U.S. moves forward on mutual fund fee disclosure

(July 29, 2003) U.S. mutual fund fees would become more transparent under a new bill proposed by the House of Representatives. The new law would require disclosure — in dollar amounts — of all mutual fund operating expenses borne by investors, says Paul Roye, director of the U.S. Securities and Exchange Commission’s (SEC) investment management division.

“Despite existing disclosure requirements as well as educational efforts, the degree to which investors understand mutual fund fees and expenses remains a significant source of concern,” Roye said in testimony last month before a U.S. House financial services committee.

Roye said that while transactional fees, such as front- and back-end sales loads, are relatively transparent, portfolio transaction costs, including management and distribution fees, remain effectively hidden because they are deducted directly from fund assets.

“These charges are reflected in reduced account balances and expressed as a percentage of net assets in a fund’s prospectus, making their impact less evident to investors,” Roye added. “Surveys have indicated that investors may not understand the nature and effect of these recurring mutual fund fees.”

Under SEC proposals released last year, fund companies would be required to include the costs of all fees in dollars associated with an investment of $10,000 in its annual and semi-annual reports. A second fee breakdown, based on the same $10,000 amount but also including an assumed investment return of 5%, must also be included.

“The first figure is intended to permit investors to estimate the actual cost that they bore over the reporting period,” Roye explained. “The second figure is intended to provide investors with a basis for comparing the level of current period expenses at different funds.”

The bill would also require improved disclosure of portfolio manager compensation and portfolio transaction costs, including any commissions paid on the trading of stocks within a fund.

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In addition, the legislation provides for tighter rules on so-called “soft dollar” arrangements, where a portion of the commission on a trade goes to investment managers or brokers for services, usually research.

Critics say there’s no way to track exactly how those soft dollars are being used or to calculate how they directly benefit the fund.

“The use of soft dollars for research should be reviewed and authorized as in the best interest of the fund by the fund’s board of directors,” Roye said.

The Mutual Funds Integrity and Transparency Act was approved by the financial services committee last week. The U.S. House of Representatives is currently on a summer break and won’t sit again until September.

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Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca

(07/29/03)

Doug Watt