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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Regulation of Mutual Funds in the United States – A Successful Regulatory Regime

Keynote Address by

Paul Roye

Director, Division of Investment Management
U.S. Securities & Exchange Commission

Keynote Address
FEFSI General Membership Meeting 2000
Paris, France

September 22, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Roye and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

I. Introduction

Thank you and good morning. It's a pleasure to be here with all of you today to discuss the regulation of mutual funds in the United States. In my view, the regulatory scheme governing investment companies is one of the most important areas of the U.S. securities laws. This is because of the tremendous size of the industry that it regulates and the importance of the U.S. fund industry to the financial health of millions of Americans.

Investment companies are one of America's primary savings and investment vehicles. A recent survey found that mutual fund ownership has increased to a record 50.6 million U.S. households - nearly half of the households in the nation. A strong stock market and robust American economy provided a favorable environment for continued investment company growth during 1999, as assets increased by more than $1.3 trillion. As of March 31, 2000, over $7.6 trillion was invested in investment companies in the United States. At the end of 1999, a total of 30,455 investment company portfolios were managed or sponsored by 1,080 investment company complexes. The $7.6 trillion in assets managed by investment companies today is more than double the $3 trillion on deposit at commercial banks in the United States. As you know, the explosive growth of mutual funds in the U.S. has not gone unnoticed by European companies and investors. This past year has seen a record pace of acquisitions of U.S. asset-management firms by non-U.S. buyers - primarily European companies.

The Investment Company Act of 1940, the principal statute that regulates investment companies in the United States, is approaching its 60th anniversary. It is perhaps the most complex of the federal securities laws. The Investment Company Act is, in effect, a comprehensive corporate statute. Requiring full and fair disclosure, the foundation of the United States Securities laws, is the common thread that ties together all of the Act's specific provisions. Investment companies are therefore generally subject to substantially similar disclosure and reporting requirements that apply to publicly traded operating companies, with one major difference. Mutual funds offer their shares continuously and thus must maintain current prospectuses.

However, the reach of the Investment Company Act extends beyond mere disclosure and reporting requirements. It places substantive restrictions on virtually every aspect of the operations of investment companies; their governance and structure, their issuance of debt and other senior securities, their investments, sales and redemptions of their shares, and, perhaps most importantly, their dealings with service providers and other affiliates.

Today, I thought I would give you a very brief historical perspective of why the statute and our regulation of investment companies are so comprehensive, explain the regulatory regime, and then discuss some issues, many of them driven by technological developments, that are at the forefront of investment company regulation in the United States, including market access issues.

II. Background on Investment Company Regulation

One source of the Investment Company Act's highly regulatory nature is the unique structure of the typical investment company in the U.S. Unlike a regular operating company, investment company employees do not operate investment companies. Instead, funds typically rely on external service providers, like the fund's investment adviser, to conduct the fund's day-to-day business, including managing the fund's portfolio and providing administrative services. Additionally, the officers of funds are usually affiliated with the fund's adviser, or the other outside service providers, such as the fund's administrator or underwriter. Consequently, the interests of fund management and shareholders of a fund may diverge in important ways.

A fund's investment adviser has a separate interest in maximizing its own profits. In contrast, officers of an operating company are paid directly by the company, often have an equity interest in the company, and are devoted to profit maximization to benefit both the company and themselves. While a fund's management and its shareholders have some common interests, such as seeking outstanding investment performance, there are important areas in which these interests may conflict, such as the level of management fees.

Based on the unique conflicts that are inherent in the typical investment company structure, you probably can imagine the kinds of problems that existed when funds were relatively unregulated. Indeed, the turbulent, early history of the investment company industry in the U.S. is a primary source of the principles reflected in the Investment Company Act.

Let me begin with the 1920's. Individual state law restrictions on companies owning shares of other companies had fallen, thus opening the door to a boom in the investment company industry. Investors of modest means were looking to cash in on a roaring stock market. And investment companies were offering a means of pooling funds to provide for diversification, economies of scale and professional management.

Investment bankers, brokers and other members of the financial industry actively promoted securities of investment companies, many of which they controlled. There was a tremendous demand among investors for securities of investment companies affiliated with financial firms. Shareholders expected, even considered it advantageous, for investment companies to participate in the business activities of affiliated financial firms. Since most of the securities firms were private, investment companies presented an effective means for the public to participate in the offerings generated by these firms.

