TESTIMONY OF ARTHUR LEVITT, CHAIRMAN U.S. SECURITIES AND EXCHANGE COMMISSION EXECUTIVE SUMMARY The Commission welcomes the introduction of S. 1815, which adds momentum to similar securities legislation currently under consideration in the House of Representatives. Over the last decade, the U.S. securities markets have dramatically increased in size. In addition, about 160 million Americans today -- over half the population -- own stocks, either directly or through savings or retirement plans that invest in stocks. The growth and transformation of the U.S. securities markets challenge the Commission and Congress to re-think the way that we regulate. The Commission is committed to supporting regulatory change in ways that maintain and improve the protection of investors, and facilitate the formation of capital by U.S. businesses. S. 1815 builds on initiatives that the Commission has undertaken in recent years to: (1) simplify and improve disclosure requirements; (2) promote capital formation; (3) streamline and coordinate regulatory efforts; and (4) promote the international competitiveness of the U.S. securities markets. S. 1815 would help to modernize the securities laws through provisions that clarify the responsibilities shared by federal and state regulators, and through significant amendments to the Investment Company Act of 1940, the primary statute governing mutual funds. The Commission supports the thrust of these amendments, and recommends additional provisions and modifications that would enhance its ability to regulate the securities markets. Allocation of Responsibility Between Federal and State Regulators. S. 1815 would more clearly define the roles of federal and state securities regulators, a goal that would have seemed revolutionary only a year ago. In doing so, the bill recognizes the key role that state regulators play in prosecuting securities fraud and educating investors. At the same time, however, the bill does not address issues -- namely, certain securities registration and broker-dealer provisions -- that the Commission believes would be helpful to address in the context of federal-state securities regulation. The Commission supports the addition of such provisions, which the attached testimony describes in greater detail. Investment Company Act Amendments. The bill would also help to modernize the Investment Company Act, a law that has not been significantly revised for over 25 years. The Commission has previously supported many of the changes proposed in S. 1815, which include provisions on fund ==========================================START OF PAGE 2====== advertising, deceptive fund names, and investment pools for sophisticated investors. In addition, the Commission urges that Congress adopt additional amendments to the Investment Company Act to augment the Commission's authority concerning recordkeeping and inspections, in order to improve the Commission's oversight of the investment company industry. The Commission hopes that the introduction of S. 1815 will serve to continue the dialogue that has begun on the significant issues raised by this bill and by H.R. 3005, its counterpart in the House of Representatives, and that these efforts will culminate in the passage of legislation in this Congress. The Commission stands ready to assist in these efforts and to participate in the process of crafting legislation that all may support. ==========================================START OF PAGE ii====== SUMMARY OF COMMISSION RECOMMENDATIONS ON S. 1815 I. Title I -- Investment Advisers Integrity Act Section 102 -- Funding for Enhanced Enforcement Priority. Section 102 authorizes an appropriation of $16 million for the enforcement of the Investment Advisers Act for each of fiscal years 1997 and 1998. The Commission opposes this provision. Section 103 -- Improved Supervision Through State and Federal Cooperation. Section 103 calls for states to assume a primary role with respect to investment advisers that are small businesses. The Commission supports this provision. Section 104 -- Interstate Cooperation. Section 104 would limit state regulators to enforcing (1) books and records and (2) financial responsibility laws of the "home" state of the investment adviser to ensure uniformity. The Commission recommends that the Committee consult with the states regarding this provision. Section 105 -- Disqualification of Convicted Felons. Section 105 would allow the Commission to deny or withdraw the registration of any person as an investment adviser who has been convicted of a felony, and the registration of any adviser with whom such person is associated. The Commission supports this provision. II. Title II -- Facilitating Investment in Mutual Funds Section 202 -- Funds of Funds. Section 202 would amend the Investment Company Act to address two types of arrangements that involve investments by a registered investment company in another registered investment company. The Commission supports this provision. Section 203 -- Flexible Registration of Securities. Section 203 would amend the Investment Company Act to implement a new system under which mutual funds and certain other types of investment companies would pay registration fees under the Securities Act. The Commission supports this provision, with one reservation regarding its effective date. Section 204 -- Facilitating the Use of Current Information in Advertising. Section 204 would expressly authorize the Commission to permit investment companies to use a new type of "advertising" prospectus for purposes of the Securities Act. The Commission supports this provision. Section 205 -- Variable Insurance Contracts. Section 205 would amend the Investment Company Act, as it relates to the regulation of variable insurance contracts, in order to ==========================================START OF PAGE iii====== provide for different treatment between such contracts and periodic payment plans. The Commission supports this provision. Section 206 -- Prohibition on Deceptive Investment Company Names. Section 206 would amend the Investment Company Act to grant the Commission rulemaking authority to define investment company names, or the title of the securities they issue, as materially deceptive or misleading. The Commission supports this provision. Section 207 -- Excepted Investment Companies. Section 207 would amend the Investment Company Act by creating a new exception from the Act's regulation for investment funds designed for financially sophisticated "qualified" investors. The Commission generally supports this provision, with certain reservations. Section 208 -- Performance Fee Exemptions. Section 208 would amend the Investment Advisers Act to except investment advisory contracts with qualified purchaser pools from the Act's prohibition on performance fees, and authorize the Commission to exempt from that prohibition investment advisory contracts with sophisticated clients and clients that are not U.S. residents. The Commission supports these provisions. Title III -- Reducing the Cost of Saving and Investment Section 301 -- Exemption for Economic, Business, and Industrial Development Companies. Section 301 would create an exemption under the Investment Company Act for a company whose activities are limited to the promotion of economic, business, or industrial development of enterprises doing business in the state in which the company is organized. The Commission supports this provision. Section 302 -- Intrastate Closed-end Investment Company Exemption. Section 302 would expand the Commission's authority to exempt from Investment Company Act regulation closed-end funds that publicly offer their securities solely within a particular state, by increasing the aggregate offering amount of securities that could be offered by these companies from $100,000 to $10,000,000. The Commission supports this provision. Sections 303-307 -- Business Development Companies. Sections 303 through 307 would amend certain portions of the Investment Company Act that pertain to business development companies. These amendments would provide business development companies with more flexibility in a number of respects. The Commission generally supports these provisions, with certain reservations. ==========================================START OF PAGE iv====== Section 308 -- Facilitating National Securities Markets. Section 308 contains proposed amendments to the federal securities laws that would preempt in specific circumstances state requirements with respect to securities registration. The Commission supports these securities registration preemption provisions, with one request for clarification and various technical comments. ==========================================START OF PAGE v====== Section 309 -- Exemptive Authority. Section 309 would amend the Securities Act and the Exchange Act to provide the Commission with a grant of general exemptive authority under those Acts. The Commission supports these provisions. Section 310 -- Analysis of Economic Effects of Regulation. Section 310 would authorize appropriations of $6 million for each of fiscal years 1997 and 1998 for the Commission's Economic Analysis Program. It would also require the Chief Economist of the Commission to prepare a report on each rule proposed by the Commission. The Commission opposes this provision. Section 311 -- Privatization of EDGAR. Section 311 would direct the Commission to submit a report to Congress within 180 days concerning Commission plans for promoting competition and innovation of the EDGAR system through privatization of all or any part of the system. The Commission supports this provision, with minor amendments. Section 312 -- Improving Coordination of Supervision. Section 312 would require the Commission and the SROs for broker-dealers to eliminate unnecessary duplication in the examination process. The Commission supports this provision. Section 313 -- Increased Access to Foreign Business Information. Section 313 would address the status of offshore press conferences and related materials under the Securities Act and the Exchange Act. The Commission supports the purposes of these provisions, but believes they should be addressed through Commission rulemaking. Section 314 -- Short-form Registration. Section 314 would require the Commission to amend the eligibility criteria for short-form securities registration. The Commission supports the concept of allowing non-voting common stock to be included in determining short-form registration eligibility, but believes this should be addressed through Commission rulemaking. Section 315 -- Church Employee Pension Plans. Section 315 would exempt from most federal securities regulation church employee pension plans meeting the standards described in section 414(e) of the Internal Revenue Code of 1986. The Commission generally supports the exemption for church plans and their related persons, but has certain reservations. Section 316 -- Promoting Global Preeminence of American Securities Markets. Section 316 expresses