WASHINGTON - The SEC should increase its scrutiny and possibly its regulation of investment accounts that may behave like mutual funds but are not required to abide by the same legal requirements as funds, according to the Investment Company Institute.

Technology and the Internet may make it possible for sponsors to create "virtual mutual funds" online, products that have many of the same features as funds but now are exempt from the key federal law that governs funds, according to Craig Tyle, general counsel of the ICI. Such virtual funds could be mass marketed, a fact that poses a potential peril for investors, according to Tyle.

The ICI last week asked the SEC to examine so-called discretionary investment advisory programs, such as wrap programs, and the federal rule that permits those accounts to remain unregistered. After completing its review, the SEC may want to consider regulating the accounts, Tyle said.

The ICI believes that a review of such accounts "would help the SEC determine whether some or all aspects of mutual fund regulation would be appropriate in the case of discretionary investment advisory programs that are widely marketed to retail investors," according to Tyle.

Tyle discussed the issue of discretionary accounts in a 21-page statement he submitted to the SEC. The statement was distributed at a conference the agency sponsored here last week on investment adviser regulatory issues. Tyle discussed the notion of an SEC review of advisory accounts during the conference and elaborated in a subsequent interview.

Advisory accounts date back to the 1970s and come in a variety of forms. Usually, a broker or financial planner charges an asset-based fee and offers clients the ability to invest in accounts run by a professional money manager based on investment objectives set by the investor.

Rule 3a-4 of the Investment Company Act permits firms to offer advisory accounts without registering the accounts as mutual funds. The rule, which the SEC adopted in 1997, permits companies to offer the accounts so long as investors receive some level of individualized treatment in terms of how their funds are invested in the accounts.

Technology and the Internet may enable advisory accounts to look and operate like mutual funds, Tyle said. The SEC should examine whether those accounts that claim protection from registration under the advisory account exception truly are complying with the spirit of its requirements, Tyle said.

"In our view, a mechanistic or ritualistic approach to compliance with the conditions set forth in Rule 3a-4 raises the possibility that numerous small individual accounts may be managed in a manner that is nearly indistinguishable from a mutual fund, but with none of the critical investor protections set forth in the Investment Company Act," Tyle said in the statement.

SEC officials were not immediately available for comment on the details of Tyle's suggestions. Paul Roye, director of the SEC's division of investment management, raised the issue of whether some investment advisory accounts were tantamount to mutual funds in a speech to fund executives in Palm Desert, Calif. in March.

"The customized separate account portfolios being marketed on a retail basis raise issues under the Investment Company Act," Roye said. "Are these advisory programs providing individualized investment advice and do they fall within the safe harbor rule under the 40 Act or are these programs the equivalent of unregistered investment companies?"

The ICI's concerns come at a time when funds are beginning to face competition from other investment products and services that offer relative ease and investment diversification at prices competitive to those of funds. Assets in managed accounts, for example, have grown from $163 billion in 1996 to approximately $425 billion as of Dec. 31, according to the Money Management Institute of Washington, D.C., a trade group.

The industry would welcome discussions with the SEC regarding possible regulation, said Christopher Davis, the group's executive director. But he questioned whether there is a need for such oversight in an industry that has no history of regulatory problems.

"Where's the beef?" Davis said. "Where's the problem?"

Advisory accounts have not been the subject of scandal, Tyle said. In fact, large firms which are concerned about the quality of their products and regulatory compliance now dominate the advisory account industry, Tyle said.

The greater concern is that as technology and the Internet lower the barriers to entry into advisory accounts, newer players may not have the same standards as today's participants, Tyle said. The SEC could find itself limited in its ability to regulate newcomers' accounts because of the advisory account exception, Tyle said.

Advisory accounts represented only one of the ICI's concerns expressed at the SEC conference. The SEC should review online investment advisory services, Tyle said. Many online investment oriented-services now are provided by firms that are not registered with the SEC, he said. In addition, investors using the Internet can not always determine the firm with which they are dealing and so they may be unaware of, for example, conflicts of interest a firm might have in providing advice, Tyle said.

A state regulator at the SEC conference said he was concerned about fraud online. Investors need tools to assess whether the online investment advice and services they are receiving are genuine, said Melanie Lubin, the Maryland Securities Commissioner.

"Out in the trenches ... we see all the cases where people get duped online," Lubin said.

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