Before 1940, most investment companies were closed-end funds. This means that shareholders did not have a right to redeem their shares based on the value of the fund's net assets. Shares of these funds traded in the secondary market at market prices. And before the market crash of 1929, these shares frequently traded at a premium to the funds' net asset values. After the crash, not surprisingly, the supply of shares of closed-end funds exceeded the demand, and their shares began trading at a discount.

The liquidity crisis aided the emergence of two other kinds of investment companies: the unit investment trust, which in the U.S. holds a fixed portfolio of securities, and the open-end managed fund, now known as the mutual fund. Shareholders were attracted to these types of funds because they offered the ability to redeem shares for cash at the funds' net asset values. Needless to say, mutual funds have continued to retain their popularity: their assets now total more than 20 times the combined assets of unit investment trusts and closed-end funds.

By the mid-1930's, it had became apparent that there were problems prevalent throughout the investment company industry. The close relationships between investment companies and their sponsors proved disastrous as unscrupulous sponsors treated fund assets as their own. Many funds failed, and many shareholders lost their investments.

In 1935, Congress asked the Securities and Exchange Commission to conduct a comprehensive study of the investment company industry, looking specifically at the functions and activities of investment companies, their corporate structures and their investment policies. Congress also wanted to know how investment company sponsors and affiliates exerted influence over the investment companies they controlled. The resulting report, called the Investment Trust Study, laid the foundation for the Investment Company Act.

The Investment Trust Study, and the subsequent Congressional hearings, found that, to an alarming extent, investment companies were being organized and operated to benefit the interests of their affiliates rather than the interests of their shareholders. The highly liquid nature of fund assets made them easy targets for embezzlement by affiliates, who often viewed them as a source of private capital. Transactions between investment companies and their affiliates, which were expressly permitted to allow investment companies to participate in the business dealings of affiliated financial firms, often resulted in improper transactions. Underwriters found it convenient to dump into the portfolios of affiliated funds securities that they found to be unmarketable.

Furthermore, investment companies were structured to ensure that they remained under the control of their sponsors. The directors of investment companies typically were affiliated with the sponsor. Sponsors were able to control a number of investment companies by organizing them in layers. One fund would invest in another, which would invest in another, enabling the sponsors to control the resulting pyramid with a minimum investment of capital.

Fund managers usually had few restrictions on the types of securities they could purchase, and often invested fund assets in whatever securities would best benefit the fund's sponsor. The Study and subsequent hearings also revealed that the capital structures of many investment companies were highly complex, often consisting of many classes of securities with different dividend, liquidation and voting rights. Often the fund sponsor owned a class of shares with senior voting rights, enabling it to control the fund at the expense of common shareholders. This complex capital structure led to investor confusion and conflicts of interests among the various classes of securities. In addition, investment companies often issued debt securities without adequate assets and reserves. This excessive leverage often led investment companies to make risky investments to produce the income needed to cover their obligations. Finally, the fact that investment companies generally attracted small, unsophisticated investors allowed sponsors to mislead these investors as to the actual nature of their investment. These investors often did not understand their rights, the sales charges they were obligated to pay, or how the investment company's manager was managing the company's assets.

And so, the U.S. Congress, the SEC, and the investment company industry worked to address these problems. The resulting legislation - the Investment Company Act of 1940 - was truly a negotiated statute, with extensive hearings before Congress, punctuated by intensive discussions between the SEC and the industry. The U.S. Congress enacted the Investment Company Act to address these abuses in the investment company industry, assure investor protection, and preserve the important role investment companies' play in capital formation.

III. Provisions of the Investment Company Act

The Investment Company Act imposes significant requirements on the organization and operation of investment companies, reflecting Congress' view that disclosure alone would not cure the abuses it found in the industry in the 1930's. The heart of the Investment Company Act is Section 17, which prohibits a wide array of investment company insiders from using the investment company to benefit themselves to the detriment of the company and its shareholders. Section 10(f), which prohibits an investment company from purchasing securities that are underwritten by a syndicate containing an investment company affiliate, is also important.

The Investment Company Act also contains provisions relating to investment company governance and other important matters. One of the more significant of these provisions requires that at least 40 percent of an investment company's board of directors not be, in the terminology of the Act, "interested persons." These directors must be independent of the investment company, its investment advisers, and its principal underwriter. Other significant provisions govern the procedure by which investment company shareholders or boards of directors (including a majority of the independent directors) approve or renew investment advisory and underwriting contracts; generally prohibit investment companies from having complicated capital structures; limit their use of leverage; authorize the Commission to examine investment company books and records; require investment companies to provide full and accurate information through periodic reports to the Commission and to shareholders; and require consent of the shareholders for certain changes in an investment company's operations.

