SEC, industry critics, support shareholder expense statements
October 5, 1998
WASHINGTON -- The Securities and Exchange Commission wants the fund industry to provide investors with personalized statements, perhaps as frequently as every quarter, which detail the expenses each investor pays for investing in a fund.
SEC Chairman Arthur Levitt told members of Congress last week that the expense reports would help investors understand the effect and importance of fund fees. In addition, in response to concerns expressed by U.S. Rep. Anna G. Eshoo (D-Calif.) about the relative absence of expense disclosure in fund ads, Levitt said the SEC would review fund advertising practices with NASD Regulation (NASDR), the self-regulatory entity which approves most funds' ads.
"Each and every investor deserves to understand what he or she is paying for a fund -- plainly, simply, in dollars and cents," Levitt said in written testimony. "We want the industry to work with us to make that happen."
Levitt spoke at a hearing Tuesday before the House Commerce Committee's finance and hazardous materials subcommittee. The panel, which oversees the SEC, scheduled the hearing to review price competition in the mutual fund industry and transparency in pricing in the bond market.
The expense reporting idea was embraced by witnesses who have been critical of the fund industry's practices with respect to expenses. Harold Evensky, a Coral Gables, Fla., financial planner who has urged fund companies to cut costs, told committee members that he favored the proposal. The proposed expense statements are not unlike the sort of report that planners make to their clients each quarter, Evensky said.
Evensky criticized the industry generally on expenses, saying it has "drifted from its traditional focus" on asset management. Most of the industry's problems "seem to be related to the industry's shift from a focus on trusteeship to a focus on asset gathering and distribution," Evensky said. Among other things, Evensky expressed doubt that the independent trustees who oversee funds are serving as an adequate check on fund advisers with respect to expenses.
Industry representatives, including Matthew Fink, president of the Investment Company Institute, said the reporting could do more harm than good. F. William McNabb, a managing director at the Vanguard Group, told committee members expense reports may confuse investors.
In general, industry representatives and others argued that intense competition in the industry has resulted in reduced profit margins for fund managers and competitive fees for investors.
"Competition is working very well in the mutual fund industry" for the benefit of shareholders, Fink said. "Funds compete vigorously based on price."
Fink presented statistics which show that, with respect to equity funds, 77 percent of shareholders invest in funds that charge fees below the industry average of about 1.5 percent. A report presented by A. Michael Lipper, chairman of Lipper Analytical Services, concluded that management profits are down from peaks; those profits are reasonable; and, when excluding newer funds and making other adjustments, the median expense ratio of funds that began in 1986 or earlier is down.
"Mutual funds share economies of scale with investors," Lipper said. But, at least one committee member, Rep. Paul Gillmor (R-Ohio), was skeptical about how reasonable mutual fund expense levels are. Competition in the fund industry "is not working like it does in other areas of our economy," Gillmor said.
"As more and more investors pool their savings, it follows that the cost of operating a fund would go down as assets continue to rise," Gillmor said. "We all know that for the mutual fund industry as a whole, this has not happened."
Eshco was concerned that those expenses were not being adequately described in advertisements. In response to her request, Levitt said the SEC would report back on fund advertising.
The SEC will also have more to say on the issue of directors and fund expenses soon. Levitt said the agency was "reviewing" the role of fund directors. Part of that review will include an SEC-sponsored forum later this fall on directors and their duties. In addition, SEC staff is in the midst of a study seeking to identify trends in fund fees. That study is reviewing the overall level of fees, the way in which fees are assessed and whether economies of scale are being passed on to shareholders in the fees they pay. Levitt said he expected the study will be complete early next year.
Levitt also said the SEC would not intervene to set fund fees. That, he said, is an issue which "must be determined by competition in the marketplace, not by government intervention."