Speech

General Counsel’s Address, 2026 Investment Management Conference

Dinesh Khanna — Mon, 23 Mar 2026 18:39:49 +0000

General Counsel’s Address, 2026 Investment Management Conference Dinesh Khanna March 23, 2026

Public

Mon, 03/23/2026 - 14:39

General Counsel’s Address

Paul G. Cellupica
General Counsel
Investment Company Institute

Investment Management Conference
Palm Desert, California

March 23rd, 2026

Good morning. On behalf of the Investment Company Institute, it’s my pleasure to welcome you to this year’s Investment Management Conference. We’re glad you’re here, and we’re grateful for your continued support.

We have a really stellar line-up of speakers and panels, and as in the past we’ve also reserved some time for networking and fun. It’s a little hotter than usual outside, but if you’re visiting from the Northeast like me, just think back to the six weeks of crusted snow and ice we had in January and February and you will enjoy it.

This is the second time I’ve been asked to give these opening remarks. Last year, I spoke about ICI’s vision of strengthening the financial well-being of everyday Americans by expanding their access to long-term investing. And even before the new administration began, we had already shared an actionable plan to modernize investing. When I spoke last year I described that plan, which resulted from our comprehensive review of the regulatory framework for funds under the Investment Company Act of 1940, and several of our priorities for improvement.

Now, twelve months later, I’m pleased to report that we have made enormous progress on those priorities. The SEC and other regulators have implemented a number of reforms recommended by ICI that strengthen your ability to serve investors. But we aren’t close to finished. We’re pushing forward on numerous fronts, and in the days ahead, we expect even more accomplishments.

I’ll dive into the details in a moment, but first, I want to highlight the work you and your firms have done to lift up investors and make our capital markets work for everyone.

Thanks to you, three out of every four households in America are actively saving for retirement.

Thanks to you, Americans now have total retirement assets of more than $48 trillion.

And thanks to you, a record number of Americans are 401(k) millionaires, and even more are millionaires when you factor in IRAs.

In short, everyday Americans are achieving a level of long-term financial security that seemed impossible 50 years ago.

No one knows these facts better than you. But much of the country doesn’t fully appreciate how much you do and why it matters, including many of our leaders in Washington, D.C. That’s why, at ICI, a large part of our job is telling your story. As many of you hopefully saw, ICI is partnering with the America250 initiative to show how regulated funds have helped build America’s economy—and how our industry remains deeply invested in its future.

And the figures I just listed are at the heart of our message to policymakers. When we go to meetings at the White House, or Congress, or the Department of Labor or the SEC, we tell your story of financial empowerment for everyday people.

But we don’t just talk about what you’ve done. We talk about what you’re ready to do, with the right reforms. You’re prepared to give the next generation of Americans an even brighter financial future.

I’ll now give you a progress report on several of the priority areas that I identified in my remarks last year, and also discuss where there is more work to do.

First, we’ve pushed for ETF innovation, starting with allowing funds the flexibility to offer both mutual fund and ETF share classes. Dual share classes increase choices for investors, promote tax efficiency, and provide economies of scale, thereby reducing costs.

We made this case to the SEC—and they listened. Last year at this conference, Acting Chairman Mark Uyeda vowed to act on the numerous applications for ETF share class relief. Since then, starting in November, the SEC has approved 48 such applications. And just last week, the ICI obtained landmark no-action and exemptive relief under the Securities Exchange Act that will enable ETF share classes of mutual funds to begin trading on exchanges. While much work and coordination with intermediaries remains before ETF share classes become widespread, the industry has taken the first steps and I predict there will be no turning back.

But the story doesn’t end there.

We can build on the SEC’s progress in advancing mutual fund investors’ access to the tax efficiencies of ETFs. It’s punitive and unfair that under current tax laws, mutual fund owners often must pay capital gains taxes long before they sell their shares. Millions of investors are losing potential returns on their investments because taxes on mutual funds penalize them even if they don’t sell a single share.

Investors are losing up to 13.4% in returns on an investment over a 10-year period, depending on the type of mutual fund, according to our research.

Fortunately, there is a solution. We’ve worked with both parties in Congress, and last year, members of the House and Senate introduced the GROWTH Act. If enacted, the bill will equalize tax treatment across mutual funds and ETFs, and encourage even more long-term investing in funds. Passage of the GROWTH Act is one of ICI’s top priorities, and we’re grateful that both Republicans and Democrats want to help more investors save for the future.

The SEC’s action on ETF share classes represents landmark progress for investors. But I have more good news to report. Another of ICI’s priorities for modernization was giving retail investors more access to private markets within regulated funds, and here as well, we have seen historic progress.

Since I last spoke, the SEC has acted on two of our main recommendations regarding retail access. Last April, the Commission issued exemptive relief providing more flexible conditions for co-investment by closed-end funds and business development companies alongside private funds. The relief reflects ICI’s call for a principles-based co-investment framework, and it has opened the door a bit wider for ordinary investors to invest in funds that provide access to private markets.

A month later, the SEC eliminated the long-standing 15% limit on retail fund investment in private funds. This will further enable middle class investors to access private markets strategies through regulated funds, like interval and tender offer funds.

The common thread through these and other actions we are advocating is reliance on the strong protections of the 1940 Act. Private markets come with risk, and investors deserve the strongest guardrails. For retail investors outside retirement plans, funds regulated under the 1940 Act are the best option. They provide diversification across issuers, industry sectors and types of credit risk, and they are managed by an adviser and overseen by a board that each have fiduciary duties to their investors. Further, investors in regulated funds benefit from the robust valuation framework under the 1940 Act, and requirements to disclose clearly and in detail the costs, principal risks, policies regarding redemptions, and other integral features of these funds.

We’re grateful the SEC has worked with us to promote the goal of responsible retailization. And we’re also partnering with other agencies to foster progress. President Trump last summer signed an executive order on expanding access to private markets in defined contribution plans, and we expect the Department of Labor will soon begin to implement this vision with a landmark rule proposal.

While we don’t know the final details yet, we hope that the proposal will provide a clearer pathway for plan sponsors to include private market assets as a portion of a vehicle like a target-date fund or CIT that provides access to a diversified range of asset classes. The proposal should describe the process that plan sponsors should follow, rather than endorse specific types of investments. And it should recognize that in evaluating an investment, fiduciaries need to consider all relevant factors, including risk-adjusted returns, rather than only focusing on cost. Experience has shown that investment accounts with diversification across asset classes produce better net returns over the long term.

We’ve shared our views with the Department, and we are hopeful that their proposal will open the door for greater diversification, and ultimately better returns, for all Americans preparing for retirement. It will take time to finalize and implement such a major rulemaking, but ICI will be involved at every step.

The third and last priority I’ll mention from our 1940 Act modernization review relates to the removal of unnecessary regulatory costs and burdens. Here, again, the SEC has made commendable progress. For example, the Commission recently proposed returning required public disclosure of a fund’s portfolio holdings to a quarterly basis rather than monthly. In addition, the SEC also proposed welcome changes to Form N-PORT that would reduce the compliance burdens of its Fund Names Rule.

Notwithstanding these positive steps, there are many other significant reforms that the SEC can and should undertake to remove unnecessary costs. One huge reform we hope to see is making e-delivery the default option for fund documents. It just makes sense given that investors communicate digitally with their service providers in all other aspects of their lives, and it would produce immediate and substantial benefits.

Nearly nine out of ten investors – including senior investors - support making e-delivery the default, as long as they can still request a paper copy if they choose.

Last month, Chairman Atkins announced that he has directed staff to work on this issue. We look forward to seeing the results of that effort.

In addition to e-delivery, the SEC should take steps to reform the proxy process for funds. Funds have higher quorum requirements than public companies for many matters, but the the fact that retail shareholders are so dispersed makes it challenging to reach that quorum, even for non-contested matters. Often, this means funds have to make repeated solicitations to the same shareholders. As one of our members put it, “We’re spending a lot of money to irritate our own shareholders.” ICI recently issued a white paper describing these challenges and the enormous costs they impose, as well as suggesting some possible solutions.

One good idea that we have endorsed is to allow shareholders to provide standing voting instructions to vote in line with the recommendations of the fund’s board, either in every vote or with certain exceptions, like mergers or increases in advisory fees. The SEC staff has provided similar no-action relief for these types of standing voting instructions to public companies, beginning with Exxon-Mobil, and there is no good legal or policy reason why funds shouldn’t be allowed to give their shareholders these same choices.

Changes like this will reduce the need for funds to send multiple solicitations that so many shareholders dislike, and will make it easier for funds to take actions that are in shareholders’ interests.

Finally, ICI continues to call for the restoration of the ability of affiliated funds to cross-trade fixed income securities. Cross-trading can significantly reduce transaction costs and enhance investors’ returns . In 2020 alone, cross-trades in fixed-income securities saved funds and their investors almost $330 million. Thankfully, we understand that the SEC is working on a proposal to allow funds to resume fixed-income cross-trading, with modernized conditions and oversight requirements that will reflect the realities of today’s markets.

Longer term, we want to move investing fully into the 21^st Century, so investors can make the most of new technology, including developments such as AI and tokenization. We’ll work toward that vision in the year ahead. While elections may change the leaders in D.C., our principles endure and will always guide our efforts.

At ICI, we will continue to tell your story and support your success. We’re glad to do this, because the asset management industry succeeds by helping others succeed. I speak for the entire team at ICI when I say it’s an honor to serve you in our nation’s capital. We’re thankful for your partnership and your leadership.

It is now my great pleasure to introduce Brian Daly, Director of the SEC’s Division of Investment Management since July 2025. Brian brings to his role decades of experience across private practice and the investment management industry.

Most recently, he was a partner in the investment management practice at Akin Gump in New York, where he advised clients on legal and compliance programs and fund and management company formation, among other matters. Prior to that, he spent nearly a decade as a partner in the investment management practice at Schulte Roth & Zabel.

Brian also has significant in-house experience, having served in senior legal, compliance, and business roles at a number of leading asset managers. He has taught legal ethics at Yale Law School. Brian earned his law degree, with distinction, from Stanford Law School, and he has also earned degrees from Catholic University and the University of Hawaii.

We are thrilled to have Brian join us today. Please join me in welcoming IM Director Brian Daly.

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Investment Management Conference

Investment Company Act of 1940

Retirement Plans

Speech

ICI President’s Remarks, Society for Financial Education and Professional Development

Dinesh Khanna — Mon, 24 Nov 2025 14:24:55 +0000

ICI President’s Remarks, Society for Financial Education and Professional Development Dinesh Khanna November 24, 2025

Public

Mon, 11/24/2025 - 09:24

ICI President's Remarks

Eric J. Pan
President and CEO
Investment Company Institute

Society for Financial Education and Professional Development
17th Financial Literacy Leadership Conference

October 17, 2025

Thank you, Ted, for that kind introduction, and thank you to this great organization for the work you do.

I want to start by saying how grateful I am to be among colleagues and partners who are on the front lines of financial education. The student ambassadors in this room, along with your faculty sponsors and fellow educators, are doing the critical work of bringing financial literacy to communities that need it most. You're not just learning about investing—you're teaching it, living it, and spreading that knowledge through your campuses, your families, and your communities. That ripple effect is exactly what we need more of, and it's why I'm honored to be here today.

The Investment Company Institute represents the interests of individual investors and the asset management industry that serves them. We advocate for the millions of Americans who are working to build their financial futures through long-term saving and investing. My organization fights every day to ensure that investing remains accessible, safe, and affordable for people from every walk of life. We see you as essential partners in that mission.

The unfortunate reality is that millions of Americans could benefit from basic financial education. The need for greater financial literacy isn’t just a problem; it’s a crisis. We need every American to fully understand the benefits of long-term investing, for their own sake and for the sake of our economy. We need to show more people the path to saving for the future—especially those who’ve been underserved or overlooked.

