original cost, management fees, expense ratios, ancillary services, performance records, etc. Whereas each prospectus describes such matters in detail, the practical result is that many members of the public are "sold" a particular fund by the salesman or broker without having the benefit of comparative information by which to judge the particular fund's merits or lack of them. At present, mutual fund sponsors are permitted to state in their public advertising, presumably directed to the general public over the heads of dealers and salesmen, only the name, the investment objective, the price, and the availability of the prospectus of the fund advertised.

In the light of these problems, legislation should be enacted calling for complete disclosure in mutual fund advertising. Such legislation should provide that the advertising of mutual fund investment opportunities carry sufficient information to (a) permit the public to determine if the security may possibly fit his need and serve a useful purpose for him; (b) if the persons in charge of the fund may be worthy of his interest and his trust; and (c) whether it may be worth the time and effort to request and to study a prospectus.

The essence of this legislation would be to protect the public from inadequate disclosure in advertising.

The SEC should not be allowed to restrict further the proper activities of a healthy, viable industry whose competitive nature has as its only inhibition the lack of communication which is prohibited between the funds' sponsors and the buyers.

The Congress should direct the NASD to study this matter and report its recommendations.

Prospectuses

These are currently a sure cure for insomnia and the foregoing legislation should be extended to require that prospectuses and other such literature be set forth in clear and understandable terms.

VII. PROPOSAL WITH RESPECT TO SELF-REGULATORY LEGISLATION

If the committee believes that self-regulatory legislation is worthwhile, this would be my proposal:

1. Congress should empower and direct the NASD to make a thorough study of the economic impact of the SEC's proposed legislation upon the mutual fund industry.

2. Predicated upon this study, empower the NASD to establish a schedule and range of permissible sales charges which would govern the industry.

3. Continue the NASD's enforcement powers and extend them to the entire industry.

4. Give the SEC authority to seek judicial review of the NASD's schedule of charges by an action against the NASD only, and place upon the SEC the burden of proving that such charges are grossly excessive if the SEC does not accord with them; and prohibit the SEC from seeking recourse against any individual fund or its managers who are abiding by the NASD rule thus providing them a protective shelter from the coercive power of this Federal Bureau.

VIII. CONCLUSIONS

I am confident that this Committee will carefully study all of the issues before it and especially the underlying issue of whether the legislative plan offered by the SEC is necessary. There are presently in existence the most comprehensive battery of laws affecting virtually every action undertaken or contemplated by managers of investment companies. Managers offering mutual fund shares must meet the requirements of (a) the Securities Act of 1933 (prospectus), (b) the Exchange Act of 1934 (underwriting), (c) the Investment Company Act of 1940 (regulation), (d) the securities laws of the various States (registration and regulation), and (e) in most instances adhere to the requirements of the National Association of Securities Dealers, Inc. (fair practice and advertising). These form an intricate and extensive legislative pattern.

The Commission's continual reference to the Investment Company Act of 1940 as a statute containing a "few elementary safeguards" is a classic understatement. This statute is formidable and complex and assigns immense powers to the Commission. The SEC should not be heard to say that it lacks the power

through its present laws to control virtually all aspects of mutual fund operations. Through the exercise of its inspection and legislative powers, rule making authority and in its review of reports, proxies, prospectuses and advertising the SEC demonstrates continually its very real power over mutual funds.

It is a small wonder that there is nothing to inspire confidence in the SEC as a price-fixing or rate-making agency in thhe field of investment companies. Congress never intended to set up the SEC as a rate-making agency to regulate investment companies. There is no reason now to turn the SEC into a vast ratemaking agency which it seeks to be.

I firmly believe that in view of these factors which must be considered decisive and the immense competition which is the hallmark of this industry. Congress should not enact legislation which would substitute the judgment of the government agency for the business judgment of managers and directors who are so effectively and wholesomely guiding this industry.

The circumstances complained of by the SEC are best controlled by the controlled by the confluence of the competitive forces of the marketplace rather than by an agency that missuppose the mutual fund industry as being like a public utility.

There is no public outcry for the SEC legislation. Witness this as an example: following an article which appeared in a national news magazine regarding the SEC's proposed legislation when it was presented to Congress this pungent letter to the Editor appeared in a subsequent issue.*

"MINNEAPOLIS.

"SIR: My worst suspicion has been confirmed: someone has been making money with my money. For twelve blundering years, I've paid between 7% and 82% sales charge on the seven funds I've bought. I'm so angry I'd sell them all now, except that I'd be charged an excessive capital gains tax for the four-fold appreciation.

