The fact that the mutual fund industry's primary trade organization, the Investment Company Institute (ICI), relies on the dues of mutual fund companies which in turn pass on the cost to shareholders, means the group represents two constituencies whose interests are sometimes diametrically opposed, some critics say.
For example, by not advocating lower fund fees but instead arguing that competition among fund advisers provides shareholders with low-cost fund choices, the ICI is representing the views of fund advisors rather than shareholders, these critics say.
The ICI has an "inherent conflict of interest" between the interests of fund management companies and fund shareholders, said Joel Feffer, a New York lawyer whose clients have challenged the fairness of fund fees in a series of lawsuits, most recently in a case filed against Fidelity Management & Research and several of its subsidiaries.
"I don't know how they could represent both," says Feffer.
Shareholders pay ICI membership fees through the funds in which they invest. For the year ending Sept. 30, 1997, the last for which Internal Revenue Service records are available, the ICI received approximately $30 million in dues and assessments from members out of total revenue of roughly $38 million. The ICI did not provide a breakdown of what portion of the $30 million came from funds versus other ICI members. ICI members include fund advisers, fund underwriters, broker/dealers and others in addition to the funds themselves. An ICI spokesperson also declined to disclose the ICI's fee schedule.
Whatever the specific amount shareholders pay to finance the ICI, critics say the association has an obligation to represent both advisers and shareholders. But, the critics say the trade organization has taken positions which better represent fund managers than shareholders on issues concerning fund director independence, shareholder rights as well as fees.
"The shareholders pay so that the ICI can stifle" shareholders, said Phillip Goldstein, a hedge fund manager and closed-end fund investor who has disagreed with the ICI's position on proposed SEC rules on proxy votes, a major issue for closed-end fund investors. "They fight the shareholders."
The ICI dismissed the charge. Competition has provided sufficient choice so that more than three-quarters of equity fund shareholders have accounts with funds which charge fees below the industry average, said Chris Wloszczyna, an ICI spokesman. And ICI legal and lobbying efforts on directors' issues were intended to save investors' expense, among other things, he said.
"Our actions have been pro-shareholder actions," Wloszczyna said.
Observers and ICI supporters said the organization's occasional dilemma is not unlike that facing other trade groups and labor unions that back political candidates and take positions on legislation and public controversies. When members' interests diverge, the organization must find the fairest way to resolve conflicts in a manner which best represents the group.
"The ICI does a good job doing the greatest good for the greatest number," said Pamela Wilson, a mutual fund attorney at Hale & Dorr in Boston. "No trade organization represents all of the views of all the members all the time." It is not possible to have perfectly consistent points of view or interests in any trade group, she said. Despite differences, there is sufficient common ground among members' interests that all can benefit from the ICI's efforts. As an example of how the association's positions can benefit divergent constituencies, Wilson pointed to the ICI's support of funds and fund management firms on legal and accounting issues. That support in turn helps reduce expenses for shareholders, Wilson said.