1 John H. Langbein & Richard A. Posner, Market Funds and Trust-Investment Law, 1976 A.B.F. Res. J. 1 [hereinafter cited as Market Funds I]. For a simplified treatment see John H. Langbein & Richard A. Posner, The Revolution in Trust Investment Law, 62 A.B.A.J. 887 (1976).Google Scholar

2 See, e.g., Paul R. Merrion, Study Claims Market Funds Are Prudent, Pensions & Investments, Jan. 19, 1976, at 3; Index Fund Study Provides Needed Perspective, Pensions & Investments, Feb. 2, 1976, at 8; Nancy Belliveau, Will Pension Officers Stop Trying to Beat the Market? Institutional Investor, Feb. 1976, at 18; Robert Metz, Debate over “Market Index” Funds, N.Y. Times, Jan. 21, 1976, at 52, col. 3; “Vanity, All Is Vanity,” Forbes, Dec. 15, 1975, at 66.Google Scholar

3 One snowy morning last January, a law professor named Richard Posner gave a talk at a conference on pension-fund investing at New York's Plaza Hotel. Posner was far and away the least popular speaker at the conference. As the drift of his message began to get across to the audience, an angry buzz filled the Terrace Room; before he had finished speaking, many in the audience were no longer listening, but denouncing him to others at their tables. Subsequent speakers warmed themselves to the group by starting off with slighting references to Posner's remarks.Google Scholar

The reason for this ill will was all too clear. The audience consisted mainly of professional money managers, most of whom pride themselves on their ability to offer superior investment performance. Posner's message was that they are wasting their time. It is impossible to beat the market averages, he insisted, and efforts to do so are expensive and self-defeating. The managers would do better; Posner argued, by investing their customers' assets in “index funds”–portfolios that duplicate broad stock-market averages like the Standard & Poor's 500.Google Scholar

A. F. Ehrbar, Index Funds–An Idea Whose Time is Coming, Fortune, June 1976, at 145.Google Scholar

4 The importance of this qualification is stressed in text at notes 35-36 infra. Google Scholar

5 See text at notes 39-40 infra. Google Scholar

6 If all investors stopped trying to beat the market, there would be net gains from research and trading. This possibility is considered in Part IIA infra. Beyond the reasons presented in our previous article why it is so difficult to beat the market, we note a special disadvantage of the large institutional investor: its efforts to exploit undiscounted information by buying or selling a security are apt to be thwarted by the price effect of its transaction due to the large volume in which it buys or sells. The large order signals the possible possession of information and so may cause the price to the institution placing the order to rise (if a buy order) or fall (if a sell order). Further, the sheer size of many institutional portfolios makes it difficult for the institution to act on undiscounted information. Supposing that an institution decides that one of its large holdings is overvalued, sales will have to be spread over a long period to avoid a dumping effect that would depress the market. Likewise, the institution that thinks it has spotted a bargain (i.e., an undervalued stock) would need to spread out its purchases lest it bid up the price and eliminate the bargain, but as the acquisition period lengthens so does the probability that other investors will identify the bargain.Google Scholar

7 We add this qualification to abstract from the (one hopes temporary) problem of rapid changes in the rate of inflation. A fixed-income security involves a risk–that the anticipated rate of inflation will change before the security matures–which common stocks do not involve, at least to the same extent. This risk could cause investors to demand a premium for purchasing fixed-income securities that could conceivably exceed the risk premium of common stocks, leading bonds to command a higher return than common stocks.Google Scholar

8 The New York Stock Exchange (NYSE) list (weighted by the capital values of the listed companies) has a beta of 1; a portfolio having a beta of 2 would rise by 20 percent if the NYSE list rose by 10 percent, and decline by 20 percent if the NYSE list fell by 20 percent, assuming that factors affecting the diversifiable risk of the portfolio in question were unchanged.Google Scholar