IV. Adaption to Change

Since 1940, the Investment Company Act has proved to be remarkably resilient. Indeed, the true genius of the Act was its drafters' understanding that markets and circumstances change, and that industries evolve. For example, the Investment Company Act gives the SEC express authority to exempt any person, security, or transaction from any section of the Act - consistent with the protection of investors. This authority makes the Act flexible and allows it to accommodate change and innovation in ways that preserve its underlying principles. This flexibility has permitted the development of money market funds, variable insurance products, expanded international investing, securities lending programs, and unique exchange-traded products that serve particular investor needs.

And the Act has weathered significant changes in the financial marketplace. For example, in response to perceived abuses by funds of funds in the 1960s - in particular, the operations of a Fund of Funds run by the infamous Bernie Cornfeld - Congress strengthened the restrictions on fund of funds structures in 1970. Subsequently, new regulatory restrictions on sales charges, coupled with increasing investor demand for asset allocation services, laid the groundwork for loosening some of the restrictions for funds of funds that were in the same fund complex. This was accomplished through a series of individual exemptions granted by the SEC, and ultimately by amendment of the Act in 1996.

Changes in the market also have led to significant deregulatory initiatives. For example, the development of structured finance and securitization, created entities that, technically, were investment companies. The SEC crafted a rule to exempt these entities, under certain circumstances, from the Act.

Another amendment was prompted by the increased interest by institutional investors, in private funds - that is, funds that are exempt from regulation under the Act. The Act previously limited these funds to no more than 100 investors, which made it difficult for sponsors of these funds to service all of their institutional clients. So in 1996 Congress created a new exemption under the Investment Company Act for private funds, the shares of which were held exclusively by sophisticated persons, with no limit on their number under the statute.

The increasing complexity of financial products has raised significant issues. The Investment Company Act's limits on the issuance of senior securities may raise questions for funds that want to trade options or futures or enter into repurchase agreements. In response to the increasing popularity of these types of investments, the SEC and the staff have issued extensive guidance as to when they may be consistent with the Act. With respect to these types of transactions, as with many transactions that raise issues under the Act, the SEC has worked hard to relive funds of unnecessary constraints, without compromising investor protections.

Another area where the Investment Company Act is evolving with the times is the issue of affiliated transactions. Recent consolidation in the financial services industry has created numerous affiliations where none previously existed. And many transactions that were previously permitted now run afoul of the affiliated transaction prohibitions in the Act. The SEC and staff are very sensitive to the need for our rules to keep pace with changes in the marketplace. We have granted dozens of orders and adopted more than a dozen rules - all exempting different transactions from the affiliated transaction prohibitions. We will continue to consider additional exemptions, provided that they can be crafted to be consistent with investor protection.

Finally, the proliferation of ways to finance the distribution of fund shares has been a significant issue in recent years. You may be aware that funds in the United States may impose front-end sales loads, contingent deferred sales loads, or distribution fees, or some combination thereof. You may not be aware that, before the 1980's, front-end loads were the only form of distribution charges paid by investors in the United States.

Distribution fees, or Rule 12b-1 fees, which refer to distribution expenses paid by funds out of fund assets, rather than by shareholders at the time of their purchases or redemptions, were not permitted until 1980. Contingent deferred sales loads were not permitted by rule until 1995, although many funds obtained individual exemptions in the 1980's and early 1990's that permitted them to impose these loads.

Fund sponsors not only wanted to offer investors different distribution financing options; they also wanted to be able to unbundle certain shareholder services, and charge different categories of shareholders different fees based on how each type of shareholder uses the services. For example, institutional clients with large account sizes generally cause funds to incur substantially lower transfer agency costs per dollar invested.

This raised structural issues under the Act, in part because of the potential conflicts of interests between shareholders who were invested in the same funds, but were paying different loads or expenses. Beginning in 1985, the SEC granted approximately 200 hundred individual exemptions permitting funds to offer multiple classes of shares with different distribution and expense arrangements. The SEC adopted a rule permitting such multiclass funds in 1995.

Each of these rules, permitting distribution fees, and contingent deferred sales loads, and multiclass funds, has facilitated competition and expanded investor choice, without diminishing investor protections provided by the Investment Company Act.