This is why I’m grateful for the Society for Financial Education and Professional Development. You are tackling this crisis head-on. So, I’d like to applaud this organization for empowering Americans with financial literacy.

We are gathered at a remarkable moment in financial history. Technological progress is rapidly lowering barriers to investing, making financial independence accessible to millions more people. Everyone in this room has in their pocket access to more information and investment options than the top stockbrokers on Wall Street had just 25 years ago. We are on the verge of the true democratization of finance. It’s one of the most exciting economic trends of our time.

But here’s the challenge we face together: Not enough Americans know about these trends. Not enough Americans know about their options, which are growing by the day. And not enough Americans are making the most of this remarkable moment. They could be investing to make their lives better—from buying their first home to paying for their children’s education to securing a more comfortable retirement. Instead, they’re on the sidelines, missing out on a lifetime of wealth building.

As educators and advocates you know that investing is not reserved for the elite few with formal financial education. It’s not just for business school graduates with corner offices. It’s for everyone, and the data tells a compelling story about what happens when people start investing early and stay invested for the long term.

Let me give you some numbers you can share when you go home for the holidays. Over the past 30 years, the S&P 500 has averaged approximately 10% in annual returns. At that rate of growth, your money doubles roughly every seven years. That's not a complicated formula or a secret strategy—it's just the power of compound returns and staying invested.

Here's what that means in practice. If someone invests $1,000 at age 25 and lets it grow at that average return, by age 70 they'd have approximately $78,000. But if they wait until age 35 to make that same investment, they'd have only $38,000 by 70. Starting just ten years earlier doubles your retirement savings.

Even recent history proves this out. Investors over the past three decades have lived through the dot-com crash, the Great Financial Crisis, and the COVID-19 pandemic—three of the most severe economic disruptions in modern history. Consider someone who invested $1,000 in the S&P 500 in 1995 and kept up that same level of investment every year since. Despite weathering all three crises, they would have approximately $279,000 today. Consistency and patience pay off.

Those are heartening statistics, but there are also facts that keep me up at night. Last year, a nationwide survey found that less than 50% of Americans can pass a basic financial literacy test. That number has actually dropped over the last five years. In 2020, 52% of Americans were financially literate. Now only 48% are. If most people can’t answer the most basic questions about their finances, it’s highly unlikely that they’re making the most of investing opportunities, if they know about them at all.

However, some long-term trends are promising. My organization has found that 53% of households own mutual funds, which are foundational for retirement and long-term saving. That number reflects some real progress, because in 1980, only 5% of households held mutual funds. Even in 2020, the number was about 45%, so we’ve improved by nearly 10 percentage points in the last five years. But it’s equally clear that we have an enormous way to go.

There are people that want to get started. These are the people we have to reach. And these are the people you’re working to reach, with great success. You know better than anyone that financial literacy needs to start early. If someone only learns about investing when they’re 55, it could be harder for them to achieve their financial dreams. Even if they start in their 40s, it can be hard to build a solid retirement nest egg. The best way to help Americans save for the long-term and achieve real financial security is to reach them while they’re in high school and college. If we give students the knowledge and tools they need by the time they’re 20, their lives will be transformed by the time they’re 60. And passing along this skill to families can be a powerful tool to help instill a foundation for financial success in the next generation.

It’s especially important to empower young people from diverse communities. Going back decades, women and communities of color have lagged behind in their rates of investing. Historical barriers have played a big role, and breaking those barriers is vitally important. Financial literacy can play a powerful role in doing just that, and we know from experience that it gets results.

Studies show that financial literacy programs have a demonstrable impact on people’s financial behavior. They also make clear that if this education starts in school, it’s most effective at making a long-term difference. Put simply, if young people learn about the power of investing, and are given a clear pathway to invest, they are significantly more likely to pursue that path for the rest of their lives.

And in fact, a rapidly growing number of people are taking that path. In the past few years, there has been a dramatic increase in women opening retirement accounts, with a nearly 50% rise between 2019 and 2023. Younger women are driving this shift, with a 99% increase in Gen Z women investing for the long haul. We’re talking about people who are in their late teens, early 20s, or mid-20s, and a big reason why they’re investing is because they learned financial literacy in their formative years.

There are exciting signs of progress in communities of color, too. Today, 41% of households that purchased their first mutual fund shares after 2019 are Black, Hispanic, or Asian—a major shift from the 13% of first-time fund buyers before 1990. The share of ETF-owning households in these groups mirrors the U.S. population overall, underscoring a financial landscape that’s become increasingly representative of the broader American experience. Once again, Gen Z is responsible for much of this growth. It’s a powerful testament to financial literacy programs that are giving them the tools and confidence to invest.

We can all take pride in this progress. But we also need to double down, for the sake of reaching all those young people who don’t yet know about the promise of investing. I know that SFEPD will continue to provide financial education and professional development, and I’m grateful. I’m also confident you’ll continue to innovate, like you did last year by creating the Mind over Money Skills certification program. Investor Education is a key component, and I look forward to seeing how you expand your efforts nationwide.

ICI is committed to actively helping the next generation make the most of the many investing options at their disposal. The ICI Education Foundation is a non-profit-organization formed to advance the financial well-being of individuals by strategically partnering with organizations and participating in initiatives that increase financial literacy and promote the importance of saving and investing. Our partnership with the Society for Professional Education is one of our most long-standing and valued collaborations. As we’re making clear, it’s never been easier or more affordable to invest for the long term. And there have never been more options or products that can meet a young investor’s interests and needs.

If you can’t tell, I’m a true believer in educating Americans about how they can achieve a future of financial independence. This is among the most important issues of our time, with national ramifications—but at the end of the day, it’s about individual people achieving their own unique financial dreams. So, I want to close by emphasizing the personal impact that investing can make in people’s lives, and why it matters that we welcome every American into that experience.

Last year was the 100th anniversary of the mutual fund in the United States. It was a major milestone in financial history, and in the course of our celebrations, I spoke with the president of the company that introduced the first mutual fund, all the way back in 1924, MFS Investment Management.

She told me that her company had recently been contacted by a retired woman whose working-class mother—a teacher—had invested in two of their mutual funds in the mid-20th century. When her mother passed away, she inherited the funds. To this day, they are the foundation of her own retirement, and thanks to her mother’s long-term investing, she has had a lifetime of financial security, too. In her own words, she’s had “peace of mind” for her “whole life.” And she says that when you learn about investing early in life, you’ll “never worry about where your next meal is coming [from] when you’re old.” In the scope of human history, that’s an incredible statement.

My friends, this is the power of investing for the future—and this is why financial literacy is absolutely essential. By reaching those who’ve been left behind, and by helping the rising generation get ahead, we can transform their finances, and really, their lives. And by helping them rise, we’ll lift up our entire economy, and the country as a whole.

Thank you again for your commitment to this cause, and for the progress you’ve made. I look forward to digging deeper in our fireside chat.

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Investment Education

Technology

Speech

Playing a Bigger Game: Why ICI Is Moving Into Private Markets

admin — Thu, 01 May 2025 12:04:18 +0000

Playing a Bigger Game: Why ICI Is Moving Into Private Markets admin May 1, 2025

Eric J. Pan
President and CEO
Investment Company Institute

ICI Leadership Summit
Washington D.C

May 1, 2025

Thank you, Carol, for your remarks, and thank you for chairing this summit. But most of all, thank you for your decades of principled leadership at MFS. You are a champion of retail investors and a credit to the entire industry. We’re sad to see you retire next year, but rest assured, your impact will be felt for decades to come. Thank you for leaving such a remarkable legacy!

I’d like to build off Carol’s remarks. She said we need to “play a bigger game,” and at ICI, we couldn’t agree more. Investors are looking to us (the members of ICI) to deliver for them, especially in this time of market uncertainty. They need us to collaborate, to create new products that meet their needs, and to reform policies that stand in the way of achieving their goals. Ultimately, investors need us to further deepen our long-running efforts to democratize finance. That, more than anything, is what it means to play a bigger game. It’s about enabling even more Americans to play—and win—the game of long-term investing.

To that end, I’m going to focus today on one of ICI’s strategic priorities: giving retail investors real access to private markets.

This initiative reflects a convergence of events. In the past few years, many ICI member firms have started to develop retail-focused products that tap into private markets. You’re working hard to give investors more options in private credit and private equity, as well as real estate and infrastructure. At the same time, private markets themselves are looking to welcome retail investors, who’ve long been on the outside looking in. Given the merging of interests, there’s an easy and obvious opportunity for collaboration given ICI’s mission to represent the asset management industry that serves individual investors.

This initiative is a natural outgrowth of ICI’s mission and our industry’s purpose. We have always been at the forefront of democratizing finance for retail investors. Carol touched on how the success of our industry depends on innovation and boundary-pushing. Money market funds and ETFs are just a few of the innovations we’ve helped pioneer and made possible through policy advocacy. As we look to the future, we need to continue pushing the boundaries, and private markets may well be an important new opportunity for retail investors.

The rise of private markets cannot be ignored as a fringe part of the investment ecosystem. In 2013—just 12 short years ago—private markets had investments of $4 trillion. A decade later, that number had nearly quadrupled, to $15 trillion. By one measure, private markets have already hit the $25 trillion mark, which means their growth is accelerating even faster than expected.

Institutional investors, such as pension funds and insurance companies, have helped drive this growth. They recognize the potential upsides, and historically, they’ve allocated five times as much as retail investors to such alternative investments. This trend also reflects the fact that the number of publicly traded companies has been steadily declining. In 1996, there were more than 7,300 public companies in the United States. By 2024, that number had dropped to about 4,300. Institutional investors are looking for more opportunities, not fewer, and increasingly, they’re finding them in the private markets.

All told, the number of private companies in the U.S. with more than 100 employees has grown by 46% in recent decades, in part because companies are staying private much longer. In 1980, companies that ultimately went public did so after six years, but now, that process takes an average of 14 years. As a result, more than 80% of global companies with more than $100 million in revenue are private today. And the number of IPOs in the last 25 years was 58% lower than it was between 1980 and 2000.

Given these trends, the institutional shift toward private markets is not surprising, and in today’s world a total market portfolio must include private investments. In addition, investors expect to be compensated with higher returns for taking on more investment risk from holding private securities. No wonder institutional investors are piling into private markets.

But retail investors don’t have the same access. They overwhelmingly rely on regulated funds for long-term investing, but federal policies severely limit how much those funds can invest in alternative asset classes, even when the funds don’t have daily redeemability. As a result, individual investors are largely stuck with the declining number of publicly traded companies, unable to meaningfully participate in the dynamic rise of private markets. Put simply, a huge and growing amount of wealth-generating potential is out of retail investors’ reach, concentrated in a dramatically smaller number of institutional hands.

This should change. If the democratization of finance means anything, it’s that individual middle class investors deserve similar opportunities as wealthy or institutional investors. That’s especially true amid the ongoing divergence between public and private markets.

In a way, retail investors are being punished for economic trends that are out of their control. In addition to the decline of publicly traded companies, the consolidation of banking has led to a 72% decline in commercial bank lending in the leveraged loan markets over the past 40 years. Non-bank lenders have rushed in to fill this gap with private credit, and they now provide 86% of the leveraged loan market. Private credit is now seen as an integral part of the spectrum of fixed income investments, which ranges from U.S. Treasuries to corporate investment grade, to high-yield and emerging market bonds. There are ways for ordinary investors to access all these other fixed income asset classes through funds, so why shouldn’t they be able to diversify their investment exposure and access private credit also?

Retail investors should be able to invest in the companies that would have gone public 25 years ago, but stay private today. They should be able to invest in the next generation of potentially transformative companies, because getting in earlier could lead to much bigger returns later. Ultimately, investors deserve the freedom to take whatever approach works best for them.

For all these reasons, ICI believes it is important to advocate for individual investor access to private markets. We are pushing to give retail investors greater access to everything those markets have to offer. And we’re confident that we can do this in ways that both empower and protect investors.