9 Capital-market research has not specified a precise number of stocks as being optimal from the standpoint of diversification. Adding stocks reduces diversifiable risk, but at a diminishing rate; at the same time, it increases the administrative costs of the portfolio. Sponsors of market funds have followed different strategies. Wells Fargo has more than 480 stocks in its portfolio; essentially, it is matching the&P500. Others are using statistical sampling techniques to duplicate the performance of the S&P500 with a smaller number of stocks, thereby reducing both transaction costs and, correlatively, the minimum efficient size of the fund. It seems too early to determine which approach is superior. See generally James H. Lode, Diversification Old and New, J. Portfolio Mgmt., Winter 1975, at 25, 28.Google Scholar

10 ERISA sec. 404(a)(1)(B).Google Scholar

11 According to Rex Sinquefield, vice-president, American National Bank, the bank has had private trust accounts employing market-matching strategy approved by the local Illinois courts where the bank does business.Google Scholar

12 Reported as In re Bank of New York, 35 N.Y.2d 512, 323 N.E.2d 700, 364 N.Y.S.2d 164 (1974), discussed in Market Funds I, supra note 1, at 24-25.Google Scholar

13 A good sign of the spread of the portfolio-as-an-entity approach to evaluating prudence is the recognition given it by the officer administering the prudent investor standard of ERISA. In a statement issued at the August 1976 convention of the American Bar Association, James D. Hutchinson, administrator of pension and welfare programs, U.S. Department of Labor, said:Google Scholar

Advocates of modern portfolio theory reject the view that focuses solely on the risky assets held by a plan and instead realizes that each investment should be evaluated in the context of the entire portfolio. Diversification is the key to this expanded concept of risk. To the extent that a portfolio is structured in a way that variation in the value or return of one security is offset by a variation in another, the riskiness of each individual investment is decreased.Google Scholar

The prudent investment manager, however, must arrive at what would be a suitable degree of risk for the particular plan before a portfolio can be constructed to meet its needs.Google Scholar

Erisa Boss Makes Major Statement on Prudency, Fiduciary Responsibilities, Pensions & Investments, Sept. 13, 1976, at 37, 38.Google Scholar

14 A possible exception is an unpublished talk given by James Hamilton of Wertheim & Co. at an Institutional Investor Conference on April 12, 1976. Hamilton informed the audience that Wertheim & Co. considered constructing and marketing an index fund in July 1972 but, after getting to the brink, abandoned the idea. The reasons for abandonment do not appear in a carefully formulated way, but review of the transcript of the extemporaneous talk leads to the following summary:Google Scholar

15 After distinguishing what the law is from what is should be, Hamilton expressed concern that “if our sense of what the fiduciary requirements are as opposed perhaps to what they would be is correct, then we felt that it was an unnecessarily risky path in these circumstances to pursue.” Thus, a business judgment about the risks inherent in trust-investment law prevented Wertheim from developing a market fund and might prevent fiduciaries from investing in them.Google Scholar

16 Hamilton said that in a legal contest between a deserving plaintiff and a perhaps affluent investment manager over a loss in a period of market decline, with the judge having to decide where to assign the loss, “you may visualize to yourself explaining capital market theory to the judge.”Google Scholar

17 Hamilton cited the Spitzer case and said that “the court specifically negated the idea that any particular rate of return held you harmless against making an imprudent individual investment.” The result would be to compel investment managers to look at individual securities.Google Scholar

18 Investing in market funds represented a clear departure from the prevailing custom in the business, increasing the risk of surcharge. It was concluded that until that custom changes, “let somebody else break the ground, frankly.”Google Scholar

Point 1 is a judgment not everyone has made in that way; the major corporations that have been investing pension money in trust funds have certainly been counseled that trust-investment law permits them so to act. Point 3 has been refuted in Market Funds I, supra note 1, at 24-25; cf. text at note 10 supra. Point 2 seems somewhat patronizing of the judiciary, which has compiled a generally admirable record of adapting (slowly, to be sure) trust-investment law to changes in investment practice, e.g., the legitimation of trust investment in mutual funds, discussed in Market Funds I, at 20-22. Point 4 suggests that by declining to change its practices, the industry can, through prevailing custom, dictate to the courts what the future standard of prudent investment shall be; we discuss in text at notes 46-90 infra why it would be hazardous for trustees to believe they can ignore the new learning with impunity. Hamilton also argued that there is nothing fundamentally new in market funds except the “statistical wrapping”; they constitute essentially a throwback to conceptions of portfolio construction current in the period before the “go-go” market of the mid-to-late 1960s. This point is incorrect as demonstrated in our first article.Google Scholar

