April 23, 2007
SEC's Commitment to Focus on Disclosure, Fees An Encouraging Sign
They may be late to the party, but they seem to be making up for lost time.
Since Christopher Cox became the chairman of the Securities and Exchange Commission, his most important contribution to mutual fund shareholders has probably been his extensible business reporting language initiative to help them better assess funds.
Since Andrew "Buddy" Donohue became director of the division of investment management a year ago, however, he has said little, if anything, on how he plans to support shareholders and shape the industry-until recently.
Cox and Donohue have now both spoken out quite powerfully on the SEC's commitment to reveal fees in a meaningful way to mutual fund and 401(k) investors-perhaps even in dollar amounts, improve portfolio disclosure, revisit the prospectus profile, potentially eliminate 12b-1 fees and issue stricter rules on soft dollars.
These goals are commendable, not only for their intent but for the inevitable hurdles they will face.
Take fee disclosure. I have sat in industry meetings where fund executives and attorneys have summarily dismissed the notion of replacing fee tables buried in the fine print of fund prospectuses with dollar-denominated figures displayed front and center in shareholder statements-essentially socking investors with actual bills. The fee tables are clear enough, the industry has argued, and the cost of calculating each investor's fees in dollars is far too cumbersome and costly.
The Department of Labor is also working on improving individualized fee and performance disclosure in 401(k) plans and has said it will coordinate its efforts with the SEC. But the problem here is that the SEC has jurisdiction over retirement plans run by mutual fund companies but not those administered by insurance companies and banks. So, the effort will require the Commission to work with state and other regulators to actually make it happen.
As to allowing fund companies to replace onerous prospectuses that very few investors read with prospectus profiles, I believe that's also a good idea. But some fund critics counter that the industry's real, subversive motivation for doing so is to save billions in annual printing costs and to withhold key information from investors, much as the statement of additional information has become an addendum rich with information.
Let's watch whether the SEC's goals become a reality-or end up a mere overreach.
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