As you can see, the Investment Company Act has survived some significant changes in the financial landscape. I believe that the popularity of the investment company industry in the United States is a rousing vote of confidence in our fund regulatory regime.

V. Role of SEC Offices and Divisions

My Division of the SEC, the Division of Investment Management, is responsible for administering and interpreting the provisions of the Investment Company Act. However, we are greatly assisted in efforts to protect investment company investors through the efforts of other Offices and Divisions of the SEC, particularly our Office of Compliance, Inspections and Examinations, the Office of Investor Education and Assistance, and the Division of Enforcement.

A. Office of Compliance, Inspections and Examinations

Our Office of Compliance, Inspections and Examinations conducts the SEC's examination program of investment companies and investment advisers. They conduct inspections to foster compliance with the securities laws, to detect violations of those laws, and to keep the SEC informed of developments in the investment management industry. One of the most important objectives of this program is the quick and informal correction of compliance problems. Violations that appear too serious for informal correction are referred to our Division of Enforcement.

B. Division of Enforcement

Our Division of Enforcement investigates possible violations of the securities laws and, when appropriate, recommends that the SEC file enforcement actions, either in a U.S. federal court or in an administrative proceeding. While the SEC has civil enforcement authority only, we work closely with various criminal law enforcement agencies throughout the country to develop and bring criminal cases when the violations warrant. SEC enforcement actions serve as a significant deterrent to those who would consider violating the securities laws, since the SEC can seek injunctions, cease and desist orders, suspension or revocation of licenses, bars from association with the industry, and monetary penalties.

C. Office of Investor Education and Assistance

Our Chairman, Arthur Levitt, firmly believes that the best defense against fraud and abusive practices is educated investors. Therefore, educational initiatives have been hallmarks of his tenure. To help educate investors about the securities markets generally, the SEC has established the Office of Investor Education and Assistance whose mission includes developing educational programs that will enable investors to better protect themselves and make wiser investment decisions. This office has produced brochures on a variety of topics and posted material on the SEC's website including materials designed to educate mutual fund investors. The SEC has also organized investor and small business town meetings where the public can address questions to the Commissioners and SEC staff.

Since this conference is focused on the internet, I should note that while the internet has brought significant benefits to investors, it has also created significant dangers for the unwary. The internet has helped bring millions of relatively novice participants to the markets, while also providing a mechanism for unscrupulous persons to defraud those participants. As of the end of this year's first quarter, the SEC has filed approximately 120 internet-related enforcement actions. Our Office of Investor Education and Assistance has responded by educating investors about the basics of sound investing so that they can navigate through the maze of information on the web.

Accordingly, through investor education, a comprehensive inspection program, prudent administration and interpretation of our securities laws and aggressive enforcement action when necessary, we have been able to maintain effective oversight of the U.S. mutual industry.

VI. Role of the Investment Company Industry

While I have described the SEC's role in protecting investment company shareholders, I would be remiss if I did not mention the important role the U.S. investment management industry plays in maintaining the confidence that U.S. investors have in the industry. The SEC working with the industry has helped keep mutual funds in the U.S. free from major scandal and contributed to the confidence that investors have in the industry. The U.S. mutual fund industry has for at least 60 years supported laws and regulations designed to protect fund investors. The industry has also supported and developed tough voluntary standards that go beyond the requirements of the law, such as the Investment Company Institute's recommended best practices on personal investing and the role of mutual fund directors.

As a regulator, I know that we cannot legislate honesty and integrity. Without the commitment of the U.S. investment management industry to the maintenance of high fiduciary standards, we would not have the sustained growth and record of integrity that the industry has experienced. I am sure that the success of the investment management industry in Europe is due, in large measure, to a similar commitment on your part.

VII. Current Initiatives and Concerns

While the basic structure of the Investment Company Act has served investors well, we at the SEC are currently in the midst of several significant initiatives designed to further its goal of investor protection, while keeping it apace with the rapid evolution of the financial products and services that the statute regulates.

The financial services industry is in the midst of a technological revolution and mutual funds are at the forefront. The SEC faces the formidable challenge of applying the existing regulatory framework that has helped ensure the integrity of the industry, while at the same time providing a regulatory scheme to keep pace with the increased competition and technological revolution underway in the securities markets. We currently are in the midst of several regulatory initiatives aimed at promoting the integrity of fund governance, enhancing and improving disclosures made to investors, and modernizing the regulatory structure to accommodate the increased competitiveness and globalization of the investment management industry.