the sense of the Congress concerning the importance of establishing a comprehensive set of generally accepted international accounting standards that could be used in such offerings. ==========================================START OF PAGE vi====== The Commission agrees with the sense of Congress on this point and is prepared to submit the specified progress report. ==========================================START OF PAGE 1====== TESTIMONY OF ARTHUR LEVITT, CHAIRMAN U.S. SECURITIES AND EXCHANGE COMMISSION CONCERNING S. 1815, THE "SECURITIES INVESTMENT PROMOTION ACT OF 1996" BEFORE THE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS UNITED STATES SENATE June 5, 1996 Chairman D'Amato and Members of the Committee: I appreciate this opportunity to testify on behalf of the Securities and Exchange Commission ("Commission" or "SEC") regarding S. 1815, the "Securities Investment Promotion Act of 1996." Let me begin by congratulating Chairmen D'Amato and Gramm for introducing S. 1815, as well as the other co-sponsors of the bill, Senators Dodd, Bryan and Moseley-Braun. S. 1815 contains significant provisions that would more clearly define the partnership of shared responsibilities between federal and state securities regulators. Only a year ago, these changes would have been viewed as revolutionary. The transformation of the debate is a testament to the broad, bipartisan support for dramatic legislative changes in this Congress that would benefit investors, industry and government alike. The bill would also help to modernize the 56-year old Investment Company Act, a law that has not been substantially changed since 1970, in ways that the Commission has supported in the past. ==========================================START OF PAGE 2====== S. 1815 adds momentum to similar legislation currently under consideration in the House of Representatives. Although the Commission has endorsed H.R. 3005 and can support many of the parallel provisions contained in S. 1815, there are a few provisions in this bill that the Commission would prefer be omitted. At the same time, S. 1815 contains additional provisions that would enhance the effectiveness of H.R. 3005 if they were added to that bill. The Commission hopes that the introduction of S. 1815 will serve to continue the important dialogue that has begun on the significant issues raised by these bills, and that these efforts will culminate in the passage of legislation in this Congress. The SEC stands ready to assist in these efforts and to participate in the process of crafting legislation that we all may support. This statement discusses some of the more salient issues raised by S. 1815 within the context of recent developments in the securities industry and its regulation. An appendix attached to this statement analyzes the specific provisions of S. 1815 in detail and discusses the Commission's views on each of those provisions. I. Introduction The U.S. securities markets play a dual role in the American economy. First, securities markets provide investors a means to invest money for retirement, save money for college education and earn money by participating in the growth of ==========================================START OF PAGE 3====== U.S. and foreign businesses. Today, about 160 million Americans -- over half the population -- own stocks, either directly or through savings or retirement plans that invest in stocks. Second, the money provided by investors gives businesses -- both small and large -- access to capital that is the lifeblood of corporate operations and expansion. Today, the U.S. securities markets serve the needs of almost 13,000 public companies,[[1]] raising capital to support new industries, finance operations, create jobs, fund research and development, and support growth for the future. In 1995 alone, some $900 billion worth of securities were sold in our markets. S. 1815 has been introduced in a period of phenomenal performance in the securities markets. Between 1980 and 1995, for example, the value of public offerings (including debt and equity, but not investment company securities) increased more than ten-fold, from $58 billion to $768 billion. Between 1990 and 1995, the dollar volume of equities traded on U.S. securities exchanges and NASDAQ grew 182%, with over $5.94 trillion traded in 1995. Volume continues to explode. December 15, 1995 was the heaviest trading day in the history of the New York Stock Exchange, with over 636 million shares trading hands. Last month, the Dow Jones Industrial Average, viewed in its 100 years by many around the world as the primary barometer of the stock market, reached record highs. On NASDAQ, record daily volume was set on May 7, 1996, ==========================================START OF PAGE 4====== exceeding 806 million shares. Over the last few months, the share volume on all U.S. markets combined has generally exceeded one billion shares each day. Dramatic growth also has occurred in the mutual fund and investment adviser sectors of the securities industry. In 1970, investors could choose from among 361 mutual funds. Today, over 5,500 mutual funds (almost twice the number of stocks trading on the New York and American Stock Exchanges) and over 500 closed-end funds are available to investors. Mutual funds, which in 1970 held approximately $48 billion in assets, now hold over $3 trillion in assets. Similarly, the number of investment advisers registered with the Commission has swelled to 22,500. The assets they manage have also increased: