love to have the institutional investors come in and buy their stock because it raises market prices, options are worth a lot more, and emoluments of office are worth a great deal, and that is a very happy time. But if the institutions begin to sell and knock the stock into a cocked hat, why then all you gentlemen up here receive all kinds of complaints. I know because some of them used to be bucked to me. This is part of the game. While I tried to make it sound funny, it is a very serious business because it does reflect an indirect influence which these institutions do exert upon the managers of American. industry and that, too, I think is most helpful. And if that is tied with a fiduciary responsibility. I think we are pointed in the right direction.

Senator JAVITS. Thank you very much.

Chairman GRIFFITHS. Mr. Conable, do you have another question? Representative CONABLE. I would like to ask Mr. Cohen something about mutual funds. I know that is a special interest of his. I have suggested that the further development of pension plans may be somewhat inhibited by government action extending the wage base for social security. I wonder if our failure to enforce tough antitrust laws and prevent the further conglomeration of business interests could ultimately be a substantial impediment to the development of the mutual funds industry? It seems to me we are getting many, many corporations now that are virtually mutual funds themselves.

Mr. COHEN. I am glad you said it, sir.

Representative CONABLE. These conglomerates are providing a degree of diversity which was essentially the purpose for mutual funds in the first place. Such corporations are held together primarily by financing, with the expert management coming from the corporate president instead of the mutual fund administrator. I am wondering if you see down the road here some falling off of this mutual fund development. Really a great deal of our mutual funds now are investing in what are in effect mutual funds and not really giving the degree of skill that is needed to justify the fees they receive, for instance.

Mr. COHEN. Mr. Conable, the remarks you make I think are very pertinent and very acute but I do not see these developments as impeding the growth of the mutual fund. As long as the rewards for the management of the funds and the rewards for selling interests in the funds continue at the substantially higher level than that available in the sale of securities generally, I think that this growing institutionalization of investment through those media will continue. And I think this can be seen by the fact that despite a bear market in 1969, the growth of assets by virtue of sales of interest in funds continued with very slight abatement.

I do not see any problem. Nor do I see that any increase in benefits or requirements for contributions to pension funds will slow the growth of mutual funds materially. Obviously, we are in an area where there is a certain competition, sometimes witting, sometimes unwitting, between different investment media which serve a similar general purposes.

We have CREE, to which Dr. Murray has referred, which is a voluntary organization but makes available to university professors a great many of the benefits which would be provided by legislation. of the kind that Senator Javits is espousing and which the Presidential Committee suggested some years ago. This is one of the benefits to which I think Dr. Murray alluded when he said the private sector should remain in the picture in a very substantial way. I do not see any really materially important effect upon the mutual funds industry.

I do think that there are other financial intermediaries, that have traditionally provided similar services to wealthier citizens, now prepared to provide those services to less affluent citizens. But they are engaged in a kind of a life and death struggle with people in the mutual funds industry. There is an obvious effect there, whether or not competition which the banks could provide should be allowed to flower in this area, an area in which now only the insurance companies, increasingly every day, and mutual funds live.

Representative CONABLE. In short, you would expect, then, continuing growth in this type of institutional intermediary? Mr. COHEN. Yes, sir.

Representative CONABLE. And you do not feel that there are selflimiting factors at work in the marketplace today that are likely to reduce the need for congressional interest in the impact of such institutions on our whole economy?

Mr. COHEN. I see the growing institutionalization continuing and perhaps accelerating but I also see the need for continuing oversight by the Congress as to the effects of these institutions on the markets, on the beneficiaries, and on the economy as a whole.

Representative CONABLE. And would that be the conclusion of your colleagues as well? That this

Mr. WHITE. Yes.

Representative CONABLE. Their type of development will continue to expand?

Mr. MURRAY. Yes, indeed.

Representative CONABLE. Thank you.

Chairman GRIFFITHS. Mr. Widnall, did you have anything you would like to ask?

Representative WIDNALL. I do not have any in particular about that. But in my own observation of the American scene, it seems to me the growing impersonalization of everything and computerization of everything can lead to our self-destruction in the end in the securities field. I had an experience with something that happened to my mother-in-law a number of months ago. She had a stock that had been paying very well over a period of years. The earnings increased to the point where they were at their high, but the company was taken over by another company and they discontinued the dividends on her stock despite the fact that it was being earned and being earned to a greater extent than ever before. But in the conglomerate picture these uses

Mr. COHEN. I am familiar with some things like that.