19 A recent estimate computes that about $1 billion in pension assets is now in market funds. Index Fund Approach Claims a New Convert, Pensions & Investments, Sept. 13, 1976, at 15. The market value of total stock outstanding as of 1975 was $816.3 billion. Securities and Exchange Commission, Office of Economic Research, Statistical Reference Tables for the Month Ending July 1976, at 61 (1976).Google Scholar

20 Id. Google Scholar

21 Harvey E. Bines, Modern Portfolio Theory and Investment Management Law: Refinement of Legal Doctrine, 76 Colum. L. Rev. 721, 777-79 (1976).Google Scholar

22 Id. at 777 (emphasis added).Google Scholar

23 Id. at 778 (emphasis added).Google Scholar

24 Id. at 777-78 n.173.Google Scholar

25 John A. Humbach & Stephen P. Dresch, Prudence, Information and Trust Investment Law, 62 A.B.A.J. 1309 (1976). See John H. Langbein & Richard A. Posner, Market Funds and Efficient Markets: A Reply, 62 A.B.A.J. 1616 (1976), for a reply to their article.Google Scholar

26 Humbach & Dresch, supra note 21, at 1311-12.Google Scholar

27 Id. at 1310-11.Google Scholar

28 Id. at 1311.Google Scholar

29 Id. (emphasis added).Google Scholar

30 Id. at 1311-12.Google Scholar

31 Id. at 1312.Google Scholar

32 Concern with these problems received its classic early expression in Adolph A. Berle, Jr., & Gardiner C. Means, The Modern Corporation and Private Property (1932, rev. ed. 1968). For recent discussion see, e.g., Oliver E. Williamson, The Economics of Discretionary Behavior: Managerial Objections in a Theory of the Firm (1964); Armen A. Alchian, The Basis of Some Recent Advances in the Theory of Management of the Firm, 14 J. Indus. Econ. 30 (1965).Google Scholar

33 The passive strategy, taken to its logical extreme, would appear to require abstention from participation in proxy fights, shareholder derivative suits, and all other devices for challenging management since a decision to participate would entail some research and/or transacting by the trustee-shareholder.Google Scholar

34 See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).Google Scholar

35 A few corporations (e.g., AT&T, IBM) may be so large that no investor or syndicate of investors, private or corporate, could be expected to make a successful tender offer, at least without raising serious antitrust problems (e.g., if IBM tried to take over AT&T).Google Scholar

36 The result should be the same if the offeror offers securities rather than cash, as long as the securities are either heavily traded or readily convertible into heavily traded securities, so that their value is easily determined and realizable. Tax considerations would limit the operation of the presumption in some cases; e.g., a taxable trust holding low-basis stock may have good reasons for not wanting to recognize a capital gain at the time of the tender offer.Google Scholar

37 A “raider” is someone who plans to misappropriate the corporation's assets for personal gain. Such behavior will force down the price of the corporation's stock, at least in the long run. We assume that there is sufficient enforcement of corporate managers' fiduciary obligations to shareholders to make raiding a fairly uncommon motive for take-overs, at least of the substantial firms likely to be held in a market fund's portfolio.Google Scholar

38 Roger F. Murray, Investment Risk in Pension Funds: The Pension Benefit Guaranty Corporation View, in Evolving Concepts of Prudence: The Changing Responsibilities of the Investment Fiduciary in the Age of ERISA 37, 39 (Financial Analysts Research Foundation, 1976).Google Scholar