since 1980, assets managed by registered investment advisers (excluding assets of registered investment companies) have risen from $205 billion to almost $8 trillion, an increase of over 3,600%. The dramatic growth and transformation of the U.S. securities markets present new challenges for regulators and Congress. Today the U.S. securities markets are widely regarded as the deepest, most liquid and fairest markets in the world. But just as the need to constantly update, revise and innovate products and services in order to remain competitive is the driving force behind American enterprise, the crucial task for federal and state regulators is to revise and re-think the way that we as regulators do business -- so ==========================================START OF PAGE 5====== that U.S. businesses may maintain their competitive edge in a changing world economy. Businesses compete best in an arena where the rules promote honesty, intelligence and hard work, and the securities markets are no exception. Accordingly, investor protection and market integrity need to be the touchstones in this important effort to effect dramatic, meaningful changes in securities regulations, an effort that S. 1815 admirably undertakes to accomplish. II. Recent Commission Achievements and Ongoing Initiatives: Selected Highlights The provisions of S. 1815 build on initiatives that the Commission has undertaken in the recent past. Over the past two years, the Commission has attempted to design new means to promote the efficiency and fairness of the U.S. securities markets, with minimal regulatory burden. A sampling of these initiatives includes the following: Simplification and Improvement of Disclosure Requirements ù The SEC has worked with the investment company industry and state securities regulators to develop a "fund profile," a standardized, short-form summary of a fund's full prospectus. The profile is designed to be more understandable to investors, and initial investor reaction has been very positive. In a related area, a similar profile program for variable annuities was announced yesterday. ù Last July, the Commission proposed improved disclosure requirements for money market funds to simplify money market fund prospectuses, making them less costly to prepare and more understandable to investors. ù In the area of derivatives, the Commission late last year proposed rule amendments that are designed to ==========================================START OF PAGE 6====== help investors assess the market risks of derivatives investments by public companies. ù The Commission is facilitating public access to corporate filings on the Commission's Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, and reevaluating and updating EDGAR to take advantage of new technology. The Commission has also approved the issuance of two interpretive releases designed to encourage issuers to use electronic media to provide prospectuses and other disclosure documents to investors, and to allow broker-dealers, investment advisers and transfer agents to deliver information to their customers and clients. Promotion of Capital Formation ù In March 1996, an internal Commission Task Force on Disclosure Simplification released a report proposing revisions to modernize and streamline the regulatory framework that governs corporate finance and accounting. The report recommends the elimination of 81 rules and 22 forms and schedules, as well as the modification of dozens of other rules, forms and schedules, related to corporate finance. The Commission has acted on many of the proposals already and expects to take further action soon. ù The Advisory Committee on the Capital Formation and Regulatory Processes, headed by Commissioner Steven Wallman, is expected shortly to recommend further reforms of the registration and disclosure process - - perhaps including a shift from a securities registration system to a company registration system. Streamlining and Coordination of Regulatory Efforts ù The SEC has eliminated the need for prior review of certain rule filings by self-regulatory organizations ("SROs") such as the NASD and securities exchanges. ù The Commission has reallocated existing resources to establish a new Office of Compliance Inspections and Examinations to conduct and coordinate examinations of brokers, dealers, securities exchanges, investment companies and advisers, and transfer agents. ==========================================START OF PAGE 7====== ù The Commission has entered into a memorandum of understanding with state securities regulators and SROs to share information, coordinate examinations, create a computerized tracking system, and hold regular planning summits. Promotion of the International Competitiveness of U.S. Securities Markets ù The Commission has streamlined the registration, reporting and reconciliation requirements for foreign companies. ù The SEC has permitted, in cross-border offerings, the use of certain international accounting standards in portions of financial statements filed with the Commission. ù The Commission has actively supported, through the International Organization of Securities Commissions ("IOSCO"), the efforts of the International Accounting Standards Committee to develop high quality, comprehensive international accounting standards. These initiatives are but a sample of the Commission's efforts to reduce regulatory burdens. At the same time, the Commission is aware that as an administrative agency, it must operate within the boundaries set by