Critics say that retail investors will be exposed to greater risk in private markets, and we agree that any such risks should be mitigated. The fact is that regulated funds already offer the best protection. They’re governed by strict legal requirements, including robust oversight from an independent board, an adviser who is subject to a fiduciary duty, diversification requirements, limitations on leverage and transactions with affiliates, and shareholder disclosure requirements, among many other commonsense guardrails. By using regulated funds to invest in private markets, retail investors will get the best of both worlds—and the protections they deserve.

At a practical level, ICI is focused on four big areas of reform. We’re seeking to expand access, expand flexibility, expand options, and expand availability on retirement platforms.

When it comes to the first goal—expanding access—we’re urging the SEC to lift its 15% limit on alternative investments by retail-facing closed-end funds. This policy will allow fund providers to offer new products and tailor them to investors who want much more diversification and access to private markets. Institutional investors have long proven the benefits of this “fund-of funds” approach, and thanks to them, firefighters, police officers, and teachers are heavily invested in private markets while enjoying transparency and strong oversight.

For the SEC, expanding access isn’t a heavy lift. The Commission has never issued a formal regulation, and the 15% limit on private funds is simply an informal position taken by the SEC staff. This fact alone shows that regulators never intended the limit to be permanent, and since markets have changed, the restrictions should change for the sake of investors. The sooner the better.

Our second goal is expanding flexibility, especially on the operational front. We called on the SEC to update the conditions for co-investment by regulated funds, including closed-end funds and business development companies, and we’re glad to see that they heard us. In early April, the SEC sought comment on a new, principles-based framework for co-investment, and the official order was issued this week. This welcome relief will make it easier for funds designed for retail investors to access private markets opportunities. And we look forward to working with the SEC staff on additional steps to expand co-investment flexibility, including for open-end funds.

Our third goal is to expand options, especially through closed-end funds. These funds are generally the easiest way for investors to access private markets, but they’re also easy targets for activist investors. We want the SEC to let closed-end funds protect retail investors, including by ending the annual meeting requirement that activist investors abuse for short-term gain. With commonsense protections, closed-end funds will enable far more retail investors to benefit from private markets over the long term.

That’s also why we’re urging Congress to pass the Increasing Investor Opportunities Act, which would close a loophole that activist investors take advantage of to harm closed-end funds. A federal law is obviously best, but failing that, a federal regulation would create a better system, too. On that note, we’re looking forward to working with new SEC chairman, Paul Atkins. He has a solid track record of working collaboratively with the asset management industry to advance reforms. I’m confident we’ll find many areas to partner in pursuit of further empowering investors.

As for our fourth and final goal, we’re looking to expand the availability of private markets strategies on retirement platforms such as 401(k) plans. We’re exploring ways to address the fiduciary liability concerns that in the past have inhibited plan sponsors from selecting target-date funds and other investment options that use private markets strategies. More than 156 million Americans have ERISA plans, so allowing target-date funds to add private funds as a component is a great way for them to diversify their portfolios. The first Trump administration began moving in this direction, and we’re looking for ways to build on those initial steps.

The benefits for investors will be many. They’ll have more options through greater diversification and the opportunity to benefit from greater investment returns through less liquid structures. And funds will benefit, too. They’ll have more flexible and tailored capital needs, and the opportunity to provide their investors with a greater range of choices.

I’d also like to emphasize that our partnership can help improve private markets, too, especially when it comes to standardization. Given their rapid and ongoing growth, these markets are still searching for industry best practices, and ICI can help identify and implement them, much as we’ve done for regulated funds. Bottom line, we want to successfully extend private market product access to retail investors. We realize there are operational challenges at play, but ICI is working on solutions to these hurdles. Achieving this goal will require smart use of technology along with process reengineering to permit distribution at scale. Optimal success can only be achieved when industry participants agree to collaborate on these matters for the benefit of individual investors by elevating service, lowering operating costs, and seeking to scale operations to unlock private market product access to retail investors. ICI is prepared to take the lead in supporting the private market industry as it strives to extend product access to individual investors.

I know you can see how this initiative fully aligns with our long-standing mission to democratize finance. Three years ago, I announced that one of ICI’s major goals is to modernize the ‘40 Act for the sake of retail investors, and expanding access to private markets is central to this vision. These markets are the next frontier, full of boundless opportunities for Americans who want to save for a home, their children’s education, and their retirement. Our goal, and our job, is to help them seize those opportunities, so they can achieve their American Dream.

In the days ahead, we’ll share more about this strategic priority, including how you can get involved. We also welcome your feedback, so please, reach out to ICI to share your thoughts. We’re doing this to help your companies serve individual investors at an even higher level—to play a bigger game. As we move forward, your insights are essential to finding the best path forward.

That’s what this is really about—finding the path that’s best for asset managers to serve investors, and ultimately, the many paths that are best for every individual long-term investor. We have a chance to deliver another new era of access, affordability, and options for Americans. As we take the next step on this journey, I thank you for your support, your partnership, and your continued leadership on behalf of retail investors.

I hope you enjoy this year’s Leadership Summit.

Now, please give a warm welcome to Gunjan Kedia, President and CEO of U.S. Bancorp, and Ryan Hicke, CEO of SEI.

Public

Thu, 05/01/2025 - 08:04

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The Mutual Fund: The Most Important Financial Innovation in Modern History

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The Mutual Fund: The Most Important Financial Innovation in Modern History admin September 26, 2024

Eric J. Pan

President and CEO

Investment Company Institute

25 September 2024

This year marks a historic anniversary. It has now been 100 years since the creation of the first US mutual fund. That was a pivotal moment for individual retail investors and the American economy. But it was more than that—so much more. I would argue that the mutual fund is the most important financial innovation in modern history.

I know what you are thinking. It’s generally believed that mutual funds have today reached maturity, or even may be ready for pasture. While the number of mutual fund owners (and AUM) has continued to rise, other products, especially ETFs, have rapidly gained market share and attention. But the evolution of these investment vehicles only proves my point. The mutual fund launched the era of financial democratization. New products like ETFs, CITs, and the burgeoning opportunities in closed-end funds have been built on that foundation that mutual funds laid.

And what a foundation it is. Before the mutual fund, only the richest of the rich invested in public markets. At the turn of the 20th Century, an estimated 1% of Americans owned stocks. They paid large sums for that privilege, and even then, a well-diversified portfolio was out of reach.

Retirement savings were also a foreign concept for almost all Americans. Certainly, there was nothing like the current system. No 401(k)s or IRAs. No Social Security. Minimal protections for the few pension plans around.

But now, that era is foreign to us. Today, more than 54% of U.S. households are saving for their financial future through mutual funds and the innovations that followed. That’s more than 120 million individual investors. The overwhelming majority are middle-income.

In the past 50 years alone, average retirement assets per household have grown nearly nine-fold. Mutual funds are a big reason why. They’ve helped power IRAs, 401(k)s, and similar plans, which represent the fastest-growing part of the US retirement market.

Not only are investing and retirement saving more accessible than ever—they’re also more affordable than ever. Since 1996, average expense ratios for equity and bond mutual funds have plunged by 60% and 56%, respectively. Expense ratios for ETFs, both active and index, have seen similar declines. Over the long run, these cost savings represent a windfall for individual investors.

People of all backgrounds are participating in this progress. Indeed, nearly 40% of mutual fund−owning households who purchased their first fund after 2019 are people of color—more than double the percentage that bought their first fund before 1990. Seen through that lens, the mutual fund is making it possible for people of color to build the wealth that was closed off to them for generations.

Regardless of their race, today’s investors have access to more savings options than their grandparents and great-grandparents ever imagined. For that matter, many of their parents never imagined it, either.

Right now, Gen Z households are twice as likely to have retirement accounts as same-age households were thirty-five years ago. Account balances have followed a similar trajectory. Adjusted for inflation, Gen Z and Millennial households with 401(k)s have more than twice as much wealth in those plans as people their age had in 1989.

Across generations, mutual funds and successive products have transformed lives. They’ve helped millions of people buy their first house. They’ve given middle-class Americans the opportunity to save for the best possible education for their children and grandchildren. Frankly, the mutual fund helped make the American middle class what it is today.

Americans now have the resources to live longer and better than any generation in human history. That fact alone makes the mutual fund uniquely transformative. But as we all know, the benefits don’t end with investors themselves. The mutual fund has revolutionized our economy, too.

Right now, US-registered funds have injected more than $33 trillion into the financial markets. That enormous sum helps businesses create jobs, invest and grow, and foster the next era of innovation. It also helps governments finance essential services. Policymakers in Europe, Japan and China are now looking to copy this American success story.

But despite this tremendous progress, there are threats on the horizon. The number of publicly traded companies is shrinking as red tape stifles IPO activity and regulated funds get saddled with more heavy-handed mandates. Meanwhile, policymakers are entranced by the rise of financial products that thrive in the private markets. That’s fine, but they should reinvigorate the public universe or grant retail investors meaningful access to private opportunities. Bottom line, the continued democratization of investing should be a top priority for policymakers, and funds offer a path forward. They can give far more everyday Americans the chance to reap the rewards of a thriving economy.

The mutual fund has sparked the development of new fund products and the democratization of finance. As such, we should call the mutual fund what it is—the greatest financial innovation in modern history. And we should continue to build on that innovation, bringing its ever-increasing benefits to ever more people—and ultimately, to every American.

Thank you.

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ICI President’s Address, 2024 Tax and Accounting Conference

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ICI President’s Address, 2024 Tax and Accounting Conference admin September 24, 2024

ICI President’s Address

Eric J. Pan

President and CEO

Investment Company Institute

ICI Tax and Accounting Conference

Boca Raton, Florida

September 24, 2024

Introduction:

Good morning. It’s great to see so many of our members and partners represented here. I and the entire team at ICI are thankful for your continued engagement.

It’s always awesome to be in Florida. You can really relax and enjoy life down here—and it seems like the sun is always shining. But as I get started, I have to apologize, because my job today is to talk about the dark storm clouds on the horizon. Specifically, I’m going to address a rising threat from Washington and what it means for our industry, the millions of investors we serve, and the future of the American economy.

Next year, we will see one of the most consequential debates over tax policy in American history. That’s not hyperbole. It’s a fact.

Regardless of which party wins the White House and Congress this November, taxes will dominate DC come 2025. Key parts of the 2017 tax-reform law will expire at the end of next year, and Washington will spend all year debating what to do.

But DC won’t just talk about whether to extend the 2017 tax cuts. Republicans and Democrats will use this opportunity to start a broader discussion of both tax policy and spending priorities.

The retirement system, and long-term investing as a whole, will be central to the debate. One or both parties likely will push for sweeping changes to tax policy. And that’s the problem. They’re probably going to consider changes that could harm Americans’ ability to achieve their savings goals and retire with dignity. The nearly 100 million US households with tax-advantaged retirement savings should be deeply worried. So should everyone who invests in the capital markets.

But I am here also to express hope. ICI is ready to defend American families and the American economy from harmful tax hikes. Our top priority in the coming year is promoting common-sense tax policies that help individual investors use IRAs, 401(k)s, and other plans that make up our country’s voluntary retirement system.

And we will oppose any proposals that would make this investing harder. We refuse to let DC disincentivize long-term savings and investment by American families. As lawmakers begin to consider their options, we’re already telling them that every law and regulation that impacts long-term savers should be thoroughly vetted, meticulously planned, and actively monitored. Policy changes must create the right kind of incentives for investors and promote real investor protections. Adding tax bills, removing tax deferrals, and piling on regulations don’t cut the bill. They’re bad for American families and bad for our country’s long-term economic health.

The financial security of millions of Americans hangs in the balance. But rest assured: ICI is here to tip the scales toward individual investors—because their financial well-being is what matters most.

Argument:

At this point, I’d like to take a step back and look at what, exactly, could happen next year.

