Functional Regulation

GAO examined the implications and considerations associated with subjecting similar financial products and services to similar regulatory treatment, specifically mutual funds and bank-sponsored collective investment funds. This would allegedly result in eliminating the competitive advantage in the marketplace that one type of fund may have over the other. GAO developed two scenarios that could lead to more equal competition among pooled funds offered by investment companies and commercial banks offer.

GAO found that: (1) the two types of funds share certain product characteristics but have basic regulatory differences; and (2) several important decisions would be necessary to regulate the two types of funds. In the first scenario, issues to be addressed would include: (1) whether to give banks expanded securities powers; (2) altering key conflict-of-interest principles; and (3) determining what role states should play in the regulatory scheme. In the second scenario, the Investment Company Act would have to be amended to create a new class of investment company that would give securities firms a product that could compete with commingled investment funds for the market segment consisting of employee benefit plans that seek only investment services.