the securities laws. Accordingly, it welcomes efforts, such as those contained in S. 1815, that would provide the SEC with the tools to respond more flexibly to a changing market environment. It is in this context that the Commission turns, below, to a discussion of some of the most salient issues raised by S. 1815. III. Significant Issues Raised by S. 1815 A. Rethinking the Federal-State Regulatory Partnership Overview. Several provisions of S. 1815 would amend the federal securities laws to preempt state requirements in the ==========================================START OF PAGE 8====== areas of investment adviser regulation and the registration of specified securities offerings, including offerings by investment companies and offerings of nationally listed securities. The bill does not, however, preempt state regulation in the broker-dealer area. The current system of dual federal-state regulation is not the system that Congress -- or the Commission -- would create today if we were designing a new system. While securities markets today are global, issuers and securities firms still must register many securities offerings in 52 separate jurisdictions; satisfy a multitude of separate books and records requirements; and bear the substantial costs of compliance with the overlapping requirements. The current scheme of federal-state regulation is particularly onerous for investment companies, which are extensively regulated by the Commission, and whose business is fundamentally national in nature. At the same time, however, state securities authorities play an essential role in the regulation of the U.S. securities industry. State regulators are often the front line of defense against developing problems; they are the "local cops" on the beat who can quickly detect and respond to violations of law. Further, the states have been aggressive in seeking to publicize instances of possible fraud and abuse as a means of better educating investors. ==========================================START OF PAGE 9====== It appears that an appropriate balance can be attained in the federal-state arena that better allocates responsibilities, reduces compliance costs and facilitates capital formation, while continuing to provide for the protection of investors. The bill's approach to the division of responsibilities in the investment adviser and investment company areas exemplifies such a balance. Additional Amendments Suggested for S. 1815. The Commission has endorsed H.R. 3005, which would preempt state law requirements, particularly in the areas of securities registration and broker-dealer regulation, that are not preempted in S. 1815. These other provisions also achieve the goals of regulatory simplification and protecting investors. While S. 1815 takes important steps in the right direction, a combination of the approaches in S. 1815 and H.R. 3005 would provide a more comprehensive rationalization of our federal- state system. Securities Registration. S. 1815 includes significant securities preemption provisions with respect to investment companies, and would codify existing state law exemptions for issuers whose securities are "nationally traded," that is, listed on the New York Stock Exchange, American Stock Exchange, or on the NASDAQ National Market System. However, other securities preemption provisions could be included that would enhance the utility of the securities preemption provisions without sacrificing investor protection. ==========================================START OF PAGE 10====== For example, H.R. 3005 provides relief for smaller businesses that are not "nationally traded" by preempting federally registered offerings by companies that have two years of audited financial statements and at least $10 million in assets. H.R. 3005 also provides helpful simplification by preempting state regulation of secondary market trading transactions, and of certain exempted securities (such as commercial paper) and municipal securities (except in the state where issued). Most of these transactions already are exempt in the states through differing formulations; codification of the exemptions could reduce "blue sky" expenses considerably. The Commission supports these provisions and believes it would be worthwhile for the Committee to consider each of these provisions as possible additions to S. 1815. Broker-Dealers. S. 1815 would not preempt state involvement in broker-dealer regulation. The Commission has supported a number of limited provisions in this area contained in H.R. 3005, which are worthy of the Committee's consideration. As a general matter, the Commission recognizes that state regulators have a compelling interest in determining who may do business within their borders, and in how such business is conducted. The Commission also recognizes, however, that businesses trying to compete in today's changing financial ==========================================START OF PAGE 11====== world are hindered by the potentially conflicting requirements of 52 jurisdictions, and that, for this reason, securities firms have a compelling interest in a centralized and predictable regulatory system. Balancing these two concerns, the Commission believes that states should continue to license broker-dealers that do business within their respective jurisdictions, and to receive fees for licensing such broker-dealers. States already have begun to create greater uniformity by developing a central registration depository system for broker-dealer registration. The Commission