Both parties will look to raise revenue, either to pay for tax cuts or more spending, or both. They’ll leave no stone unturned, considering changes to the tax treatment of defined contribution plans, IRAs, ETF transactions, and anything else that could potentially raise revenue. As so often happens in our nation’s capital, some policymakers will be too focused on the immediate effects of their actions while discounting the harm such changes would do to middle-class Americans in the future.

And make no mistake: middle-class Americans are in the crosshairs. They’re where the money is, potentially hundreds of billions of dollars’ worth. That’s a lot of cash that policymakers could redirect toward short-term political priorities like tax credits and costly new programs. To be clear, I’m not diminishing the importance of those other initiatives. And, of course, there are serious holes in the budget that need to be filled.

But however much DC thinks it can gain in the short-term by rolling back long-term investment tax treatment, Americans will lose significantly more. Let’s call this what it is: A tax hike on retirement and savings. Even supposedly modest changes will do more harm than good, if they do any good at all.

Any policymaker who thinks taxing retirement and savings is a good idea is forgetting or ignoring an important truth. America’s retirement system is the envy of the world, and it got that way because it’s nearly a century in the making.

Our system isn’t some mishmash of policies piled on top of each other over time, as naysayers claim. Just the opposite: policymakers have spent decades painstakingly and expertly crafting a superior system that benefits Americans. From Social Security to ERISA to SECURE 2.0, Democrats and Republicans alike have championed smart reforms to give Americans a secure retirement.

They largely succeeded. That’s where this debate needs to start—with a full acknowledgement that the current retirement system works for most Americans. In fact, it works wonders for a growing number of people.

Let’s look at the facts:

At this exact moment, IRAs, 401(k)s, and similar retirement accounts have more than $25 trillion in assets. They’re a primary source of financial security for everyday Americans, and year after year, more Americans rely on these plans for their financial futures. Balances in these accounts have climbed to or near record highs, helping the average long-term saver build a meaningful nest egg. And while increases in the cost of living have made it harder to set money aside for the future, retirement savings trends are still on the upswing. Clearly, Americans are taking a more proactive approach toward their golden years. The worst thing DC could do is make it harder for them to invest and save.

For that matter, it would be incredibly harmful if DC took away the incentives that future retirees depend upon. According to a study by ICI economists, our retirement system now allows the typical 72-year-old to replace more than 90% of the average take-home pay they had in their mid- to late-50s, even after inflation. This bears repeating—especially because the media often says the opposite. Despite negative headlines looking for clicks, the typical retiree maintains the standard of living they had while working.

And as we look to the future, tomorrow’s retirees could be even better off. Today, access and contributions to retirement plans are at or near record highs. Let’s take a look at younger Americans. Nearly two-thirds of 401(k) participants are now under the age of 50. Comparing the present with the past, Gen Z households are twice as likely to own a retirement account as Gen X households were in 1989. Adjusted for inflation, Gen Z and Millennial households with 401(k) plans have more than twice as much wealth in those plans as people their age had thirty-five years ago. Across all generations, average retirement assets per household are nearly ten times what they were 50 years ago. Again, that’s inflation-adjusted, which makes it even more impressive.

These numbers point to a future of greater financial security for untold millions. And remember: More and more Americans benefit from—and depend on—this system with every passing year.

That’s reason enough to protect the tax-advantaged retirement system and oppose any tax hikes. But if DC needs even more justification, they should consider that these everyday investors support and strengthen the entire economy. All told, the funds that Americans invest in for retirement, their kids’ education, and other financial goals supply more than $36 trillion to financial markets. That enormous sum helps businesses create jobs, expand their operations, and foster the next era of innovation. It also helps governments finance essential services that we all rely on.

Policymakers need to take a step back and account for this fact. They need to realize that mutual funds and other registered investment funds direct trillions of dollars to their highest use, turning breakthrough ideas into commercial successes and make thriving companies even better. Frankly, investment funds have helped make America the world’s economic leader, providing endless opportunities for companies and uplifting millions of people. And with the right policy framework in place, these funds will propel the economy to even greater heights and feats of innovation.

I could keep going about the many benefits of America’s retirement system. And I can’t say enough that none of these benefits happened by accident. They are the direct result of smart reforms by generations of policymakers, who gave more and more Americans the ability to access marketplace innovations. We have built an unprecedented retirement system that promotes a nationwide culture of investing for the future. Our system is so superior that Japan, European states, and other countries are trying to emulate it. They’re encouraging more IRA- or 401k-like plans, precisely because they’ve seen them work in the United States.

These voluntary retirement plans and the funds that fill them are a national treasure. To be clear, they’re not the only pillar of American retirement. Social Security is important, too. But voluntary retirement plans are the part that’s thriving. And they’re only growing more important, which is why more and more Americans are turning to them for their long-term financial security.

As a nation, we should build on this historic progress. After all, as amazing as our retirement system is, it can also be made even better. The recent passage of the SECURE 2.0 Act put even more workers on the road to retirement, while showing our ability to make improvements to the broader system. We should be looking for more such constructive ideas. But taking away the foundational tax benefits of 401ks and IRAs isn’t constructive. To the contrary—it would be profoundly destructive, tearing down the system that millions of American workers depend upon.

It’s not hard to predict what would happen next. Decades of progress would suddenly reverse. Fewer young people would save for retirement. Current and future retirees would have less income and smaller accounts. Less capital would flow into the economy, holding back job growth and the next era of innovation. And America would further divide between the “haves” and the “have nots.” That may be the most concerning consequence of any tax hike. Policymakers are threatening to take us back to the days when fewer people formally planned for retirement—when investing was mainly for the wealthy and well-connected. None of us want to go back to those days. We’d much rather move forward, toward the day when every American has affordable access to a well-funded voluntary retirement plan.

This is the message that ICI will deliver to D.C. in the coming days, weeks, and months. We’re already telling policymakers on both sides of the aisle that this is no time for a retirement tax hike. Actually, we’re telling them there’s never a time for a retirement tax hike. Few policies would do so much damage to so many Americans.

This is our message, but it doesn’t actually start with us. This is the clear and unmistakable message from the American people themselves.

Last year, ICI conducted a scientific survey of the public’s sentiment on this issue. We found that nearly 9 out of 10 Americans oppose taking away the tax advantages of defined-contribution plans. An even higher percentage opposed reducing the amount that people can contribute to these plans.

I defy you to find another issue where public opinion is so aligned. It cuts across partisan lines, racial lines, socio-economic lines, and more. Our survey even looked at people who don’t own defined contribution plans and IRAs. Tellingly, even the Americans who aren’t using these options overwhelmingly support them, with 80% backing their current tax treatment.

This makes sense. These individuals may not yet avail themselves of these plans, but they certainly want to, because they want to achieve financial security, as well. As for those who do have these plans, nearly 90% say they make it easier to plan for the long-term and save for the future. And more than 80% indicate that the tax treatment of their retirement plan is a big incentive to contribute. In other words, the current system is essential to achieving their financial goals, especially a secure and stable retirement.

These are the facts that policymakers need to know heading into next year. They have to understand that this isn’t about ICI and our members. It’s about the nearly 100 million households with retirement savings who would be unequivocally harmed by such a tax hike. Our job, as a trade association, is to elevate their voices to the point that Washington D.C. cannot ignore them.

By the same token, we’re making clear that if any policymaker pushes for a retirement tax hike, the burden of proof is on them. Why break in a year the system we built over a century? Why hurt Americans in the name of helping them? Policymakers won’t have good answers because there aren’t any.

At the end of the day, any policymaker who makes it harder for Americans to save for retirement threatens the financial well-being of future and current generations. That’s unacceptable, and Americans deserve better. In fact, Americans deserve more of what our industry provides, and that’s affordable and accessible retirement options that help them achieve their financial dreams. And I speak for everyone here when I say we’re ready to help make more progress.

Conclusion:

Now, many of you are probably asking: Why is ICI saying all this now? The election is a month and a half away. The actual tax debate won’t start until January. Aren’t we getting ahead of ourselves?

No, just the opposite: We’re getting ahead of the threat. Everything I’ve said today is what we’ll say to the White House and Congress next year, no matter who’s in charge. We’re letting them know what they’re up against if they go down this road. They’re not fighting an industry. They would be working against the interests of the nearly 100 million American households with tax-advantaged retirement savings, along with the millions more who want a better and more secure financial future.

But we won’t just warn D.C. against undermining America’s retirement system. We’ll shine a light on a better path. As I said before, our retirement system isn’t perfect. Instead of weakening it with tax hikes on savers and retirees, we should strengthen it with real reforms—ones that make it easier for more people to secure their retirement. Right now, for instance, we’re championing a bipartisan bill in the Senate that would broaden the investment options available to teachers, nurses, and other nonprofit workers. And we’re confident there are more reforms that can bring a stronger retirement to more people.

ICI’s history is one of delivering reforms that expand retirement savings. We secured the Pension Protection Act, the retirement-related provisions of the 2001 tax reform, and of course, the SECURE acts, to choose just a few of many examples. And ICI also knows how to defeat the worst policy threats—including the threat I’ve discussed today. Just seven years ago, in 2017, we prevented tax hikes on retirement. And in the past year, we were vocal opponents of onerous rules from federal and state regulators. The danger will likely be much bigger come 2025. But we can and must work together to meet this challenge, and ultimately, to overcome it.

As an industry, we have a duty to continue welcoming more people into long-term financial security, confidence, and comfort. And we’ll remind Washington that we have the same duty as a country. While D.C. is divided between right and left, long-term investors cut across ideological and partisan lines. If we unify and mobilize them, their voices will be impossible to ignore. ICI will be there to make sure of it.

In a way, it’s fitting that 2024 is a year of preparation. This year marks the 100th anniversary of the mutual fund—the backbone of many retirement accounts and the breakthrough innovation marking our industry’s leadership on behalf of investors. We’re now looking to the next 100 years. We’ll start that second century by defeating attempts to roll back the clock.

As we celebrate this anniversary and prepare for these efforts, I’m grateful for you and your companies. You show what’s possible—ever-expanding access to retirement. And your partnership will enable us to continue moving forward, toward our shared vision of financial security for all. Thank you.

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ICI President’s Address, 2024 Investment Management Conference

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ICI President’s Address, 2024 Investment Management Conference admin March 19, 2024

ICI President's Address

Eric J. Pan

President and CEO

Investment Company Institute

ICI Investment Management Conference

Palm Desert, California

March 19, 2024

“Another Century of Progress: How ICI Is Advocating for Investors and Against Over-Regulation”

INTRODUCTION: A CENTURY OF PROGRESS

Good morning. I hope you’ve enjoyed the conference so far. On behalf of the Investment Company Institute, thank you for making time in your busy schedules to be here. We’re grateful to you—our members—and everyone else here at this conference that supports the work of our members. By being here, you’re helping us carry out our mission, which is to strengthen the asset management industry for the benefit of the long-term individual investor. We take great pride in this mission. And it’s remarkable to realize how far we’ve come.

It has been one hundred years since the first mutual fund was established in the United States by MFS in March 1924. Since that momentous day, mutual funds, ETFs, and other investment products have given American households the unprecedented opportunity to set and achieve their long-term financial goals. A century later, 100 million Americans rely on funds to save for education, homeownership, and retirement, and even more rely on other investment products. While the American dream is debated by historians and promised by politicians, the fact the United States is the largest economy in the world and the wealthiest of the G7 is possible because of the role of mutual funds and investment products serving as a transmission channel for household savings into the capital markets. Put another way, you are the ones who opened the door to the American Dream.

I can’t overstate the importance of our progress. A hundred years ago, the concept of a nest egg with money to spare for vacation, leisure, and retirement was a privilege enjoyed by only the most wealthy. Now it’s a reality for hundreds of millions of Americans. Mutual funds launched the democratization of finance, and, to this day, that process continues through ongoing innovation by the firms represented in this room.

We’ll continue to remove barriers of entry to financial services, ensuring that anyone who wants to invest, can invest, no matter their background or experience. We’re making this possible through increased education, access, and affordability. Technology has made it possible to open an account and begin investing at any time. And competition has lowered fees, making investments more affordable than ever. As innovation continues, one thing is clear: The asset management industry is prepared to deliver another century of progress for individual investors.

