Statement of the Investment Company Institute on “The President’s Proposed Fee on Financial Institutions Regarding TARP” before the Committee on Finance, United States Senate
May 4, 2010
The Investment Company Institute appreciates the opportunity to submit its views regarding the Administration’s proposed “financial crisis responsibility fee.”
ICI is the national association of U.S. registered investment companies. ICI members manage total assets of nearly $12 trillion and serve almost 90 million shareholders. Our members include mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs).
While we understand the policy rationale for the proposed fee, we urge that it be structured and applied so as to avoid penalizing registered investment companies and their investors, as discussed below.
The Administration’s proposal is not directed at mutual funds and other registered investment companies
The Administration has indicated, both in its January 14, 2010 fact sheet summarizing the proposal and in public statements, that the fee is intended to be levied on the liabilities of the largest, most highly leveraged financial institutions—namely, those with over $50 billion in consolidated assets. The January 14, 2010 fact sheet identifies banks and thrifts, insurance and other companies owning insured depository institutions, and broker-dealers as firms that may be covered by the proposed fee.
These details suggest that the Administration does not intend for this fee to be assessed on mutual funds and other registered investment companies. In our view, this is the correct result, because registered investment companies are not highly leveraged. They are subject to very strict leverage limits under the Investment Company Act of 1940 and must maintain specified asset coverage ratios even as the market fluctuates. Mutual funds, for example, can borrow no more than one-third of their assets. Thus, for every dollar a mutual fund borrows, it must have $2 in equity (resulting in a maximum leverage ratio of 1.5).
The Administration proposes to levy the fee on the “covered liabilities” of financial firms with over $50 billion in consolidated assets. “Covered liabilities,” which is defined as assets less Tier 1 capital and insured deposits, is a banking concept with little application to mutual funds and other registered investment companies. Tier 1 capital is, among other things, equity paid in by investors. Mutual funds are composed virtually entirely of paid in capital, which further supports the conclusion that this fee is not intended to apply to them.
The “financial crisis responsibility fee” should not penalize registered investment companies and their investors
The stated purpose of the Administration’s proposed fee is to reimburse taxpayers for the expected shortfall from the Troubled Asset Relief Program (TARP). Mutual funds and other registered investment companies did not receive government assistance under TARP.*
Imposing this fee on mutual funds would defeat the purpose of the proposal, by singling out one class of taxpayers. An estimated 87 million individual investors owned mutual funds in 2009 and held over 80 percent of the $11.1 trillion in total mutual fund assets at year-end. These individual investors, many of whom are saving for retirement, would be the ones ultimately to bear costs associated with recouping the TARP shortfall.
Applying the “financial crisis responsibility fee” to mutual funds would have a direct and negative impact on fund investors
If the proposed fee—which the Administration has estimated at 15 basis points—were assessed on a mutual fund having total net assets over $50 billion, the entire fee would automatically pass through to shareholders as a fund expense. The expected impact on mutual fund shareholders would be as follows:
- For all mutual funds with assets of $50 billion or more, the average expense ratio (asset-weighted) is 42 basis points. A 15 basis point fee would result in a 36 percent increase in costs to shareholders.
- Expenses for money market funds with assets of $50 billion or more would rise by nearly 60 percent from an asset-weighted average of 26 basis points to 41 basis points.
- Expenses for equity mutual funds with assets of $50 billion or more would rise by about 25 percent from an asset-weighted average of 57 basis points to 72 basis points.
- Expenses for bond mutual funds with assets of $50 billion or more would rise by 30 percent from an asset-weighted average of 50 basis points to 65 basis points.
The proposed fee also would eat away at benefits from economies of scale that mutual fund shareholders reap as funds grow in size. Fund sponsors may have incentives to close funds so that they do not exceed the $50 billion threshold and cause fund shareholders to incur higher fund expenses.
We respectfully urge the Committee to ensure that the proposed financial crisis responsibility fee would not be applied to mutual funds and other registered investment companies. Any other result would defeat the stated purpose of the proposal, by having a class of ordinary Americans—mutual fund investors—bear costs associated with the TARP shortfall. For similar reasons, registered investment company assets should not be included when calculating the consolidated assets of an integrated financial institution that includes one or more registered investment advisers.