39 Id. at 39.Google Scholar

40 The following table compares the performance, in the last two bull markets, of the S&P500 with the four categories of mutual funds having betas equal to or higher than that of the S&P500. The table shows that, even in rising markets, the S&P500 outperformed the fund categories (arranged from left to right in order of declining beta) in seven out of eight possible comparisons:Google Scholar

41 Murray, supra note 34, at 39-40.CrossRefGoogle Scholar

42 Id. at 40.Google Scholar

43 Id. Professor Murray is a director of Chemical Fund.Google Scholar

44 Chemical Fund's second-quarter 1976 report to its shareholders discloses that Chemical Fund underperformed the S&P500 for the first half of 1976.Google Scholar

45 Murray, supra note 34, at 40.CrossRefGoogle Scholar

46 See William F. Sharpe, Likely Gains from Market Timing, Financial Analysts J., Mar./Apr. 1975, at 60.CrossRefGoogle Scholar

47 Murray, supra note 34, at 40.CrossRefGoogle Scholar

48 For some evidence that European stock markets are efficient, see Gerald A. Pogue & Bruno H. Solnik, The Market Model Applied to European Stocks: Empirical Results (M.I.T., Sloan School Working Paper No. 657-73, May 1973). Batterymarch Financial Management Corporation has begun to offer a foreign market fund.Google Scholar

49 It is noteworthy that the S&P500 has recently been revised to include some major financial and non-NYSE (including over-the-counter) stocks, such as American Express and Anheuser-Busch, in place of the stocks of several industrial corporations, railroads, and utilities dropped from the index.Google Scholar

50 See Lorie, supra note 9, at 25, 28.Google Scholar

51 Plainly, the number of securities held in the portfolio is not a guarantee of adequate diversification. A portfolio composed of 100 oil stocks would be less diversified than a portfolio of 25 stocks selected with some regard to balance among the industries represented.Google Scholar

52 See text at note 8 supra. Google Scholar

53 Restatement of Trusts (Second) sec. 228 (1957).Google Scholar

54 152 Mass. 184, 25 N.E. 99 (1890).Google Scholar

55 Id. at 188.Google Scholar

56 Id. Google Scholar

57 Id. at 189.Google Scholar

58 Id. at 185.Google Scholar

59 Restatement of Trusts (Second) sec. 228 (1957). Neither the language of the section nor any of the accompanying text was changed between the first (1935) and second (1957) Restatements. Google Scholar

60 See the evidence extracted in Lichtenfels v. North Carolina Nat'l Bank, 268 N.C. 467, 151 S.E.2d 78, 79 (1966).Google Scholar

61 In re Mueller's Trust, 28 Wis. 2d 26, 135 N.W.2d 854 (1965); Steiner v. Hawaiian Trust Co., 47 Haw. 548, 393 P.2d 96 (1964); Lichtenfels v. North Carolina Nat'l Bank, 268 N.C. 467, 151 S.E.2d 78 (1966); Security Trust Co. v. Appleton, 303 Ky. 328, 197 S.W.2d 70 (1946).Google Scholar

62 E.g., Lichtenfels v. North Carolina Nat'l Bank, 268 N.C. 467, 151 S.E.2d 78 (1966), and Security Trust Co. v. Appleton, 303 Ky. 328, 197 S.W.2d 70 (1946).Google Scholar

63 145 Misc. 345, 260 N.Y.S. 173 (Sup. Ct. 1932).Google Scholar

64 Id. at 352, 260 N.Y.S. at 181.Google Scholar

65 E.g., Note, Investments by Fiduciaries in Pennsylvania, 84 U. Pa. L. Rev. 640, 643 (1936). The Restatement of Trusts (First), which contained the duty to diversify that was carried forward in the Restatement of Trusts (Second) and is quoted above, was promulgated in 1935. See generally Note, Trust Fund Investment in New York: The Prudent Man Rule and Diversification of Investments, 47 N.Y.U.L. Rev. 527 (1972).Google Scholar