A. Fund Governance

One of the most significant initiatives we have undertaken is in the area of fund governance. Last year the SEC issued a comprehensive package of fund governance reforms and a staff interpretive release providing guidance on specific issues relating to independent fund directors.

The rule proposal is designed to reaffirm the important role that independent directors play in protecting fund investors, strengthen their hand in dealing with fund management, reinforce their independence, and provide investors with better information to assess the independence of directors. The proposal would amend certain exemptive rules under the Investment Company Act by adding a number of conditions to the exemptive rules that any fund must meet to rely on the rules. These conditions are: (1) independent directors must constitute at least a majority of their board of directors; (2) independent directors must select and nominate other independent directors; and (3) any legal counsel for the independent directors must be an independent legal counsel.

We also have proposed a number of disclosure requirements that will enhance shareholders' ability to evaluate whether the independent directors can act as an independent, vigorous, and effective force in overseeing fund operations. These proposals would require funds to provide basic information about directors to shareholders annually so that shareholders will know the identity and experience of all directors. The proposal also would require disclosure of directors' ownership of fund shares, information about director's potential conflicts of interest, and information to shareholders on the board's role in governing the fund. By requiring funds to provide this information, the proposals will give shareholders the tools and information to determine how effectively the directors serve their interests.

B. Disclosure Initiatives

In addition to the protections that will be afforded to shareholders as a result of the independent director proposals, the SEC has issued a number of rule proposals, and is considering a number of other proposals, that further our continuing effort to improve the quality of mutual fund disclosure in order to help investors make better-informed decisions.

The SEC completed efforts to streamline and simplify mutual fund prospectus disclosure, encouraging these documents to be drafted in plain, straightforward language understandable to the average investor. In March, the SEC issued a rule proposal to improve disclosure to investors of the effect of taxes on the performance of mutual funds. Taxes in the U.S. are one of the largest costs associated with a mutual fund investment. Estimates show that over two and a half percentage points of the average U.S. stock fund's total return is lost each year to taxes, an amount significantly in excess of average expense ratios for these funds. Our proposal will help investors to understand the magnitude of tax costs and compare the impact of taxes on the performance of different funds. The proposed amendments would require mutual funds to disclose after-tax returns for 1-, 5-, and 10- year periods, based on standardized formulas comparable to the formula currently used to calculate before-tax average annual total returns. The after-tax returns would be required to be disclosed in the fund's prospectus and in the fund's annual report. The proposal also would require funds that include after-tax returns in advertisements and other sales materials to include standardized after-tax returns in those materials.

In our continuing efforts to improve disclosures to shareholders, we also are working on revisions to the shareholder report and financial statement requirements. Our goal is to make the prospectus and the shareholder reports work together to provide information that investors need, when they need it, and in a format that is useful. In a shareholder report, fund management can tell the story of what it has done for shareholders. Our goal will be to facilitate getting that information from management to the fund's shareholders.

C. Fund Advertizing

In addition to enhancing disclosures to shareholders, the SEC also is faced with the regulatory challenges of industry competitiveness, brought about by rapid technological advances and consolidation of the financial services industry. As funds face increased competition, one fear we have is that funds will respond to the competitive environment with overly aggressive advertising.

This is an area of particular concern to Chairman Levitt. He has asked the Division of Investment Management and our Office of Compliance, Inspections and Examinations to conduct a special review of fund marketing - including websites, sales literature and advertisements. The purpose of the review is to determine whether a fund's actual portfolio performance and investment strategies are consistent with its website statements, its advertising and its prospectus disclosure.

D. New Products

The industry has responded to competitive pressures and rapid technological changes by creating and marketing new types of funds. We need to ensure that the rush to develop attractive products does not come at the expense of products and services that offer investors real financial benefits and value. An area that presents a unique regulatory challenge is the evolution of exchange-traded funds. Assets in exchange traded funds listed on the American Stock Exchange, where almost all of these funds are traded, have risen from $2.4 billion three years ago to over $38 billion. These funds, with names like SPDRs, WEBs, Diamonds, and Cubes, have obtained exemptive relief from the SEC to facilitate secondary market trading in their shares. They are bought and sold throughout the day and are priced continuously, rather than once a day at 4 p.m., which is the pattern for conventional funds. Unlike mutual funds, they can be sold short. Additionally, their expense ratios are a fraction of those charged by an actively managed mutual fund.

