course of these hearings reference has been made to it.

Senator HICKENLOOPER. I think there is some dispute on that point. Mr. JAMES. I believe it is difficult to compare that, because in the trust department of the bank, their responsibilities extend beyond the management of the money itself anyway, when you are trustee of an estate.

Senator HICKENLOOPER. I don't want to get into that, but having been a lawyer for a few years, I am not so sure their responsibility is any greater.

I don't think I have any more questions.

The CHAIRMAN. Thank you very much, Mr. James. We are glad to have had your testimony.

The CHAIRMAN. Mr. Victor H. Polk, executive vice president, Mutual Funds Advisory, Inc.

Mr. Polk, we are glad to have you, sir.

STATEMENT OF VICTOR H. POLK, EXECUTIVE VICE PRESIDENT, MUTUAL FUNDS ADVISORY, INC., CORAL GABLES, FLA.

The CHAIRMAN. We have your statement, Mr. Polk. It will be printed in full. You may proceed as you see fit.

Mr. POLK. Mr. Chairman, I am Victor Polk, Mutual Funds Advisory, Inc., of Coral Gables, Fla.

Quite naturally the opposition to SEC's proposals for regulation of mutual funds has considered and will center on the economic dislocations likely to result within the industry, how much will dealers be hurt, which ones, which dealer services will be curtailed, which firms will disappear, which men will lose jobs? This is inevitable and I think correct.

However, one question seems in danger of getting less attention than it deserves, the investor himself. As a principal in a mutual funds dealership, I feel qualified to speak on this and welcome this opportunity to set a few observations before the committee. In brief, what I shall say is this: By regulating a reduction in allowable mutual fund sales commissions, this bill seeks to cure an ill which its proposers, SEC, have referred to as oversalesmanship in the mutual fund area; but this so-called oversalesmanship is itself resulting from the SEC's own regulated blackout of mutual fund information which has been leaving the investing public overdependent on personal salesmen for their mutual fund data.

SEC would hobble and disperse the personal mutual fund salesman because they view his self-interest as publicly undesirable; but he is being made necessary today by existing SEC regulations which leave mutual fund investors, without him, blind.

Cure? Let SEC lift its information blackout so this personal doorbell-ringing salesman may gradually make his economic disappearance through becoming less needed-leaving new Federal legislation on the point much less necessary then I think we have been believing it.

Mutual funds now are mystery shrouded. The area of mutual funds investment is presently mystery shrouded. A single factor is responsible for this. A cure administered to the whole security business in the SEC regulations promulgated under the Security Act of 1933 has become an overcure in the mutual fund area. Desiring that investors' decisions on purchase of new stock issues be freed from influence of salesmanship and ballyhoo, the SEC back then took the position that only when all facts contributory to an investor's evaluation be presented to him. It seemed sensible. This was a way of saying: "Don't tell the good without the bad. Don't tell the strengths without the weak

nesses." This rule begat "tombstone advertising." No single qualitative fact about a new issue could be shown an investor until he had the new issue's prospectus.

If the Dreyfus Fund makes a $2 distribution, it may not print this in the papers, unless it prints the entire prospectus-which it actually nowadays does annually as a New York Times Sunday supplement. Nor may the Wellington Fund buy an ad to tell of their new "milliondollar computer to help take the guesswork out of portfolio selections." How dense the fog. The degree of ignorance to which this protective blanket reduces the investing public about mutual funds has never been accurately measured. One completely informal study has shown that billion-dollar mutual funds have names which are still unheard of by three out of four owners of common stock. "Have any mutual fund's shares appreciated as much as IBM or Xerox shares?" People don't know the answer to that. "In retirement plans, is there a difference between mutual fund, insurance company, and bank trust-department handling?" Vary sophisticated businessmen don't know the answer to that either.

Now, unless there is a simultaneous lifting of the present publicity curtain, any legislating of a pay cut or stoppage for the sincere representative who is presently the sole information bringer in this deeply clouded area must certainly have a woeful effect: The public's knowledge in these regions must be blacked out even further than it is.

It will be said that no-load mutual funds presently succeed in conveying the mutual fund story without the representative's help. However, the measure of their little success is apparent. After all these years, less than one equity security investor in 280 has ever bought a no-load fund share.

Nor does the situation of today's no-load mutual fund investor seem in any way ideal. Indeed, if this is what proposers of the present changes have in view as the mutual fund investors' eventual salvation, it is not a happy thought. It takes only a glance at the facts here to see this. There are presently 34 no-load mutual funds of a size of more than 1,200 shareholders each. Segregated as to objective, this means some dozen each of growth funds, income funds, and stability funds. But, if a shackling of the field operations of the several load funds were now to remove competitive pressures, it is foreseeable that these numbers of no-load funds would be vastly increased.

This would mean that the careful investor who desired to use the no-load mutual fund medium would be compelled to first write away for, then read, and finally comparatively evaluate literally scores of fund prospectuses. Would he do this? Of course he would not. Yet, in not doing it, how well informed an investor would he be? His accepting the services of the first mutual fund management which sent him a prospectus, or his accepting the fund his friend recommended, would serve him badly; it would also serve badly the cause of good, profesional investment management. News of management excellence would be reduced to horse-and-buggy traveling.

In short, if these proposed regulations were adopted, the situation would amount to this: While the 1933 rules still excessively curtailed mutual fund investor's information flow, the new rules would now excessively curtail his responsible investment counsel.