Mutual Fund Firms Thrown Back Into Uncertainty With Passing of Byrd, Reversal of Brown

(June 29, 2010) — Turbulent events in the Senate during the past 48 hours — notably, the death of Senator Robert Byrd (D-WV) and the shift from ‘yay’ to ‘nay’ of Senator Scott Brown (R-MA), one of only four Republicans to support an earlier version of new financial regulations — have once again thrown what was thought to be a mostly untouched mutual fund industry into uncertainty.

“The certainty for the mutual fund industry regarding regulation was premature in light of recent events,” said Bob Reynolds, CEO of Putnam Investments, at a breakfast in New York City Tuesday morning. “We had thought that the mutual fund industry would virtually be left untouched, but the death of Senator Byrd — especially as a native West Virginian — is a huge loss. It also makes financial reform harder to pass.” The mutual fund industry, Reynolds noted, had been expected to be exempt from certain parts of the so-called Volcker Rule, which would see proprietary trading largely eliminated at the nations’ financial firms.

In addition to Senator Byrd’s passing, Senator Brown has reversed course on supporting the bill that has emerged from the legislative process. In recent weeks, Democratic leaders have altered the legislation in an effort to secure Brown’s support, including an exemption to permit insurance and mutual fund companies to continue trading for their own accounts. Additionally, Brown has won a concession to permit banks to invest 3% of their capital in hedge funds and private equity funds. However, over the weekend, Brown removed his support, citing his opposition to the $19 billion fee (raised via a bank tax) that was inserted into the bill at the last minute to pay for the estimated cost of the legislation. “I’ve said repeatedly that I cannot support any bill that raises taxes,” he said, according to The Boston Globe. His reversal throws into doubt whether such provisions will remain in place.

While acknowledging the uncertainty of the current environment, Reynolds noted that he did not think more regulation of the industry was necessarily the best course of action following the financial crisis of 2008.

For a complete interview with Putnam Investments CEO Bob Reynolds in the latest ai5000, click here.