Your leadership is key to making this vision a reality—and so is your partnership with ICI. Since our founding in 1941, we have been the industry’s voice in Washington, DC, and in financial centers around the world. We’ve shaped the policies that brought investors this far, ensuring they’re developed and implemented in the most even-handed and innovation-friendly way. Our difference was clear in the early days of the ‘40 Act and over the 80 years that followed. For the better part of a century, the Investment Company Institute has secured the policies that help you secure the financial futures of the American people.

As markets have become more complex and interconnected, ICI’s work has become more important. And as the regulatory state has expanded, we’ve become investors’ most important advocate for sound regulation. This is the situation in which we find ourselves today. Even as we marvel at the progress of the last hundred years, ICI is advocating for the policies that will enable you to achieve even more over the next hundred years.

THE CHALLENGE: AN ERA OF OVER-REGULATION

Unfortunately, the road of progress is not guaranteed. It must be built and pursued with vigor. And it demands a regulatory system that is sound, smart, and grounded in facts and data. But as we’ve seen, regulators do not always head in this direction. We must be vigilant against regulatory initiatives based on rumor, fear, and misunderstanding.

Consider the following examples. SEC Chair Gary Gensler has repeated the assertion several times that mutual funds begged for a government rescue during the dark days of March 2020. We have no knowledge of any such requests, nor has the SEC provided evidence of such requests. Yet this assertion is being used to justify many sweeping regulations that will drastically change how mutual funds operate in the United States.

Another concerning claim is that America’s retirement system is close to failing. The media recently fixated on a third-party report that our retirement system gets a C+ grade and claimed that this poor grade justifies curtailing the tax incentives for retirement plans. That’s news to me and millions of Americans. According to actual income data, the typical retiree maintains more than 90% of the average spendable income they enjoyed when they were between 55 and 59 years of age—the working years people enjoy before most enter retirement. Misleading reports are no guide for good policy.

Finally, we’ve heard claims in the public square that the bank failures of Silicon Valley Bank and Signature Bank, and other problems in the banking system, were the fault of money market funds. Several media reports cited analysts who suggested that money market funds are drawing deposits away from banks, adding to stresses at banks and preventing them from lending more to businesses and consumers. Analysis by ICI's Research team found that the narrative that these funds are preventing increased lending to the real economy is strained at best and incorrect at worst. If we’re going to strengthen our financial system, we need to look at the facts.

But that’s not what regulators are doing. They’re ignoring facts and data from the industry, setting up barriers between you and investors. These barriers are formidable, to say the least, and it’s fair to say we are currently in an era of extraordinary regulatory activity.

ICI saw it coming. In 2021, we began warning about a change of posture and priorities in Washington, DC, especially at the SEC. Not long after, the SEC began to propose big new rules at a breakneck pace. We warned that the Commission was doing too much, too fast, with too little concern for how investors would be affected.

We expressed ourselves even more strongly in 2022 as the proposed list of new regulations continued to grow. At the time, I warned in The Wall Street Journal that the SEC had embraced an academic approach—what I called “regulation by hypothesis”—with little regard for real-world effects. At that point, the Commission had proposed 26 rules in less than a year. In comment letter after comment letter, and in research product after research product, ICI pointed out that the cost of this regulatory deluge would be severe, and so would the damage to capital markets and investors, with little actual benefit.

And a couple of months later, we spoke out opposing the views of central banks and prudential regulators that our members were the main source of risk to the global financial system.

We reiterated our concerns about the SEC rulemaking approach at this conference last year, pointing to its still-growing list of costly proposed rules. And now, nearly three years after ICI issued its first warning, it’s clear that our concerns were warranted. The SEC is pursuing a range of rulemakings that harm investors and the health of our capital markets.

It’s been tough to see this transformation. ICI has a longstanding relationship with the SEC that goes back to the Commission’s earliest years. We respect its mission and commitment to protect the same investors that our members serve, which is why we’ve been so forthright about the costs and consequences of the SEC’s current agenda. We’ve analyzed the effects these rules will have. We’ve shown how many mandates are built on unrealistic assumptions that make them unworkable. And we’ve humbly asked the SEC to reconsider its proposals, while providing alternative approaches and actionable ideas for consideration.

Specifically, ICI submitted our analysis to the SEC last year, noting that it has issued a wide range of interconnected rule proposals but has failed to consider and analyze them holistically. We pointed out that, in addition to being substantively flawed, the rules have serious procedural deficiencies. For example, the Commission has failed to consider the effect of interconnected and interdependent proposals in its cost-benefit analyses. Implementing so many complicated rules simultaneously has potentially multiplied costs that the SEC didn’t identify.

Our industry supports all forms of new regulation that serves investors. But we do not want massive, one-size-fits-all mandates that hurt investors while exceeding their expected benefits. In many cases, we have found the SEC’s efforts to balance costs and benefits to be lacking. The proof has come over the last 12 months, as some of the most concerning proposals have started being finalized.

Consider the SEC’s final money market fund reforms. Before the final amendments came down last July, we made clear that the proposal’s focus on swing pricing would be disastrous for investors. While the Commission didn’t adopt swing pricing, it did elect to impose an expensive and complex mandatory fee on many investors.

There is no precedent for such a mandatory fee framework. It was a major shift at the eleventh hour. And there was little discussion in the original proposal of such a fee and how it would work. The last-minute change deprived the public of key details and the ability to comment on such sweeping changes. The SEC should have re-proposed this fee framework instead of finalizing an alternative that no one saw.

As firms grapple with the challenges of implementing the money market fund amendments, the true costs are becoming clearer. We must ask whether the difference between what a regulator says is going to happen and what actually happens is something we as a society should care about. Trust in the regulatory process depends on transparency and the regulator’s good faith effort to understand real world impacts. Otherwise, the rulemaking process becomes performative.

The SEC’s final Fund Names rule is another example of where ICI’s concerns were merited. Rolled out last September, the rule is supposed to provide more clarity to investors about how a fund is investing so that the fund’s name does not mislead investors about its investments and risks. But the final mandate goes much further, sweeping three-quarters of all US funds into its dragnet. There is no justification for such a massive expansion, and there will be enormous costs for investors.

Funds will have to redesign their systems and spend significantly more resources on compliance. The SEC may second-guess portfolio managers’ investment decisions after the fact. The Commission itself estimates the final rule could cost up to $5 billion. And the only thing that’s more staggering than the sum is the fact that it’s a solution to a problem that doesn’t exist. The SEC didn’t fix anything, and investors are already paying the price.

These final mandates are deeply disappointing, but the situation could get worse. The SEC is moving to finalize more proposed rules, and many of them will be even more costly.

That includes the SEC’s liquidity and swing pricing proposal for open-end funds, which ICI strongly opposes. Compulsory changes to liquidity risk management programs, as well as mandatory swing pricing and a daily “hard close” for mutual funds, would fundamentally alter how funds are managed, priced, bought, and sold. If finalized, investors would have less pricing transparency and less ability to meet their financial goals.

All told, more than 100 million American investors could be hurt. Two-thirds would be in the middle class, including tens of millions of retirement savers. The SEC should be helping them prepare for a more secure financial future. Instead, it’s hurting their finances by pursuing mandates disconnected from reality. The SEC has no good data to support its proposal and no interest in analyzing its real-world feasibility.

Our message to the SEC couldn’t be clearer: the liquidity and swing pricing proposal is unworkable. For the sake of investors, its adoption should never see the light of the day.

There’s one more pending SEC policy I want to mention. It’s the proposed rule on predictive data analytics, which seeks to address the purportedly unique risks to investors from artificial intelligence and other emerging technologies. We agree with Chair Gensler that AI is worthy of focus and further study, yet these specific rules are not the answer. The SEC hasn’t explained why conflicts raised by AI are unique or how existing legal standards are inadequate to address any concerns. As an industry, we want commonsense rules that protect investors while promoting innovation. Unfortunately, this proposal does neither. Like the other policies I’ve mentioned, it has all the hallmarks of an academic theory that ignores the reality of markets and the needs of investors.

Put simply, the predictive data analytics proposal is an assault on the innovation that investors deserve. It would effectively limit investors’ ability to access, through technology, the affordable advice and investment products they’ve come to rely on for a more secure financial future. If this rule is adopted, firms will avoid new technologies, lest they expose themselves to massive compliance costs and enforcement risk. And the rule is so broadly written, it will cover old technologies, too. Financial planning, allocation formulas, forecasting tools—even spreadsheets and retirement calculators could all be banned or limited.

The ICI estimates this single rule will cost at least $30 billion just in its first ten years. It could be one of the most expensive rules we’ve ever seen, creating far more problems than it solves. The SEC needs to withdraw this bad idea, go back to the drawing board, and develop a narrow proposal that actually protects investors and addresses the issues that Chair Gensler laid out when the Commission unveiled it.

There is not enough time for me to repeat our concerns with a host of other outstanding SEC proposals affecting funds and advisers, including those related to ESG disclosure, outsourcing, custody, cybersecurity, and market structure. But I do want to point out that the most recent threat to investors has come from the Department of Labor, not the SEC.

As you know, the Department has proposed a sweeping change to the definition of fiduciary for retirement investment advice. I want to make clear that we appreciate the Department of Labor’s desire to help Americans get the advice they need when saving for retirement. But the fiduciary rule doesn’t do that, and in fact, it would hurt people’s ability to get sound advice. Middle-class families would lose access to crucial investment information, while having fewer choices in the marketplace. And of course, the rule would cost billions of dollars, which is money that investors will inevitably pay.

ICI has marshalled this evidence and made our case to the Department of Labor. The best course of action is to withdraw the proposal immediately. Once again, there is no proven problem that needs to be solved, and investors deserve better than heavy-handed mandates that hurt their ability to invest and save.

CONCLUSION: ANOTHER CENTURY OF PROGRESS

The continued deluge of over-regulation vindicates ICI’s warnings over the past three years. Yet even now, some people wonder why the Investment Company Institute has decided to speak up and express its concerns more directly. My answer is simple: Our actions are proportionate to the aggressive policies that threaten investors. We’re serving our members and the investors they serve in the best way we can.

By the same token, some have asked me why the ICI doesn’t stay quiet and do its work behind the scenes. There’s an easy answer there, too. The stakes are too high to stay in the shadows—not when investors face such serious threats. We must stand up and speak up. We must make our voice heard because the alternative is to allow investors to lose.

The regulatory system that we have always worked within is becoming less connected to the success of capital markets and investors. Today, we’re grappling with dozens of mandates simultaneously. Many have conflicting messages and overlapping effects, leading to spiraling costs while leaving funds in the lurch about how to implement them. The rules we’re seeing don’t improve the market’s mechanics. They bring uncertainty to the market, and every new rule increases the uncertainty—and the harm to investors.

That’s the most concerning thing of all. Rules are being constructed without concern for the consequences for the people. Yet a rule’s costs and complications shouldn’t be an afterthought, let alone ignored altogether. The real-world effects should be at the forefront of the discussion, and in many cases, they should end the discussion. If a single rule is going to cost $30 billion, you don’t rush it out the door. You close the door, because that mandate is obviously a bad idea.

Our members are devoted to helping Americans achieve their financial goals, and the past hundred years are proof that you do incredible work. You haven’t just empowered investors. You’ve transformed our economy for the better. We must tell that story, and throughout this year, ICI will commemorate this century of progress in many different fora. We’ll paint a picture of the difference you’ve made and the sound policy framework that made it possible.

Most of all, we’ll keep advocating for another hundred years of progress. Now is the time to break barriers, not build them. Now is the time for smart regulation, not stifling mandates that hold us back. America’s investors deserve even more access to markets, even more affordable options, and even more opportunities to secure a stronger financial future.