66 Saeger Estates, 340 Pa. 73, 77, 16 A.2d 19 (1940).Google Scholar

67 Note, 25 Minn. L. Rev. 806, 807 (1941).Google Scholar

68 In re Mueller's Trust, 28 Wis. 2d 26, 135 N.W.2d 854 (1965); Steiner v. Hawaiian Trust Co., 47 Haw. 548, 393 P.2d 96 (1964); Mandel v. Cemetery Bd., 185 Cal. App. 2d 583, 8 Cal. Rptr. 342 (1960). See generally the authorities collected in Annot., 24 A.L.R.3d 730 (1969).Google Scholar

69 ERISA sec. 404(a)(1)(C).Google Scholar

70 Bines, supra note 17, at 732-34, 758, 794-97, is in general accord with our position. He writes: “Unless an investment manager has a strategy for controlling unsystematic risk to provide consistently better returns over those provided by the capital asset pricing model [i.e., those predicted by the theory of efficient markets]., an investment manager who fails to diversify introduces unsystematic risk into a portfolio for which his client receives no premium and from which a client can expect no return.”Id. at 758. The author also believes that “the law is bound to recognize the distinction between systematic and unsystematic risk as a bench-mark for diversification.”Id. at 796. “As more and more vehicles diversified over the market become open to investors lacking the means to diversify their own portfolios fully, investment managers should be expected to use such services to the extent that they do not conflict with defensible positive investment strategies.”Id. However, he also says: “Plainly, the duty to diversify does not mean that an investment manager must achieve the total elimination of unsystematic risk in a portfolio.”Id. at 794. Perhaps this means nothing more than that at some point additional diversification may be unwarranted due to transaction costs. The logic of Bines's position, as of ours, is that the duty to diversify does call for the elimination of uncompensated, i.e., unsystematic, risk to the extent compatible with avoiding excessive transaction costs.Google Scholar

71 Uniform Probate Code sec. 7-302; Restatement of Trusts (Second) sec. 174 (1957); 2 Austin W. Scott, The Law of Trusts sec. 174.1, at 1412-15 (3d ed. 1967) [hereinafter cited as Scott, Trusts]. For strong recent authority see In re Estate of Beach, 41 Cal. App. 3d 418, 116 Cal. Rptr. 418 (1974).Google Scholar

72 At this writing only Batterymarch offers a no-load market fund to private trustees; it requires a minimum investment of $1 million. Vanguard's First Index fund has no minimum, but has a sales charge, discussed in text at note 92 infra. Google Scholar

73 Restatement of Trusts (Second) sec. 179 (1957).Google Scholar

74 Cornet v. Cornet, 269 Mo. 298, 322, 190 S.W. 333 (1916).Google Scholar

75 Springfield Safe Deposit & Trust Co. v. First Unitarian Soc'y, 293 Mass. 480, 200 N.E. 541 (1936).Google Scholar

76 2 & 3 Scott, Trusts, supra note 67, secs. 179.4, 227.9.Google Scholar

77 See 3 id. sec. 227.9, at 1830 n.26.Google Scholar

78 7 U.L.A. 40 (1970).Google Scholar

79 “Commissioners' Prefatory Note,”id. at 37-38.Google Scholar

80 The rest of the portfolio: $56,000 in corporate stocks, $8,800 in government bonds, $8,700 in commercial paper, $11,000 in a land contract.Google Scholar

81 Restatement of Trusts (Second) sec. 228 (1957).Google Scholar

82 See 3 Scott, Trusts, supra note 67, sec. 227.9, at 1833 n.28.Google Scholar

83 Market Funds I, supra note 1, at 18-24.Google Scholar

84 Trust Banking Circular No. 4, “Subject: Investment of Trust Assets in Mutual Funds,” a four-paragraph circular letter issued over the signature of Dean E. Miller, deputy comptroller for trust operations, and addressed to “Regional Administrators, President of Banks with Trust Powers (Attention: Senior Trust Officers) and Trust Examiners.”Google Scholar

According to a report published as this article was in press, the Comptroller issued a ruling on September 29, 1976, largely recanting the December 23, 1975, ruling by remitting the question entirely to state law. Paul R. Merrion, Banks Can Use Money Market Funds If They Decide It's Prudent, Pensions & Investments, Oct. 11, 1976, at 1.Google Scholar

