CONFERENCE CALL: CRA BID WON’T GO AWAY, FUNDS WARNED

The mutual fund industry is beginning to sound alarms about the possibility it may be required to invest in low-income areas.

At the Investment Company Institute’s annual conference in Washington earlier this month, chairman Don Powell and president Matthew Fink both called on the industry to beware of the possibility that the government will push to impose Community Reinvestment Act programs on it.

Under CRA, as it’s known, banks are required to make investments in low-income communities in the areas they serve. In recent years, Clinton administration officials have suggested that the law be expanded to cover non-bank financial services like mutual funds. Rep. John Dingell (D-Mich.), ranking minority member of the House Commerce Committee, earlier this year retreated from trying to impose the requirements on non-bank financial companies.

But Mr. Powell and Mr. Fink indicated that the issue is likely to resurface in Congress.

‘A TEMPTING TARGET’

Mr. Powell, also chairman of Chicago-based Van Kampen American Capital Inc., noted that new cash flow into long-term mutual funds reached $272 billion last year, topping the record set in 1993 by $30 billion. He then warned the 1,800 attending the conference that the $4.5 trillion industry is “a tempting target for irrelevant programs and taxes, such as community reinvestment programs and other success taxes.”

Mr. Fink said that the industry must “oppose proposals that would displace SEC regulation and thereby weaken investor protection.”

An example of displacing Securities and Exchange Commission investor protection, he said, “is the idea of imposing bank community reinvestment requirements on non-banks, including mutual funds.”

CRA requirements are inappropriate for mutual funds, Mr. Fink said, because they do not make loans as banks do. Funds also are not chartered to serve local communities, and they do not receive government benefits, such as deposit insurance or access to Federal Reserve loans.

“But,” Mr. Fink added, “most importantly, unlike banks, mutual funds are required to be managed solely in the interests of their shareholders.” Imposing CRA requirements on mutual funds “would amount to a totally unjustified tax on the assets of 66 million fund shareholders.” He pledged that the fund industry “will do all that we can to ensure that our shareholders’ assets are invested solely for their benefit.”

Mutual fund companies may be nervous about the prospects for bringing them under CRA, but for the moment, at least, proponents of extending CRA requirements are backing down.

Early in deliberations over financial services reform legislation, which narrowly passed the House this month, the Treasury Department proposed creating a new type of entity for bank affiliates involved in non-banking financial services. The new entity would be subject to CRA, a department spokesman said.

“Congress disregarded that” proposal, the spokesman said, and there is “no longer that type of debate going on about extending the CRA . . . We have not proposed that in this current debate on financial services reform.”

HAS SUPPORT ON KEY PANEL

A spokesman for Rep. Dingell said his earlier proposal to extend CRA to non-bank financial companies “was a compromise with Banking Committee people.” The proposals made in his earlier amendment “were not exactly the way he would have written them,” spokesman Dennis Fitzgibbons said. Extending CRA “was a position very strongly supported by a lot of the banking committee,” he added.

The bill passed by the House includes a requirement that a study be conducted of whether CRA requirements are harmed by diversification of the financial services industry. “The study will answer a lot of questions about how or whether CRA will apply,” Mr. Fitzgibbons said.