ICI is committed to making this vision a reality. A hundred years ago, nobody knew we’d do so much good for so many people. And with your renewed partnership with ICI, a hundred years from now, people will marvel at how investors have continued to rise and thrive.

Thank you again. I hope you enjoy the rest of the conference.

Now, please welcome our next panel, “The Rise of the Courts and the Regulatory Process,” moderated by ICI General Counsel Susan Olson.

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ICI President’s Address, 2024 ICI Innovate

admin — Thu, 08 Feb 2024 18:46:16 +0000

ICI President’s Address, 2024 ICI Innovate admin February 8, 2024

ICI President’s Address

Eric J. Pan

President and CEO

Investment Company Institute

ICI Innovate

San Diego, California

February 8, 2024

The Right Way To Regulate Technology: Three Guidelines for the SEC

Good morning! It’s a pleasure to kick off the second day of ICI Innovate—and it’s a privilege to address all the people here who are moving finance into the future.

I hope you’ve enjoyed your time in San Diego. I certainly have. Unfortunately, the weather was supposed to make my colleagues in Washington jealous that we’re in southern California. Maybe one of our presenters can show us how to create AI-generated images of us basking in the sun. Weather aside, it is nice to be in a place that truly values innovation. Generally speaking, DC struggles to embrace new ways of doing things, while California is synonymous with entrepreneurial energy and progress. There’s a palpable sense that the future is bright—and worth bringing into the present.

That attitude defines you and your companies, and your work at the intersection of technology and finance holds great promise for individual investors. As an industry, we’re on the verge of historic leaps in accessibility and affordability, giving far more people the chance to achieve long-term financial security.

And yet, there’s a risk we don’t get there—and indeed, that we’re blocked from getting there. This morning, I will look at the regulatory challenges facing innovation, using the recent work of the Securities and Exchange Commission as an example. Then I will look at how ICI is addressing those challenges, arguing for a better way to develop the rules that govern the intersection of technology and investing. ICI is committed to being good partners to regulators, and we fully support prudent rules that unleash innovation while protecting investors. We have to get this right, so that you can continue to pioneer the advances that will benefit investors for generations to come.

That’s where I want to begin: With the tangible progress that technology is already bringing to the world of investing.

Any discussion of tech and finance should start with the most exciting innovation of our time. I’m talking, of course, about artificial intelligence. While most people are focused on AI’s ability to generate text and images, it has great potential to transform how people invest. With AI’s vast processing and predictive power, we will soon be able to help investors make better decisions and provide them with better portfolios. In fact, with AI, we could further tailor products to provide personalization to more investors, helping more people from every income bracket.

Remarkably, AI is just one of many technological breakthroughs that could transform investing. Another major development is blockchain. It’s a powerful technology that could have many applications to benefit investors in powerful ways. For example, it can make financial transactions significantly faster, while also making them more transparent.

The final innovation area I’ll name is data science. Many of you are finding new ways to distribute products to a broader array of investors. For example, data science has enabled more effective outreach on social media, pairing specific products with the individuals most likely to want them. It’s another chance to bring a new generation into investing. Without advances in data science, many would-be investors would still be on the sidelines, never knowing about the products that speak to them and meet their unique financial needs.

There are more innovations I could name, and while they’re broadly different, they all contribute to the same forward momentum. Even bigger advances are on the way, and you’re working hard to bring them to market. Because of you, investors can look forward to a future where investing is more affordable than ever, more individualized than ever, and more advantageous than ever.

The rapid pace of technological progress has, understandably, drawn the attention of Washington, DC Regulators have responded by rushing out new policies, with the goal of keeping investors safe. To be clear, these officials are well-meaning, and it’s certainly true that prudent regulation is needed in this brave new era. We need commonsense rules of the road. We don’t need to grind the wheels of progress to a halt.

Unfortunately, some regulations are trending in that direction. A case in point is the SEC’s proposed rule on predictive data analytics. The SEC drafted this rule in response to the rise of artificial intelligence. Chair Gary Gensler has spent much of his career studying technology, and he has major concerns about how it will affect the broader economy. He wants to put a stake in the ground to show that the SEC is taking this danger seriously.

Chair Gensler deserves praise for trying to prevent potential problems caused by the rapid adoption of AI technology, but his agency’s proposed rule is fundamentally flawed. It was poorly developed and hastily rolled out, and, as a result, it will harm far more investors than it protects. This rule will dramatically hike costs, hold back the most promising technologies, and hamstring your efforts to democratize investing. In fact, it will disrupt almost every aspect of a firm’s operations and interactions with investors, while eviscerating the certainty and stability on which innovators and investors depend. Harmful and dangerous—those are the words that best describe what the SEC is proposing to do.

The SEC has stated that it’s trying to prevent conflicts of interest when advisors and brokers use AI. To that end, it has developed a new standard that assumes that any time a financial firm takes its own interest into account, it’s potentially creating a conflict with investors. But that’s simply not true. Financial institutions have already gone to great lengths to mitigate conflicts of interest, and regulators have also taken important steps to protect investors. For instance, disclosure mandates are a powerful regulatory tool, one that empowers investors to make informed decisions. Yet the SEC ignores disclosure, and in fact, this proposal prevents investment firms from using disclosure to avoid conflicts.

In that sense, the rule is a solution in search of a problem. And worse, at the same time, the SEC is creating a host of new problems.

The SEC wants to require that when advisors and brokers use artificial intelligence and emerging technologies, they consider every instance in which it may advance their own interest. Then they must eliminate or neutralize any potential conflict, all while painstakingly documenting every step in real time. This will be an administrative nightmare, and it’s an obvious barrier to using AI. Financial firms will avoid new technologies, lest they expose themselves to massive compliance costs. The most promising innovations will never see the light of the day.

But it’s not just new technologies that will be affected. As SEC Commissioners Peirce and Uyeda pointed out, the SEC’s definitions are so broad that most old technologies will also be covered. Financial planning, allocation formulas, forecasting tools—even spreadsheets and retirement calculators could all be banned or limited. The same goes for portfolio management and trading systems, all of which are essential to investing. Think, for a moment, about what that means. The SEC is creating a world in which advisors and brokers struggle to provide the very services that led investors to hire them in the first place. This proposed rule undermines the architecture of modern investing.

The cost of this mandate will be enormous. Firms will be forced to completely redo the vast majority of their operations, and we estimate this rule will cost at least $30 billion over the next ten years. It could be one of the most expensive rules we’ve ever seen, yet the SEC has failed to justify such a staggering price tag. It says it’s preventing conflicts of interest, but there are more effective and targeted ways to do that. It’s going a mile when a foot was sufficient.

I can’t stress enough that ICI strongly supports smart regulation on emerging technologies and conflicts of interest. But the SEC’s predictive data analytics rule doesn’t fit the bill. It chills innovation instead of creating safeguards to guide it, while piling on costs without any clear benefit. In its current form, this rule will back the future while causing investing to get stuck in the past.

Thankfully, we aren’t the only ones who recognize the danger. Just this week, Senators Ted Cruz and Bill Hagerty introduced the Protecting Innovation in Investment Act, which would prohibit the SEC from finalizing this proposal. ICI strongly supports this bill.

But we aren’t just focused on the predictive analytics rule. It’s emblematic of a broader attitude toward regulation in our nation’s capital. That attitude can be summed up as “regulation by hypothesis” where regulation is based on theory and supposition and not by understanding the problem. Yet the better approach is the opposite—understand before you regulate.

The ICI is leading the way back toward this commonsense approach. While you’re on the frontlines of innovation, we’re on the frontlines of regulation. We make sure your voices are heard in the halls of government, and right now, we’re speaking directly with the SEC, as well as key policymakers in the Administration and Congress. We’re advocating a regulatory process that protects investors while promoting the progress that comes with innovation. This shouldn’t be “either/or.” Investors deserve “both/and”—both protection and progress.

To that end, in our conversations with policymakers, ICI recommends three guidelines for better regulation. Each one can be summed up in single words—deliberation, communication, and imagination. I’d like to unpack each one, briefly.

The first guideline, deliberation, is an essential ingredient of sound policy. It refers to the wisdom of carefully studying an issue, instead of moving straight to mandates. The rush to regulate is dangerous, not least because hastiness leads to sloppiness. It’s far better to seek clarity before unleashing the full force of government.

There’s a famous adage to describe this guideline—measure twice, cut once. Yet while the phrase is old, it’s especially apt with new technology. Artificial intelligence is inherently complicated, both in terms of how it works and how it can be applied. It defies simplistic narratives, and it requires substantial analysis to understand its potential uses and misuses. Sadly, that’s not what the SEC did with its predictive data analytics rule. It moved too quickly, with all the unintended consequences that quick action entails.

Frankly, it’s impossible to understand AI in a short period of time, given its rapid evolution and the only now developing evidence as to its effects. With a more deliberative approach, the SEC could have crafted a rule that encouraged responsible AI innovation, instead of undermining it. For that matter, had it waited and weighed the full effect of its words, the SEC could have defined its terms to focus solely on emerging technology, instead of covering everything going back to the pocket calculator. When the stakes are so high, the goal should be sound rules that stand the test of time, not rushed rules that ignore the needs of the time.

The second guideline is communication.

Put simply, whenever regulators are considering action on an emerging technology, they should have open and active dialogue with industry. Regulators should be right here, in this room, talking with all of you, all conference long. Practitioners like you deserve such respect—and you deserve to be heard. You are best suited to help regulators understand how new technology works. By the same token, you are best equipped to explain the damage that a bad regulation will do. In finance, industry voices can predict how a mandate may hike costs or hurt investors. Regulators should be eager to collect that information to minimize a rule’s pain and maximize its benefits. By contrast, if they refuse or fail to communicate, regulators are much more likely to do more harm than good.

Once again, the SEC rule is a case in point. Its understanding of AI appears to reflect an academic mentality. That’s all well and good, but practicality is key to good regulation in our dynamic economy, and you must have the best insight into the practical effects of this mandate. The best regulations account for real-world consequences. The moment they don’t, the more damage they are likely to do.

The final guideline that we’re advocating is arguably the most important. It’s imagination, and it simply means that regulators need to believe in technology’s potential. They must imagine that technology can be used for good, not just evil—and indeed, that its capacity for progress defies prediction. The alternative to imagination is fear and a defense of the status quo. If you assume the worst about a new technology, you’ll block it in favor of the status quo. You may think you’re protecting people, but in fact, you’re preventing them from experiencing untold benefits.

Instead of giving into fear, the SEC should look to the lessons of history. Over 30 years ago, the internet was just getting started—and it wasn’t pretty. The early internet was overrun with less than savory activity, including but not limited to criminal activity. It would have been easy for policymakers to kill the use of the internet, based on the belief that it was a tool that benefits wrongdoers. Instead, our nation’s leaders recognized that it could transform our economy in unexpected and frankly incredible ways. They had imagination, and over 30 years later, the internet is still the cornerstone of economic growth. It has made everyday life immeasurably better, and in many respects, the internet revolution is still continuing.

The same lesson holds for emerging technologies like artificial intelligence. Is there cause for concern? Of course there is. But there’s also great cause for optimism. AI has the potential to transform investing and empower a new generation of investors. We don’t know what benefits we’ll see, but we do know that regulation grounded in fear will block them from materializing.

Regulators owe it to investors to let technology flourish, while putting up guardrails to prevent its abuse. The SEC is going the opposite direction, on the assumption that abuse is all we’ll get. But that’s not the case, as everyone in this room can attest. You are working every day to empower investors with AI and other cutting-edge tools—and you deserve regulators who share your belief in a better future.

This is the message we’re delivering to the SEC and all of Washington. It’s a message of partnership, based on our deep desire to develop the best rules for investors. We’re ready to aid regulators in devising a stronger and more sensible framework for emerging technologies. We can aid with deliberation. We can offer good insights through communication. And we absolutely have that optimistic imagination. We know that technology’s potential is truly unlimited—and that investors deserve to discover it

What gives us such confidence? The answer is you. And so I want to end my remarks where I began. Thank you for pushing the boundaries through innovation, for the sake of investors. And thank you for partnering with all of us at the Investment Company Institute. We are your voice in Washington, DC, and other capitals around the world—and we are proud to tell your story and support your efforts to move investing into a new and better era for all.