also believes, however, that states should not impose books and records and capital requirements that exceed applicable SEC and SRO standards. H.R. 3005 would preempt state laws that impose books and records requirements, as well as financial responsibility and reporting requirements, that are inconsistent with or that exceed requirements established under the Exchange Act. The Commission supports state preemption in this area. Broker-Dealer Margin. In a related area, S. 1815 does not include amendments that appear in H.R. 3005 concerning margin requirements for broker-dealers. The Commission and representatives from the securities industry recommended these provisions, which would remove legislative restrictions on the sources from which broker-dealers may obtain financing. These provisions also would exempt from the Federal Reserve Board's margin requirements the extension, ==========================================START OF PAGE 12====== maintenance or arrangement of credit for a broker-dealer or a member of a national securities exchange if (1) a substantial portion of the broker-dealer's or exchange member's business consists of transactions with persons other than broker- dealers or (2) such credit is used to finance the broker- dealer's or exchange member's securities activities as a market maker or underwriter. The Commission supports these margin changes. B. Issues Raised by Amendments to the Investment Company Act Overview. A substantial portion of S. 1815 would effect important changes to the Investment Company Act of 1940, the primary statute that governs mutual funds and other pooled investment vehicles. Many of these changes were proposed in the Commission staff study on the Investment Company Act.[[2]] These changes in the Investment Company Act are proposed at an appropriate time -- over a quarter of a century has passed since the Act was last significantly revised by the Congress. The changes in the investment company industry since 1970 have been dramatic. Nearly one- third of all U.S. households own investment company shares, a fact that attests to the enormous significance of the industry to our country's economy and its citizens. The trust in investment companies is based in no small part on the strong framework for investment company regulation provided by the Investment Company Act, a law which the fund industry's ==========================================START OF PAGE 13====== leading trade association has termed "a model of effective legislation."[[3]] S. 1815 would improve, and help bring into the 21st century, many aspects of investment company operation and regulation. The bill would accomplish the following objectives: ù allow the Commission to make its advertising rules more flexible; ù authorize the Commission to adopt rules to address deceptive and misleading fund names; ù make more flexible the Investment Company Act's provisions concerning "funds of funds" and certain types of insurance products that are regulated as investment companies; ù improve the system under which mutual funds pay their registration fees under the Securities Act; ù simplify the existing exception from Investment Company Act regulation for "private" investment companies with no more than 100 investors; ù create a new exception for investment pools whose only shareholders are highly sophisticated investors; and ù create greater flexibility for investment companies that invest primarily in small businesses. Additional Amendments Suggested for S. 1815. While the Commission supports the changes proposed in S. 1815, the Commission also believes that further changes to the Investment Company Act are needed in order to improve the Commission's oversight of the investment company industry. H.R. 3005 contains additional amendments to the Investment Company Act that would provide the Commission the tools it needs to function effectively in today's complex market ==========================================START OF PAGE 14====== environment. The Commission urges that these provisions -- which include increased authority with respect to recordkeeping, inspections, and shareholder reports -- be included in S. 1815.[[4]] Recordkeeping and Inspections. The fund industry and the Commission agree that the success of the investment company industry depends greatly on public trust, and also agree that public trust is furthered by an effective Commission inspections program.[[5]] The continued success of this program depends on the Commission's access to all documents needed to determine whether funds are meeting regulatory requirements. The Commission's existing statutory basis for fund recordkeeping and inspections, however, is relatively narrow. The Investment Company Act currently permits the Commission to inspect records that funds are required to maintain by Commission rule.[[6]] The Act, in turn, limits the Commission's rulemaking authority to records that relate to the fund's financial statements.[[7]] Although most funds voluntarily provide all materials that the Commission staff requests, voluntarism is no basis for effective oversight. H.R. 3005 contains provisions that would enable the Commission to specify, by rule, the information that must be reflected in investment company records.[[8]] This approach would strengthen the inspections program and elevate it to the standards that currently apply to inspections of ==========================================START OF PAGE 15====== broker-dealers and investment advisers.