"WALTER W. HARTMAN."

America is not a land of illiterate peasants. It is a land of intelligent people, many of whom do make the right selection of savings media, and as you gentlemen have happily observed are even capable from time to time of correctly marking the ballot.

Senator MCINTYRE. Our next witness is Attorney Milton Mound, from Mound, Belfer & Greenburg.

STATEMENT OF MILTON MOUND, PRESIDENT, FIRST MULTIFUND OF AMERICA, INC., AN ATTORNEY, MOUND, BELFER & GREENBURG; ACCOMPANIED BY HENRY A. GREENBURG, ATTORNEY, MOUND, BELFER & GREENBURG

Mr. MOUND. Our fund is the one aimed at in section 7. Section 7 is proposed to prohibit a fund which invests in shares of other funds. I have been attending all of these meetings with great interest from the very first session. I have learned a great deal.

I had intended originally to make a presentation of some length. But in view of certain circumstances, I do not chose to testify. I prefer

not to.

Senator MCINTYRE. Let me interrupt and say your statement, if you wish, will be made a part of the record.

Mr. MOUND. Yes. I would like the statement to be a part of the record.

Senator MCINTYRE. Then you may summarize any points you want to bring to our attention specifically.

Mr. MOUND. I would prefer, if I may, to request permission to submit some additional statements before your committee closes the record and before you go into deliberations.

Time magazine, Dec. 23, 1966

Senator MCINTYRE. Yes. I might tell you and announce now that the record will be held open until September 1, 1967, on S. 1659. So you will have an opportunity to present any statement you wish.

Mr. MOUND. Thank you very much. I think it is best I leave it that

way.

Šenator MCINTYRE. Thank you very much for your appearance. I am sorry our time schedule didn't give you any opportunity.

Senator BENNETT. Do I understand you are as an independent director on some fund other than your own?

Mr. MOUND. Yes, sir. I have been an independent director. The term has been very much malined here, I think distinctly unfairly, for about 7 years.

I have been a director of one of the leading funds.

Senator BENNETT. Do you have any comment on your experience in that service?

Mr. MOUND. My comment, sir, is that those directors on our boardand I must say with no atempt to be modest, I am the least distinguished of all of the independent directors are very much alert to everything that is going on, take a very active part in what is going on, and do have a strong voice in management.

However, I must say that I think-I have listened to all of the testimony, Í have heard a good deal said about the arm's-length bargaining on the question of the management fee. We have dealt with that and we have come to certain conclusions.

You can't do much arm's-length bargaining unless you are in a position to say unless, Mr. So-and-so, you meet our terms, we are going to fire you and get somebody else. Other than that, you can try to persuade and suggest, but you are not in a position to say these are our terms, if you don't like them we will get somebody else. The fact is that just does not exist and cannot exist in this industry for very obvious reasons.

The shareholders have not asked the directors to fix the terms of the compensation. That arm's-length bargaining takes place every year between the management company and the shareholder, in our view, as I see it, because when the shareholder first decides to buy into X company, he buys because he knows who the management is. He has learned something about their record. He knows about their performance and he knows how much it will cost him to hire their services each year. He knows he is going to pay them a half of 1 percent, or whatever it is. He makes up his mind he is going to buy that fund. How can an independent director come along later on and say we are going to fire that particular management company, replace them with somebody else?

I don't believe it is the function of the director to put his judgment in in replacing the judgment exercised by the man the day he bought the shares. He didn't buy it because I am on the board. He bought it because X company is doing the managing.

Now, at the end of the year that contract terminates. It is a yearly contract. It has to be renewed. When it comes up for renewal, it goes out to every shareholder. They know the terms of the contract. They know the provisions, and they are asked to vote yea or nay as to whether they want to renew that contract and they send in their proxy statements.

82-865 0-67-pt. 2- -23

They get an annual report which tells them how much was paid last year and the year before in management fees. They know exactly how much it is going to cost. They know every dollar of compensation that this company gets. And they then vote their ballots. And their ballots come in, and about 90 percent of the shareholders vote and send in their proxies and practically all of them vote for the renewal and continuation of that management contract for the next year. I question, therefore, whether in view of that contract being approved by the shareholder who is paying the money, it is possible for the independent directors to say we are going to impose our judgment over those shareholders, we are going to fire this management and take another company, because if we did such a thing, would we not be exposing ourselves to the question from our shareholders that we haven't been authorized to fire and cancel a contract which they have approved?