85 “At this point most trust officers appear to be relying upon option [i.e., subsection] ‘A' of the Comptroller's statement to implement the use of money market funds.” Bruce R. Bent, Sorting Out the Money Market Funds, 115 Trusts & Estates 408, 409 (1976).Google Scholar

On the prevalence of pension-trust and pension-fund investment in mutual funds in general, see Investment Company Institute, 1975 Mutual Fund Fact Book 48-51 (1975). Cf. Michael Clowes, Mutual Fund Managers Attracting Big Bucks from Small Pension Plans, Pensions & Investments, Apr. 12, 1976, at 20.Google Scholar

86 Opinion letter of November 4, 1975, issued by James D. Hutchinson, administrator of pension and welfare programs, U.S. Department of Labor, citing Joint Explanatory Statement of the Committee of Conference, H.R. Rep. No. 93-1280, 93d Cong., 2d Sess. 305 (1974) (emphasis added).Google Scholar

87 See generally 2 Scott, Trusts, supra note 67, sec. 164, at 1254.Google Scholar

88 See, e.g., Colonial Trust Co. v. Brown, 105 Conn. 261, 135 A. 555 (1926).Google Scholar

89 The Restatement formulation of the duty to diversify, in text at note 50 supra, is prefaced with the proviso “Except as otherwise provided by the terms of the trust.”Google Scholar

90 See, e.g., In re Griffith, 66 N.Y.S.2d 72 (Sup. Ct., Special Term 1946), involving a 1911 instrument containing both types of direction. The settlor required the trustee to retain the entire fund in the inception assets, 4 percent first mortgage bonds of the West Shore Railroad Company due in the year 2315, and to hold the fund “separate and apart from all other property held by it.”Id. at 73. The trustee sought enlarged investment powers under the New York statutory version of the common law deviation doctrine. The court denied the application, reasoning that since the bonds were still selling at 84 (compared with 97 when transferred to the trust), there was insufficient change of circumstances to justify invoking the doctrine.Google Scholar

91 Restatement of Trusts (Second) sec. 167 (1957).Google Scholar

92 139 Misc. 575, 249 N.Y.S. 87 (Surr. 1931).CrossRefGoogle Scholar

93 259 Minn. 91, 105 N.W.2d 900 (1960). For other cases both allowing and refusing to allow deviation from investment restrictions, see 2 Scott, Trusts, supra note 67, sec. 167, at 1271-76.Google Scholar

94 Restatement of Trusts (Second) sec. 167(3) (1957).Google Scholar

95 Wells Fargo created the first market-matching vehicles; cf. Fischer Black & Myron Scholes, From Theory to a New Financial Product, 29 J. Finance 399 (1974). The three organizations named in the text are now being joined by competitors. Bankers Trust, one of the nation's largest pension-fund managers, is setting up a market fund for employee-benefit accounts. See Bankers Trust Enters Index Fund Competition, Pensions & Investments, Sept. 13, 1976, at 1. Manufacturers' National Bank of Detroit is also instituting a commingled equity market fund. See Ford Motor Turns over Index Fund to Bank, Pensions & Investments, Sept. 13, 1976, at 2.Google Scholar

96 In the initial public offering, shares were priced at $15.00. The sales charge (underwriting commission) was $0.85 per share–6.01 percent of the remaining $14.15 received for investment by the trust. On investments in excess of $50,000, the schedule of commissions declined as follows (in round numbers): up to $100,000, 5 percent; up to $500,000, 3 percent; up to $1 million, 2 percent; above $1 million, 1 percent. First Index Investment Trust, Preliminary Prospectus, July 30, 1976, at 1, 14. These figures remained unaltered in the final prospectus. First Index Investment Trust, Prospectus, Aug. 23, 1976, at 1, 14.Google Scholar

97 See, e.g., the column published by Paul Samuelson during the First Index initial offering, commending the advent of a market fund for small investors but warning that “frontend loads are hard to justify.” Samuelson, Index-Fund Investing, Newsweek, Aug. 16, 1976, at 66.Google Scholar