Thank you again for joining us this week.

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Aligning Goals with Actions: The EU Retail Investment Strategy

admin — Wed, 28 Jun 2023 14:04:02 +0000

Aligning Goals with Actions: The EU Retail Investment Strategy admin June 28, 2023

Michael N. Pedroni

Chief of ICI Global

28 June 2023

As prepared for delivery

Good afternoon. I’m delighted to welcome you to our roundtable in the new ICI Global Brussels office and to see so many policymakers, asset managers, and stakeholders around our seminar table. We’re here to discuss a critical issue—the European Commission’s recently proposed Retail Investment Strategy.

Opportunity to Unlock Retail Investment

Let me say at the outset that we have an opportunity for a substantial jump forward in the development of European capital markets.

With the Retail Investment Strategy (RIS), the European Union has a chance to empower tens, perhaps hundreds, of millions of people to chart a stronger financial future. There is an opportunity to create a framework that will enable and incentivize retail savers to invest in the capital markets to deliver better returns on their hard-earned savings. Creating deeper and more liquid capital markets will strengthen the outlook for European citizens for decades to come.

On behalf of ICI Global, I commend Commissioner Mairead McGuinness as well as Marcel Haag and the DG FISMA staff for embracing this opportunity.

I want to spend a few minutes introducing our discussion today on the proposals under the retail strategy. And while many proposals of the strategy will support retail investors and should be vigorously pursued, there are also parts of the strategy that may lead to unintended and counterproductive consequences—specifically the cost-benchmarking requirement.

The litmus test for analyzing the various proposals is simple: does the measure improve outcomes for retail investors? If it does not, then the measure should not be pursued.

After my observations, we are looking forward to an open discussion with all of you around the table.

Different Approaches to Financial Planning

As is widely recognized, EU citizens in too many Member States rely on low-yielding savings accounts for their financing needs. I spent parts of my childhood in Germany with my grandmother, and I recall watching her live off of the meager investment returns she was getting from putting her entire savings into a deposit account at a local bank.

She should have had much better options, as capital markets can yield significantly better investment outcomes. The idea of the RIS is to create the reasons why today’s generations of savers in Germany, Belgium, Italy, France, and across the Union will choose investment funds to grow their wealth.

We need to ask ourselves: Why hasn’t this happened to a greater extent already?

A huge percentage of US workers gain access to defined contribution plans early in their careers, creating a strong culture of investing. Most European workers, by contrast, tend not to have the same level of access, especially in their 20s and 30s, and don’t embrace investing to the same extent. The retail investment strategy seeks to address this imbalance. But how?

Europe’s retail investors need to be empowered with better tools for making informed choices. Investors have a wide range of objectives, risk tolerances, time horizons, and preferences, including considerations such as sustainability. Yet, they need help discovering the options that are best for them.

That brings us to the RIS proposal.

What Parts of the Framework Will Help Retail Investors

At ICI Global, we’re very supportive of the European Commission’s attempts to modernize disclosure and allow for simplified investment advice.

To that end, there are several parts of the RIS that we find very promising:

First, our members have long recognized the benefits of digital disclosure. As such, we’re pleased that the Commission has proposed making electronic delivery the default method for Key Information Documents.

Second, the simplified advice proposal is promising. It would allow independent investment advisors to provide advice to retail investors on certain “non-complex” products without the need to obtain information on the client’s knowledge, experience, and existing portfolio composition.

Third, we are supportive of the enhanced best interest of the client principle, although we do question the over-emphasis on costs for the advice framework. Financial advisers should, at the core of their services, have the best interest of their clients in mind. With some adjustments, the best interest of the client principle could be a key driver in improving the investor experience.

Fourth, we commend the Commission for refraining from introducing a full ban on inducement. The Commission acknowledged that a full ban “would entail significant and sudden impacts on existing distribution systems, with consequences that are hard to predict.” We agree.

What Parts of the Framework are Counterproductive

Yet, it must also be said that some parts of the RIS need to be improved or indeed removed.

One example is the cost-benchmarking requirement. Let me clear that we support the Value for Money principle. Embedded in ICI’s mission is a commitment to strengthen the foundation of the asset management industry for the ultimate benefit of the long-term individual investor.

When we evaluate the elements to the RIS, unfortunately we find the cost-benchmarking requirement would not achieve its objectives and would be counterproductive. Based on our analysis, this requirement would reduce product diversity and stifle innovation, to the detriment of retail investors. Therefore, we believe it should not be pursued.

Our primary criticism is that the benchmark will function like a price control cap. Such controls have a long history of failing: they reduce competition, drive up prices, and for retail investors they will eventually lead to a one-fund-fits-all approach.

Let me take just a moment to explain why it will function like a price control cap. The requirement calls for the European Supervisory Authorities to construct cost benchmarks against which approximately 30,000 UCITS would need to be evaluated. Any deviation from the relevant benchmark would introduce a presumption that costs and charges are too high—regardless of other factors such as performance and investment objectives—and require a manager to suspend new subscriptions until they have justified any cost deviation.

Although cost is an important element of any assessment of value, factors such as investment performance, diversification, the investment objectives of the retail investor, and the services provided to the investor play an equally important role. Given these nuances, it would be extremely difficult to construct adequately granular and fully representative benchmarks across the full range of potential funds, strategies, and investor preferences.

So how can value for money be accomplished without solely focusing on cost at the expense of broader factors of value?

First, categorizing costs and charges more consistently across several areas, including ongoing advice, marketing, and distribution, will allow for apples-to-apples comparisons across funds being offered.

Second, fund managers need to work with distribution partners to create greater efficiencies, which can be passed on to retail investors in the form of more competitive costs.

And third, it is important to note that, as ICI Research has shown, average ongoing charges of UCITS funds have declined since 2013, with most of the decline stemming from assets shifting to lower-cost funds, lower-cost funds entering the market, and higher-cost funds exiting the market.

Conclusion

I‘ll stop there and take a step back. Empowering retail investors is no easy task, but this proposal is a commendable effort and a welcome advance. We’re ready to collaborate to ensure that the final reforms deliver the strongest benefits to retail investors, and ultimately, strengthen Europe.

Let’s make the most of this opportunity, and more immediately, the most of our in-depth debate around the table here today. I would now like to introduce Victor Van Hoorn, Managing Director of the ICI Global Brussels Office, to guide our discussion.

Thank you.

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ICI President’s Address, 2023 Investment Management Conference

admin — Mon, 20 Mar 2023 14:33:28 +0000

ICI President’s Address, 2023 Investment Management Conference admin March 20, 2023

ICI President's Address

Eric J. Pan

President and CEO

Investment Company Institute

ICI Investment Management Conference

Palm Desert, California

March 20, 2023

“Celebrating the Mutual Fund and the Appropriate Role of Regulation”

Thank you, and good morning.

I’m grateful to Terry Nilsen for kicking us off, and I’m glad to welcome all of you to the ICI Investment Management Conference. For those of you who were here last year, it’s great to see you again. And it’s just as great to see so many new faces. We're glad you're here!

It’s always a pleasure to address members of the most important industry in finance. And it’s a privilege to be joined today and tomorrow by so many leaders from the Securities and Exchange Commission.

At this conference, we’ll hear from Commissioner Mark Uyeda and SEC staff from the Divisions of Investment Management, Enforcement, and Examinations.

And of course, as soon as I’m done speaking, we’ll hear from the Director of the Division of Investment Management, William Birdthistle. I know one of the highlights of this conference is hearing directly from the regulators, and we’re all excited for Director Birdthistle’s remarks.

Our capital markets are the envy of the world, creating countless opportunities for individual long-term investors to achieve their financial goals. That theme will run through everything you hear over the next few days, and, more importantly, it will define everything we do as an industry moving forward. We must keep our markets vibrant, while expanding the good they do and the difference they make for the American people.

Our capital markets connect hundreds of millions of investors with companies of all sizes. What’s more, they direct hundreds of billions of dollars to their highest use, turning small businesses into big ones and making successful companies even better. Our capital markets find and fund the next American success story, day after day, and they make America itself the most successful economy in human history.

Mutual funds are at the heart of this progress. They are the original and greatest democratizing force in the investing space, and to this day, they give people unprecedented access to the capital markets. All told, more than 100 million Americans, most of them middle-class, depend on mutual funds to achieve their savings goals, from education to homeownership. And as we all know, mutual funds are especially important for retirement. For the great majority of Americans, the mutual fund is the cornerstone of their secure financial future.

The importance of the mutual fund is further bolstered by the innovation that has gone into them. Our industry has gone to extraordinary lengths to give investors access to affordable, diversified, and professionally managed portfolios, and through fierce competition we’re constantly looking to expand both accessibility and affordability. Thanks to the hard work of the people in this room and across the country, we’ve made great headway.

Look no further than fund fees and expenses, which have plummeted for decades. In fact, in the 25 years between 1996 and 2021, average expense ratios for equity mutual funds and bond mutual funds have fallen by more than half. It’s a record that few products or services in the US economy can match.

At the same time, our industry has expanded the range of products we offer investors. Consider, for instance, target-date funds, which are particularly popular among younger 401(k) plan participants, because they offer convenience and instant diversification. It is safe to say that investors have an abundance of choice, with the ability to select from a diverse universe of products and strategies that are best suited to meet their financial objectives.

We should recognize this progress, and yes, we should celebrate it. For that matter, we should ask ourselves what we can do to keep moving forward. That includes a discussion of the policies that will do the most good for the most people, as well as critiquing the rules and regulations that risk hurting investors and holding back progress.

This is the focus of the bulk of my remarks, as it’s top of mind for our entire industry. I hope our policymakers fully appreciate the special role that mutual funds play in our capital markets and the lives of American investors. I hope they recognize that mutual funds are essential and irreplaceable in securing a financial future for so many.

I do worry, however. It sometimes appears that policymakers favor a bank-centric prudential regulatory view toward the capital markets, which translates into looking for ways to eliminate as much risk as possible from the financial system. But this approach is inconsistent with the historical regulatory approach that has worked so well for so long. Consider, for example, the US regulatory regime’s traditional reliance on regulatory tools like disclosure, which explicitly recognizes the risks inherent in investing.

Applying a bank prudential regulatory lens to our capital markets will harm far more people than it helps. Different levels of risk and risk pricing are implicit within investment markets, and trying to eliminate risk will stifle the progress that investors deserve and what our capital markets depend on. More to the point, it will limit access to returns generated by mutual funds, holding back the progress we hope to deliver for an even greater share of Americans.

Some of this trend comes from regulators’ belief that American financial markets should adopt what is done in other jurisdictions, like those in Europe. We should be careful. While we should be open to good ideas from any corner of the world, we also should continue to appreciate the strengths and unique characteristics of our markets and the regulatory approach that supports them.

The fact is that countries in Europe and Asia often look to the US for inspiration. They envy our vibrant capital markets and look to move their own economies away from relying so much on bank financing. They dream of giving their citizens the same level of investment opportunities that the average American enjoys today.

That’s why I’m so concerned that regulators are at risk of limiting Americans’ investment options. And, to this end, I have serious concerns with the pace and scale of the SEC’s current agenda. The Commission has issued a slew of rule proposals on a wide range of topics where much more work needs to be done to understand their cumulative effect on the markets and investors. Many of the rules also seem to be fall into the category of solutions in search of articulated problems.

One example is the proposed Fund Names rule amendments rolled out last year. The current version of this rule has worked well for decades, and it reflects the principle that while a name helps an investor choosing from an array of funds, it’s the starting point, not the last word. The proposal, however, tries to make a fund’s name do far too much, and ironically, it may cause investors to place too much reliance on a few words that describe a financial product.