Representative WIDNALL (continuing). For that money in other directions are, I would say, speculative and manipulative, more for the benefit of a few people within the group than for those that were investing as a whole.

Could you comment on that?

Mr. COHEN. Yes, I will be glad to, Mr. Widnall. I have spoken to this subject over a number of years. I recognize the point you make and there is no doubt that the pace at which conglomeration took place in recent years, frequently by the use of the take-over bid-which, incidentally, we borrowed in its present form from our British cousins who have been dealing with this problem for almost a decade has brought with it a number of abuses and that these abuses need attention. They have already received some attention through amendment of the Internal Revenue Code. The subject matter is the subject of hearings by other subcommittees of Congress. They are also the subject of continuing concern to other agencies of government concerned with this development. And yet, having said. that. I am also concerned that what is a very imaginative use ofin many cases-resources by capable managers, even though there are others who do not quite fit that category, may be defeated if we outlaw these merger efforts. It would be pretty much like throwing the baby out with the bath water. The abuses are almost similar or, at least, have some resemblance to previous events in our economic history and they are already on the books, very successful legislative efforts to deal with abuses. The Public Holding Company Act of 1935 and, indeed, the Investment Company Act of 1940, were both designed to deal with abuses arising out of gross institutionalization of our society.

Now, in the last decade, particularly in the last five or six years, before the bear market brought its own dampers, this had been running almost wild in the view of many. There is no question about that. Nor is there any question about the suggestion that Congressman Conable made that many of them begin to look like investment companies. I am sure that the relevant regulatory agencies and departments of the government have been worrying about this problem for some little while. In short, I agree with your concern. There are problems. The problems can be dealt with, but it does not require that we put a halt to this very imaginative private enterprise development.

Representative WIDNALL. That is all.

Chairman GRIFFITHS. I would like to thank each of you for appearing here this morning. It is very kind of you and you have added greatly to our knowledge. Thank you very much.

This hearing is adjourned until tomorrow morning in this room. at which time we will hear Mr. Arthur Levitt, Mr. Roy A. Schotland, Professor James H. Schulz, and Professor Walter Werner.

(Whereupon, at 12:20 p.m., the subcommittee adjourned, to reconvene at 10 a.m., Tuesday, April 28, 1970.)

INVESTMENT POLICIES OF PENSION FUNDS

TUESDAY, APRIL 28, 1970

CONGRESS OF THE UNITED STATES,
SUBCOMMITTEE ON FISCAL POLICY,
JOINT ECONOMIC COMMITTEE,
Washington, D.C.

The Subcommittee on Fiscal Policy met, pursuant to recess, at 10:05 a.m., in room S-407, the Capitol Building, Hon. Martha W. Griffiths (chairman of the subcommittee) presiding.

Present: Representative Griffiths.

Also present: John R. Stark, executive director; James W. Knowles, director of research; Loughlin F. McHugh, senior economist; and Douglas C. Frechtling, economist for the minority.

Chairman GRIFFITHS. Today we have four eminent authorities in the analysis of problems and issues in the institutional investment

area.

Prof. James Schulz, from the University of New Hampshire has done considerable research in the economic circumstances of the aged. His doctoral thesis involved a projection of these circumstances for 1980. Today he will address his remarks to these important and related subjects.

Prof. Roy Schotland, Associate Dean of the Georgetown Law School and formerly Chief Counsel of the SEC's institutional investor study, and before that, was law professor at the Universities of Pennsylvania and Virginia. He was also editor of the monumental special study of the securities markets, completed several years ago. Professor Werner is professor of law at both the Columbia Law and Columbia Business Schools. He also has been a long-term student of the institutional investor and the securities markets and was the first Director of the Office of Policy Research at the SEC, an office which was the direct outgrowth of a recommendation study by the "special study" of the SEC.

Dean Schotland and Professor Werner will direct their attention to such questions as the advisability of use of pension funds for social purposes and the impact of the funds on financial markets and related subjects.

Arthur Levitt is comptroller for the State of New York, an elected official who has held this position longer than anyone before him. As sole trustee for one of the largest State pension systems he has had more than his share of headaches evolving sensible investment policies to achieve adequate incomes for current and prospective public pensioners.

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