[[9]] The Commission could use this rulemaking authority to facilitate examinations of fund transactions that present novel investor protection issues. For example, the use of derivative investments, which often involves complex strategies, can only be understood by reviewing records unrelated to the financial statements. A complementary provision would clarify the Commission's authority to receive more frequent reports about material events concerning an investment company (such as a change in control).[[10]] This provision would enable the Commission, upon learning of such events, to take appropriate action, if necessary, to protect and preserve fund assets. Shareholder Reports. Finally, H.R. 3005 would broaden the Commission's authority to prescribe the content of semi-annual reports to fund shareholders.[[11]] With this augmented authority, the Commission would be able to require that such reports contain certain important information, such as a fund's investment activities underlying its recent performance results.[[12]] This information may also help reduce the length and complexity of fund prospectuses. The Commission supports this enhanced authority. * * * Collectively, these provisions could significantly improve investment company regulation. They are particularly ==========================================START OF PAGE 16====== important to the Commission's ability, in the face of limited resources, to oversee a growing industry. In addition, these provisions reflect the Commission's sensitivity to imposing unnecessary burdens on investment companies, as well as its recognition that investment company internal compliance programs can operate most effectively in an atmosphere that promotes candor. These provisions would complement the other Investment Company Act amendments of S. 1815 discussed in the attached appendix. IV. Conclusion The Commission is pleased that S. 1815 continues the dialogue to develop securities legislation that would update and modernize the laws that govern this nation's vibrant securities industry. The Commission takes very seriously the directive to "reinvent" government, and it has already begun to take important steps to reduce bureaucracy, streamline regulatory requirements and eliminate regulatory burdens. The Commission strongly supports the thrust of S. 1815 and its counterpart bill in the House of Representatives, H.R. 3005. The Commission also appreciates the provisions of S. 1815 that break new ground in improving securities regulation. As this Congress draws to a close, it is constructive to focus efforts on achieving legislation this session that largely achieves results we all identify as important. The Commission is enthusiastic about working with ==========================================START OF PAGE 17====== the Committee, as well as other interested parties, on the many significant issues raised by these bills. Our success will be measured by the efforts we share to enhance capital formation, while preserving the investor protections that are so crucial to our financial markets. ==========================================START OF PAGE 18====== ENDNOTES [[1]] This figure does not include the roughly 5,000 registered investment companies (representing over 23,000 separate portfolios) that also raise capital in the U.S. markets. [[2]] See U.S. SECURITIES AND EXCHANGE COMMISSION, DIVISION OF INVESTMENT MANAGEMENT, PROTECTING INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY REGULATION (May 1992). [[3]] Oversight Hearings on the Mutual Fund Industry: Hearings Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 103d Cong., 1st Sess. 94 (1993) (prepared statement of Matthew P. Fink, President, Investment Company Institute). [[4]] In his floor statement on S. 1815, Senator Bryan characterized these sections as "key provisions" of H.R. 3005. 142 CONG. REC. S5598 (daily ed. May 23, 1996). [[5]] See, e.g., Mutual Fund Industry: Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 103d Cong., 1st Sess. 99-100 (July 22, 1993) (statement of Matthew P. Fink, President, Investment Company Institute). [[6]] Investment Company Act section 31(b), 15 U.S.C.  80a-30(b). [[7]] Investment Company Act section 31(a), 15 U.S.C.  80a-30(a); Investment Company Act rule 31a-1, 17 CFR  270.31a-1. [[8]] Section 207 of H.R. 3005 (amending Investment Company Act section 31(a), 15 U.S.C.  80a-30(a), to require investment companies to keep such records as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors). H.R. 3005 also would amend section 31(b) of the Investment Company Act to allow examiners to obtain copies of fund records without seeking a formal order. [[9]] See Securities Exchange Act sections 17(a) and (b), 15 U.S.C.  78q(a)-(b) (requiring broker-dealers to produce such records as the Commission may prescribe by rule); Investment Advisers Act section 204, 15 ==========================================START OF PAGE 19====== U.S.C.  80b-4 (imposing a similar requirement on investment advisers). [[10]] Section 206 of H.R. 3005 (amending Investment Company Act section 30(b), 15 U.S.C.  80a-29(b)). [[11]] Section 206 of H.R. 3005 (amending Investment Company Act section 30(d), 15 U.S.C.  80a-29(d), which currently limits the Commission's authority to prescribing the content of financial statements contained in annual reports). [[12]] Such rulemaking would be particularly beneficial for the shareholders of closed-end funds who, unlike their mutual fund counterparts, receive updates on fund activities only in the form of annual reports.