There are many issues to consider as these products evolve. For example, we must consider whether the development of these products would encourage investors to view mutual funds as something other than long-term investments and encourage short-term trading of mutual funds. The SEC is currently considering an application that would allow an exchange-traded class of an existing index fund. So far, relief has been extended only to index funds but not to managed funds. Is there even a framework pursuant to which a managed exchange traded fund can work? And what impact, if any, would an exchange-traded class of a managed fund have on an existing non-exchange traded class?

Separately managed accounts that can be opened with as little as $100,000, have become competitive with mutual funds. Today, investment managers routinely have access to personal computers that are more powerful than the computer originally used to send men to the moon. Better software and portfolio management systems make it feasible for a manager, who in the past would only take institutional accounts with a minimum of $5 million or higher, to take on much smaller accounts, including retail accounts.

Financial advisers increasingly are attracting investors from funds by offering customized portfolios. They offer services over the Internet to enable individuals to create and manage their own portfolios or create a virtual mutual fund on-line; tailor-made portfolios that reflect the investor's risk tolerance, time horizon and tax situation. Technology has made customization on a large scale possible. From a regulatory perspective, we will have to consider the implications of these new products.

Electronic Media 

Another area where there is increasing competition is in the use of electronic media. The SEC recently issued an interpretive release in an effort to clarify the application of the U.S. securities laws to electronic media. The increased use of the Internet by issuers as a means of widespread information dissemination has resulted in uncertainty about the application of the U.S. securities laws to these communications. The release builds on previous SEC interpretations and seeks to remove interpretively some of the barriers to the use of electronic media, while preserving important investor protections. The release provides guidance on the use of electronic media to deliver documents under the U.S. securities laws, addresses an issuer's liability for website content and hyperlinks and outlines basic legal principles that issuers and market intermediaries should consider in conducting online offerings. We recognize, however, that continuing guidance will be necessary in this area as use of electronic media continues to evolve.

VIII. Market Access

Finally, I would like to discuss briefly access that non-U.S. money managers have to the U.S. mutual fund market. I do not need to tell you that investors are looking increasingly beyond national borders to diversify their investment portfolios. This trend has prompted investment management firms that traditionally served investors in a single country to explore asset management opportunities in the world markets. U.S. firms are interested in selling mutual funds in Europe and European firms are interested in entering the U.S. market. The Investment Company Act imposes the same regulatory standards on all funds, regardless of whether they are managed by a U.S. or non-U.S. manager.

Under our regulatory system, a non-U.S. management firm can organize a fund under U.S. law and register the fund under the Investment Company Act. Such a fund can be managed outside the U.S., as long as the manager is registered with us as an investment adviser. The U.S. system does not impose barriers to entry such as high capital, residency, or place of business requirements. Only $100,000 of seed capital is necessary to organize a fund, and the fund's directors and managers do not have to be U.S. citizens or residents. Furthermore, a fund registered under the Investment Company Act can be administered outside the U.S. The management company does not have to be a U.S. company and does not have to have a U.S. place of business.

Under this system, non-U.S. investment management companies have captured a significant portion of the U.S. fund market. As of February 2000, non-U.S. companies accounted for approximately $800 billion of the assets managed under the SEC's oversight. That translates to approximately 13 per cent of the U.S. open-end fund market. As of December 1999, approximately $19 billion in closed-end fund assets, or 12 per cent of that market, was managed by non-U.S. companies.

We are sensitive to the concerns of non-U.S. managers seeking access to the U.S. market. Moreover, we are aware that many U.S. investors desire investment expertise from overseas. As globalization of markets and our industries continue, we will continue to reassess the access that non-U.S. firms have to our market. I assure you that the SEC's approach to that issue will continue to be based on principles of non-discrimination and investor protection.

IX. Conclustion

Hopefully, my remarks have provided you some useful guidance on investment company regulation in the U.S. and the SEC's major regulatory priorities for the year ahead in the investment management area. We are in a time of extraordinary change which imposes a formidable challenge for the investment management industry and its regulators. Part of this change is the increasing globalization of the mutual fund industry which necessitates that groups such as yours, work together with your industry counterparts in other parts of the world, just as we at the SEC must work with our counterparts around the world, to maintain the integrity of a global investment management industry. At the SEC, we have some work to do in order to adapt our regulations to the realities of technology and globalization. Fortunately, the history of the Investment Company Act demonstrates that it is well-suited for that adaptation and I am confident that we will meet the challenge.

Thank you.