In a memorandum commenting upon an earlier draft of this article, John Bogle of Vanguard put two principal points in defense of the First Index load charge. First, when amortized over a long enough holding period, load charges can compare favorably with the steady drain of sales costs charged as expenses in a no-load fund. Second, as long as a no-load fund is unavailable, the First Index “sales charge was highly competitive with the cost of the most modest possible diversification on an ‘individual stock' basis; i.e., round trip stock exchange commissions for an individual diversifying in just 10 stocks would be 7.8% at the $5,000 level, 6.0% at the $10,000 level and 4.2% at the $25,000 level.” John Bogle, Memorandum of Sept. 15, 1976, at 2 (copy on file with A.B.F. Res. J.).Google Scholar

Vanguard believes that investor resistance to the load charge was less important than other factors in holding down the initial public subscription to First Index. It thinks that any mutual fund must overcome a stigma, evidenced in the high net redemption rates of recent times, which it attributes to the market crash of the 1970s (and which may also reflect the sales abuses of the 1950s and 1960s). “Despite our efforts to differentiate First Index, it was perceived as a mutual fund–and it is difficult to sell mutual funds these days.”Id. at 1. It also emphasizes the difficulty of explaining to the uninitiated a counterintuitive investment strategy and the awkwardness of having to rely on brokers (whose basic source of income is clients' stock picking) to explain the futility of stock picking to those clients.Google Scholar

Nevertheless, the point remains that a no-load fund has yet to be tried. No one knows how large or small the latent demand for a no-load market fund really is.Google Scholar

98 I.R.C. secs. 541-42.Google Scholar

99 Of course, there are professional skills involved in constructing a market-matching vehicle, monitoring its performance, and trading in response to fund inflows or redemptions. See, e.g., Harvey D. Shapiro, How Do You Really Run One of Those Index Funds? 10 Institutional Investor 24 (1976). But by comparison with old-fashioned stock picking and portfolio turnover, market-fund managers have much less to do and to charge for, and investors expect the savings to be passed on.Google Scholar

100 The preliminary prospectus of July 30, supra note 92, at 1, 3, projected an annual operating expense ratio of two-tenths of 1 percent for a $30-million fund. The final prospectus of August 23, supra note 92, at 1, 3, issued after preliminary sales activities, assumed a $17-million sale and increased the annual expense ratio to three-tenths of 1 percent.Google Scholar

101 Investment Co. Inst. v. Camp, 401 U.S. 617 (1971).Google Scholar

102 48 Stat. 162, codified in Title 12, U.S.C. The Court concluded that bank-operated mutual funds violated sec. 16 of Glass-Steagall, now 12 U.S.C. sec. 24(7) (1970), prohibiting a national bank from purchasing the shares of other companies “for its own account,” and sec. 21 of Glass-Steagall, 12 U.S.C. sec. 378(a) (1970), forbidding a national bank to underwrite any issue of securities.Google Scholar

103 401 U.S. at 630.Google Scholar

104 Id. The eight points numbered in text are listed in the order contained in the opinion, id. at 630-33.Google Scholar

105 Id. at 630.Google Scholar

106 Id. at 636.Google Scholar

107 Id. at 637-38.Google Scholar

108 Id. at 637.Google Scholar

109 Id. at 636-37.Google Scholar

110 See generally Note, The Legality of Bank-sponsored Investment Services, 84 Yale L.J. 1477 (1975). In the application form that it uses to enroll customers in its Monthly Investment Service, the First National Bank of Chicago explains how the stocks were selected: “The stocks listed are the 25 largest, in terms of the market value of shares outstanding, in Standard & Poor's Industrial Index and were chosen, without subjective evaluation by the Bank, solely upon share market value rank in that Index.” According to Herbert V. Prochnow, Jr., counsel, the bank “presently has about 1% of its checking account customers signed up for the monthly investment plan.” Letter to the authors (Aug. 10, 1976).Google Scholar