“Finally, a breath of fresh air. After being clobbered by the press time and time again for seven or eight long years, your apparent reluctance to completely back the S.E.C. in its attack on planned ownership of American industry and business through mutual fund investment companies has restored our faith in our great society.”
- February 17, 1967 letter from William B. Rudd, Investment Planned Corporation, to President Johnson
The reform of the mutual fund industry was another of Cohen's important objectives, albeit less successful.
The SEC had commissioned a study of the mutual fund industry in 1958 by the Wharton School of Finance and Commerce. The Wharton School Study of Mutual Funds examined the administration of the Investment Company Act, concluding that fees paid by the funds to investment advisors bore little relation to the cost of performance of their services or to investment results. The report, completed in 1962, made no legislative recommendations but suggested that the industry was in need of reform.
Under Cohen, the SEC took a hard look at problems in the mutual fund industry. Cohen noted that the mutual fund industry was beset with opportunities for self-dealing and conflicts of interest between fund management and shareholders, and that most mutual funds exhibited "the possible absence of arm's-length bargaining between fund management and investment advisers."(18)
In 1966, the SEC published the findings of an internal study entitled "Report of the Securities and Exchange Commission on the Public Policy Implications of Investment Company Growth." The recommendations of the report, intended to be a springboard for legislation, instead attracted wide criticism about the SEC's competence in economic regulatory matters. The report, critics claimed, failed to make the case that sales loads and fees were higher than they should be if there was effective competition.
In several key areas, the SEC approach, still suffering from the lack of an overall theory of regulation, failed to address the cause of the non-competitiveness in the mutual fund market and the economic implications of proposed legislative changes to investors and the industry. The SEC, which had long and successful experience in regulating fraudulent practices, was less effective in addressing industry problems that arose from market structure.
The failure of the SEC legislative proposals to address the economic implications of regulation of the mutual fund industry, coupled with a strong lobbying effort against the mutual fund legislation, resulted in watered-down legislation which failed to include the SEC's reforms on excessive mutual funds fees charged to investors. The SEC did persist over time in addressing the issue of sales loads.
(18) Seligman, Transformation, 366.
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