Except for the question of management fees, and I would say the independent directors I have had the privilege of serving with do an alert and intense job and continuously are watching closely the performance of this fund, week by week, in comparison with the performance of other funds. We watch it every week to see how we are doing in comparison to Dow Jones and in comparison to all of the other funds that we consider our direct competitors.

Senator BENNETT. Thank you.

Senator MCINTYRE. Mr. Mound, I understand that you are an unaffiliated director of the Oppenheimer Fund.

Mr. MOUND. Yes, sir.

Senator MCINTYRE. If your fund of funds bought shares of the Oppenheimer Fund, would you not be in a conflict of interest position? Mr. MOUND. Quite obviously. That is the reason the moment First Multifund of America buys any shares of Oppenheimer, I will resign from Oppenheimer Fund. It says that in black and white in the prospectus.

Senator MCINTYRE. Senator Williams?

Senator WILLIAMS. Is it your judgment or conclusion that the fees that are charged for management advice to mutual funds are by and large reasonable?

Mr. MOUND. In my judgment, Senator, they are reasonable, because in my judgment this is a professional relationship between the man who owns the money and wants to invest it and the fiduciary to whom he entrusts his money, and he asks that fiduciary, do a good as job as you known how and if you run your fund well and make money for me, as you have been for the past 25 years, based upon the history. the fellow who is paying the fee is the one best qualified to decide whether he is paying too much or too little. And if he decided, in his judgment, that he is willing to pay that amount of money for that kind of service, I don't know how anybody can come along and say to him we think you are a fool, you are paying too much. We think you should be obliged to pay less.

Now, the service that these companies render-I can't speak for others, I haven't the privilege or knowing how they work-but I have the privilege of knowing the team running our fund and I cannot imagine a more conscientious, more competent, more dedicated group

of people working to manage anybody's money, and I am assuming that the other funds must be doing just the same kind of job, because their results are, in most cases, quite good. And therefore I think that the fee is not too high.

But, as has been said by many witnesses, now that these funds are getting larger, they are beginning to scale down, and when they reach the point of $200 million or $300 million, instead of being a half of 1 percent, some cut down to three-eighths of 1 percent for the next 200 million and others still lower.

In our particular fund, the Multifund which we have now before SEC, we charge a quarter of 1 percent, not a half. A quarter of 1 percent fixed, plus a contingent quarter of 1 percent, if we outperform Dow Jones by more than 20 percent.

In addition, all of the other expenses are scaled downward in proportion to growth, because this seems to be a desirable thing to do, and it is fair, where you assume a fiduciary relationship, which I think most of these managers recognize, in handling monies entrusted to them they try to do, and in my judgment are succeeding admirably in doing a thoroughly conscientious job of handling other people's money. And the best proof is, as they used to say, "fifty million Frenchmen can't be wrong." I think "four million American investors can't be wrong," and they have put $48 billion up to back their judgment. I don't think they are being fools.

The statement I have submitted to you answers a question as to how well have the funds been doing. How much money are they really making, not in theory or adjectives, but in black and white. It shows precisely how much money all of the funds have been making, and in my judgment they have been doing better than six times as well. as an investment at 5 percent in a savings bank.

And there is one other statement in there. In any fund, the poorest fund, in the poorest 10 years we have had, not a single person who invested any money and left it in the fund for 10 years lost 1 cent at the end of that 10 years he got back more than he put in, after deducting all expenses and all management fees and the 8.5 percent load charge as well.

Senator WILLIAMS. Have you heard of the returns on the newly created McIntyre fund?

Mr. MOUND. I saw that, yes. I prefer not to comment, if I may. Senator MCINTYRE. I want to thank you, Mr. Mound, for your appearance here today.

The statement of Mr. Mound follows:)

STATEMENT BY MILTON MOUND, PRESIDENT, FIRST MULTIFUND OF AMERICA, INC.

My name is Milton Mound. I am president of First Multifund of America. For many years I have been and still am an unaffiliated director of one of the leading mutual funds. I am not appearing on its behalf, but only on behalf of First Multifund of America and of the investors we expect to serve.

Multifund is an open-end mutual fund which will invest only in the shares of 5 or more registered American mutual funds. Through Multifund's ownership of a flexible package of mutual funds, it can offer the investor the dual advantages of diversification among several fund managements, and continuous supervision, at no extra cost to the investor. Multifund thereby provides the investor with a measure of protection against inconsistency of mutual fund performance, and enhances the attractiveness of mutual fund investment as a means