that which is granted to the FRB. This action will strengthen the strong functional regulation oversight system embodied in H.R.10.

V. CRA Should Not Apply to Mutual Funds

The mutual fund industry is opposed to attempts to extend CRA to mutual funds. Such an action would act against the interest of the millions of middleincome Americans who invest in mutual funds, would be directly at odds with the obligations imposed on fund managers to place the interests of the fund shareholders first, and would fundamentally misconstrue the nature of CRA and represent a drastic change in its purpose.

First, the effects of imposing CRA-like requirements on mutual funds would be largely borne by middle-income Americans. Institutions and wealthier individuals are better able to obtain the benefits of diversification and professional management of their portfolios through direct investments.

Second, forcing mutual funds to make investments in order to serve some general social or political purpose-no matter how well-intended-would be directly at odds with the entire regulatory and fiduciary structure that governs the activities of mutual funds, the purpose of which is to place the interests of the funds' investors first. (Unlike bank depositors, who receive a rate of return guaranteed by the federal government, the return on every investment made by a mutual fund is directly passed on to the fund's shareholders.) As the former acting Chair of the SEC stated, “Imposing community reinvestment requirements on funds similar to those imposed under the CRA would require fund directors and managers to take into account factors other than the interests of their shareholders, which would be fundamentally incompatible with the requirements of the Investment Company Act.""

Third, CRA is premised, in large part, on the fact that depository institutions are publicly chartered entities that receive significant federal subsidies, including deposit insurance and access to the discount window and the payments system. These benefits are provided so that banks may service the convenience and needs of the communities in which they are chartered. CRA is intended to ensure that those services are provided. Mutual funds, in contrast, are not publicly chartered and do not receive the benefits of those federal subsidies. Also, the types of activities contemplated by CRA, such as making loans to small businesses and offering housing loans, as well as offering basic banking services, are not offered by mutual funds, which are pools of liquid securities. Thus, it is difficult to contemplate how mutual funds could comply with CRA-like requirements.

It should be noted that mutual funds play an important role in economic development throughout America. Mutual funds are major investors in municipal securities, which finance projects such as housing, hospitals, schools, and infrastructure. Mutual funds also are significant purchasers of mortgage-backed securities; the growth of this market has reduced housing costs for millions of Americans. Mutual funds also supply capital to new and growing companies, for instance by purchasing shares in initial public offerings. Mutual funds are helping millions of Americans save for their retirement, in IRAs and employer-sponsored plans, as well as housing, education and other needs.

For these reasons, the Institute respectfully urges the Committee to reject attempts to extend CRA to mutual funds.

VI. Sharing of Customer Information

Various proposals have been offered to restrict the ability of financial services firms to share customer information. The Institute does not favor a broad legislative prescription on the sharing of customer information because it will fail to take into account the unique structure of mutual funds.

The structure and operation of a fund is unique because the fund itself is essentially a pool of assets under the supervision of a board of directors. Typically, a fund has few or no employees of its own. Instead, as is shown by the diagram in Appendix A, the fund's operations are carried out by various entities, including the fund's investment adviser, principal underwriter, transfer agent, and custodian. In order to service an investor's account, it is necessary for these entities to share customer information with one another.

Because of the structure of the industry, fund shareholders view themselves as customers of a mutual fund organization (or perhaps of the broker-dealer or other intermediary through which they made their investments), rather than of a particular entity within that organization (for example, a transfer agent or custodian).

"Letter from Mary C. Schapiro, Acting Chairman, U.S. Securities and Exchange Commission, to Frank N. Newman, Undersecretary for Domestic Finance, Department of the Treasury, dated May 26, 1993.

From the point of view of the shareholder, the fund operation is seamless, as it should be. This is apparent from the popularity of such features as exchange privileges among affiliated funds and consolidated account statements.

Thus, the application of a generic rule on the sharing of customer information to mutual fund organizations is almost certain to be disruptive. If fact, it could potentially make impractical existing mutual fund operations. This is true even if the rule contemplates an "opt out" approach (i.e., one in which customers must affirmatively act to restrict information sharing); funds would be forced to attempt to build extensive systems to track those customers that request to block information sharing in this context.

The Institute is sensitive to the concerns of many regarding their financial privacy. In fact, the Institute has been working for several months with the National Association of Securities Dealers (NASD) on rules governing the sharing of confidential customer information. It is our belief that the NASD is best-suited to address the matter, as it can adopt rules that are tailored to the structure of the mutual fund industry and the securities industry in general.

VII. Nonfinancial Activities

An important objective of any financial services reform legislation is to create competitive equality among banks, mutual funds, broker-dealers, and insurance companies. Unfortunately, H.R. 10 retains a strict separation between "banking" and "commerce," although it attempts to bridge this gap to a limited degree by permitting financial services companies to engage in a small amount of activities deemed "complementary" to financial activities. In general, however, a diversified financial services company that becomes a financial holding company would be required to divest its nonfinancial activities within 10-15 years. This approach would introduce a fundamental competitive inequity: all bank holding companies could enter the securities and insurance businesses, but mutual fund companies, brokerdealers and insurance companies with limited nonfinancial activities would be forced to alter their operations and structure in order to enter commercial banking. For long-standing public policy reasons, still valid today, mutual fund companies and other nonbanking financial services firms have never been subject to activities restrictions like those contained in H.R. 10. In recognition of this and in order to provide a fair and balanced competitive environment, the Institute recommends that H.R. 10 be amended to allow a financial holding company to engage to a limited degree in nonfinancial activities, for example, at a minimum, the amount specified in the version of H.R. 10 that was passed by this Committee last year. This would create a financial services holding company that reflects the realities of today's marketplace in which financial companies often engage in limited commercial activities. VIII. Grandfathered Unitary Savings and Loan Holding Companies

Under the Home Owners' Loan Act, in general, any company may establish or acquire a single thrift and become a socalled unitary savings and loan holding company. Such a company can be engaged in any kind of commercial or financial activity if its thrift complies with the qualified thrift lender test. H.R. 10 would bar a company engaged in any commercial or nonfinancial activities from securing a thrift, subject to a grandfather provision. Under the grandfather provision, if a company already owned a thrift as of March 4, 1999, or had made an application for one, it can retain or secure the thrift.

As a general matter, the Institute has no view on this new prohibition. However, we believe that any company that owns a thrift or has made an application for one should be covered by a grandfather provision that is available until this activity is actually prohibited by law. This approach provides all entities with an equal opportunity to take advantage of an existing business opportunity. Moreover, we are unaware of any identifiable risk to the banking system from extending the date. Accordingly, we support changing the applicable date for the grandfather provision to the effective date of H.R. 10.

IX. Conclusion

The Institute continues to support efforts by Congress to modernize the nation's financial laws. H.R. 10 represents a significant contribution to that endeavor, in particular, by permitting affiliations among all types of financial companies, by establishing a system of functional regulation and by raising the issue of whether a holding company should be able to engage to a limited degree in nonfinancial activities. The Institute's recommendations to the Committee are embodied in this statement.

We thank you for the opportunity to present our views and look forward to working with the Committee as this legislation moves forward.