New rules proposed for mutual funds

Thursday, July 6th 2000, 12:00 am
By: News On 6

Quarterly reports should detail fees investors pay, GAO recommends>/b>

WASHINGTON – U.S. mutual funds should be required quarterly to disclose to investors the fees charged to their individual accounts, the General Accounting Office said Wednesday in a report to Congress.

The GAO, the congressional auditing agency, said the Securities and Exchange Commission should draft rules instructing mutual funds to include in quarterly reports the specific dollar amount of each investor's share of operating expenses.

The recommendation was contained in a report requested by U.S. Reps. John Dingell of Michigan, the senior Democrat on the Commerce Committee, and Mike Oxley, an Ohio Republican who chairs the Commerce's subcommittee on finance.

In a letter to SEC Chairman Arthur Levitt, Mr. Oxley and Mr. Dingell urged him to "take the necessary steps" to implement the recommendations.

"Investors deserve to know exactly what they are paying for mutual fund services on a regular basis," Mr. Oxley said in a written statement. "You shouldn't have to have a degree in high finance to figure out whether your mutual fund is giving you a good deal."

The way it is

Mutual fund fees that are paid by investors include the day-to-day costs of running a fund, called operating expenses.

Some mutual funds charge investors sales charges, called loads, which can be paid at the time of purchase or over a specific period or when shares are redeemed.

Current disclosure practices inform investors only of the fees they are likely to incur, Mr. Oxley said. Specifically, the disclosures list only percentages of fees and hypothetical examples in prospectuses, he added.

The mutual fund industry organization, the Investment Company Institute, responded that mutual funds already make extensive disclosures about fees and that funds compete on the basis of performance.

"We have reservations about the account statement recommendation," institute president Matthew Fink said in a letter to Thomas McCool, GAO's director of financial institutions and market issues.

"This requirement could erode the value of the standardized, all-inclusive fee information in the prospectus and . . . diminish rather than enhance investors' overall understanding of fund fees."

Numbers game

While the mutual fund industry has grown dramatically – from $371 million in 1984 to $5.5 trillion in 1998 – industry researchers are concerned that funds are not operating more efficiently and that fees are not declining enough.

"Growth in the mutual fund industry has been powerful, particularly in the last decade," Mr. Oxley said. "This growth gives mutual fund companies economies of scale, and investors ought to know whether these benefits are being passed on to them."

The GAO analyzed data on the nation's 77 largest stock and bond funds and found that not all had reduced fees. Of the 51 funds that experienced at least 500 percent growth in assets over the eight years, 38 funds, or 74 percent, reduced fees by at least 10 percent, the GAO said. The rest cut expenses less, including six whose fees did not change or rose, the GAO said.

Because operating expenses can be calculated in various ways, the SEC also should consider "the costs and burdens" that different alternatives would place on the industry or on investors, the GAO said.

Neither federal law nor SEC rules expressly limit the fees that mutual funds charge as part of their annual total operating fees, the GAO said.

Mr. Oxley and Mr. Dingell asked Mr. Levitt for two progress reports on achieving greater fee transparency in mutual funds, the first report at the end of the year and the second in June 2001.

SEC officials praised the GAO's report, while withholding judgment on whether the SEC would move to require the quarterly disclosures.

"As the report points out, there are advantages and disadvantages of the report's recommendation and alternatives that need to be considered," wrote Paul Roye, director of the SEC's investment management division. "We welcome the report's recommendations and suggestions, and will consider them carefully."

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