This policy choice is puzzling, given the SEC’s focus on improving disclosure for investors by creating short documents with essential information such as a fund’s investment strategy and performance. That information can easily be accessed in SEC-mandated summary prospectuses and streamlined shareholder reports. So why shoehorn so much into the fund name, as well?

By the SEC’s own admission, complying with this mandate will cost as much as $5 billion. That’s an astronomical sum, especially for a rule a less-than-clear rationale, and it’s a price tag that investors should never have to pay.

The same is true for the SEC’s proposed rule on “Outsourcing by Investment Advisers.” If adopted, it would create burdens on investment advisers without creating any additional protections for investors. That’s a damaging combination.

Other proposals raise similar concerns. Yet the most worrisome of all is the SEC’s latest proposal on mandatory swing pricing, hard close and liquidity risk management. The proposal is breathtaking in scope, and it’s no exaggeration to say that it represents the most significant transformation of the mutual fund industry in generations.

Such a sweeping mandate requires the strongest possible justification and the longest possible drafting and review process. Yet in our view, the proposal is not sufficiently attuned to its impact on the hundred-million-plus investors who depend on mutual funds for their financial security.

The ICI made this clear to the SEC in a formal comment letter we submitted last month. We devoted 180 pages to in-depth legal and economic analysis, and I’ll describe three particular areas of concern.

First, in our opinion, the SEC did not adequately explain and quantify the problem it’s trying to solve. Instead, the proposal just generally invokes the concepts of dilution and resiliency. It’s missing a comprehensive analysis of the landscape and investor experience, which is necessary to justify such a massive shift in regulation and such a massive burden on mutual funds, intermediaries, and investors.

On that note, our second concern is that the SEC is not accounting for the sizeable compliance costs this mandate will impose. Small- and mid-size mutual funds, which typically have the least financial resources, are most at risk. As their costs go up, so will prices for investors. And in some cases, rising compliance costs will sink mutual funds, leaving investors with fewer choices and less competition.

Our third concern is centered on dilution. While the SEC cites dilution as a primary reason for this proposal, ICI has found that, depending on the fund type, dilution ranges from minimal to non-existent. We estimate that daily dilution for U.S. mutual funds is typically just hundredths or tenths of a basis point per day. Over the longer-term, any potential dilution would be greatly offset by the returns investors earn from such mutual funds. The data simply do not support the SEC’s sledgehammer-like approach.

Consequently, targeted reforms are a far better approach than any one-size-fits-all plan. Fixing clearly identified problems is far superior to inadvertently creating bigger problems across the entire mutual fund market.

It’s hard to overstate how harmful those problems will be. If this mandate moves forward, middle-class Americans will be at a severe disadvantage in our country’s financial markets. To start, the rule would make it difficult or impossible for regular investors to trade and receive timely pricing in response to market events. These changes will leave investors with less control over their investments and the benefits they provide.

Middle-class investors on the West Coast would be hit even worse – discriminated against purely due to their time zone. They would be permanently behind investors on the East Coast and the center of the country. In fact, the cut off for daily trading would likely come before most people on the West Coast even get out of bed. That’s 50 million or more Americans at risk of being left behind – every single day.

There is much more I could say about the proposed swing pricing, hard close and liquidity risk management rule. Fortunately, many others are saying the same things. To date, the SEC has received more than three thousand comment letters on this proposal – and most express deep concerns.

It’s one of the most commented-on SEC proposals last year, and much of the feedback is coming from the very retail investors who will suffer under it. Criticism is also coming from organizations representing a diverse range of market participants and perspectives, including the College Savings Foundation, Better Markets, the American Retirement Association, and the SPARK Institute.

The SEC even received a joint letter from Republican Ann Wagner and Democrat Brad Sherman, the Chair and Ranking Member of the House Financial Services Committee Subcommittee on Capital Markets. They expressed concerns about the impact of this proposal on individual investors. It turns out that opposition to this proposal unites Congress across party lines. That’s quite a statement in these divided times.

Across the board, stakeholders are making clear: This is not the direction we should be going, nor is it the direction our industry has taken. For decades, we’ve strived to deliver lower costs, more options, and greater flexibility, with remarkable success. Our progress is evident in the more than 100 million Americans who’ve entrusted mutual fund managers with their hard-earned money, and we’re taking steps to reach a new and even more diverse generation of investors.

The SEC has overseen the growth and development of the US capital markets that helped to support an American middle class. Since its founding, the SEC has kept watch while retirement and financial security became attainable goals for tens of millions of people from all walks of life. Its mission is uniquely American, focusing on the disclosure and truth before all else, and carefully considering the people that rely on the financial products they regulate.

But the SEC’s current approach stands in contrast to its history. Let me be clear: ICI has always been, and always will be, a strong supporter of thoughtful, measured policy. It’s in our DNA. We have an 80-plus-year track record of supporting regulations that improve the market and protect investors. We also have a duty to share our perspective and expertise to move policies in a better direction.

That’s exactly what we’re doing now. We will continue to engage on these critical matters in good faith. We trust that the SEC will as well. Despite our current differences of opinion, we hold the SEC and its staff in the highest regard and know that they bring great talent and professionalism to their very challenging work. We promise to do the same, in a spirit of conversation and collaboration.

This is my hope coming out of conference – that the private and public sector can unite in common cause and continued progress. Let’s work together to help more investors save for education, homes, and retirement. And together, let’s make our country’s capital markets even stronger than they already are – lifting up everyone, from all walks of life.

As an industry, we want nothing more. And I know we all agree that the American people deserve nothing less.

Thank you. And once again, welcome to the Investment Management Conference.

It is now my privilege to introduce our next speaker.

William Birdthistle is the Director of the Securities and Exchange Commission’s Division of Investment Management. In his role as Director, Mr. Birdthistle oversees the Division’s overall operations, core functions, and mission.

Prior to joining the SEC in 2021, Mr. Birdthistle was a professor of law at Chicago-Kent College of Law, where his scholarship focused on investment funds, securities regulation, and corporate governance.

Since becoming IM Director, Mr. Birdthistle has hit the ground running and has become well-known to the industry. I appreciate Mr. Birdthistle being here and taking the opportunity to speak directly to the leading legal and compliance professionals of the fund industry.

[To Birdthistle] Thank you for being here. We look forward to hearing your perspective and insights.

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IDC Governing Council Chair’s Remarks, 2022 IDC Fund Directors Conference

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IDC Governing Council Chair’s Remarks, 2022 IDC Fund Directors Conference admin November 22, 2022

IDC Governing Council Chair’s Remarks

Cynthia Plouché

Chair, Governing Council

Independent Directors Council

2022 IDC Fund Directors Conference

Chicago, Illinois

Tuesday, October 25, 2022

Thank you, Tom, for your kind words. IDC is fortunate to have you. I’m excited to partner with you and your team in furthering our mission for the next two years.

To everyone here: It’s my privilege to serve as the Chair of IDC’s Governing Council. It is a distinct joy to represent you.

For me, it’s easy to, support and proudly take on the role of leadership for an organization that aligns with who I am. It’s also easy to be a champion for others when you have had people who were champions for you.

I think it is important to acknowledge the stakeholders here whose support is essential as well. Many experts in the audience – whether from accounting firms, law firms, specialized service providers, and management companies – are critical to the success of our funds and the advancement of shareholders’ interest. Thank you all for being here, and for your ongoing partnership in our work.

We all serve in a vital role as stewards of financial security. We’ve committed ourselves to advancing the interests of mutual fund, ETF, and other registered fund investors. Investors, who might look like us or might not. All told, we serve a hundred million shareholders from the broadest possible range of the US.

Thinking of that number, not just the trillions of dollars they represent, helps me as a director keep the shareholder, that everyday investor, front and center in this work. It’s a way of staying connected to the mission where we as independent directors, oversee the work that helps others achieve financial security.

Along with you, my colleagues, that group, the everyday investor, is on my mind today.

I want to focus on the role of education and mentoring and how that translates into the commitment I bring to the four IDC pillars that Tom mentioned. I will also talk about the importance of our input into policy creation.

As you heard from Tom, and as you will experience over the course of the next two days, we already deliver best-in-class director education. Over the year ahead, we’ll continue to have a wide range of offerings and opportunity for peer-to-peer thought leadership sessions that will help our offerings reflect the needs of our community.

Education has always been a key part of my life. Fun fact, both my grandmother and my mother, went back to finish their college degrees when I was in junior high and high school. So that means the three generations graduated from college within 11 years of each other.

Education is at my core and has been throughout my life.

IDC will continue to support your continuing education in meetings like this. That looks like the speaker series that Tom mentioned, where IDC uses its resources to inform us of market dynamics. At IDC, we know how important it is to understand the markets and the broader economy in the context in which our funds operate. And today, we’ll benefit from a presentation by Jim McDonald, Northern Trust’s Chief Investment Strategist.

As directors we seek to educate ourselves through IDC offerings and other resources. I also hope to take us to a place where we can remind ourselves about the educational needs of our shareholders and the broader public.

I want to visit IDC’s role in helping to shape the best possible public policy. It’s an area where our concerted action is key, and where IDC is doubling down.

In this dynamic, rapidly changing, twenty-first century environment, our collective, thoughtful voice is necessary in public policy. That voice will be amplified as we align with the ultimate purpose, advancing shareholder interests.

As we can all attest, thoughtful regulation is the cornerstone of strong governance and investor protection. IDC supports regulation that enhances good governance. It’s the kind of regulation that acknowledges the oversight role of fund boards, supports effective disclosure, aligns interests, and creates appropriate checks and balances to manage potential conflicts of interest. Our oversight role as fiduciaries can be aided by thoughtful regulation. The compliance framework established by Rule 38a-1 is an example of regulation done right.

That said, not all regulation feels as thoughtful or beneficial. Some mandates may have unintended consequences. That includes diverting attention away from issues most pressing and relevant to a fund and enacting more rigid rules that may miss the forest for the trees.

IDC remains committed to working with policymakers to improve regulation. We weigh in on a wide variety of issues, using the voice of the fund director community. Valuation, derivatives, cybersecurity risk management, the role of information providers – all are areas where director input recently has been important.

Ongoing dialogue with policymakers is critical to supporting a greater mutual understanding that ultimately benefits shareholders. To this end, we are looking forward to our time with Director William Birdthistle today.

At a more macro level, ICI launched an initiative to seek to modernize the ‘40 Act. Independent directors are participants in this effort through ICI and IDC. Modernization efforts, appropriately crafted, can help to ensure stringent protection for shareholders, while also encouraging innovation and fostering capital formation.

The third focus, in addition to education and policy input, is around sustaining the pipeline of trustees.

We have an opportunity– to invest our time and talent in each other and in the next generation of independent directors. This goes hand in hand with serving shareholders.

One place to start is with mentorship. I’m confident that everyone here had someone who filled that role in your life, someone who was key in getting your first board role. I certainly did and you might have had a similar experience that impacted your career or board path. We can all mentor one another and the next generation of fund trustees.

IDC will continue taking an active role in building a pipeline of strong independent directors.

The pipeline can reflect diversity in many ways – including perspective, experience, professional background, race/ethnicity, gender, and more. It’s diversity, broadly defined, that can enhance board effectiveness in representing the shareholders we serve.

I’m proud to say that IDC has been very active in this arena. This summer, we launched our director database in partnership with Diligent, and you’ll see a table near the registration desk for those who may wish to learn about how to navigate the database to post a board position or add a candidate profile.

I especially want to highlight a new pilot offering that we just launched last week, called IDC Connections.

IDC Connections will link together board-ready diverse candidates with seasoned independent directors who can spend a brief period of time, sharing experiences and offering guidance.

If you’re a veteran director, please consider participating in IDC Connections. It’s a chance to share your wisdom and guide the next wave of board candidates. If you’d like to play a part, please email IDC with the subject line: “connections.”

Thank you in advance for stepping up. There is much we can do, and I’m excited that we can get it done, together.

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