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Executives Oppose Quarterly Fee Reports

NEW YORK - Mutual fund companies are doing a good job of disclosing fees to shareholders and should not be required to send shareholders personalized fee reports each quarter, executives from three leading mutual fund companies said recently.

The executives spoke at an annual conference held here on mutual fund law sponsored by the Practising Law Institute, a legal education non-profit organization in New York. The speakers included moderator Paul Haaga, executive vice president of Capital Research and Management Co. of Los Angeles, Heidi Stam, principal, securities regulation at The Vanguard Group of Malvern, Pa. and Henry Hopkins, managing director and chief legal counsel at T. Rowe Price Associates of Baltimore, Md. Joseph Savage, counsel on regulation, disclosure and investor programs at the National Association of Securities Dealers of Washington, D.C., also sat on the panel.

"There is a conclusion at the SEC that fees need better governance and disclosure. Isn't the fee table useful?" Haaga asked, launching the discussion.

The mutual fund company panelists agreed that the fee tables in the front of every mutual fund prospectus clearly spell out fees.

"The fee table tells shareholders comprehensively what a mutual fund's transaction fees are," Stam said. "These tables have even been perfected to a standardized presentation" with the extensive fee table enhancements that the SEC required in March of last year, she said.

These additional requirements included stating gross, not net, expenses, and an indication of which payments come out of the fund's assets and which come from a shareholder's account. The new rules also called for the use of plain English in prospectus introductions, clearer headings, and instructions on how to use the fee charts. The SEC also asked mutual funds to upgrade their hypothetical investment charts from $1,000 to $10,000 to more accurately reflect costs.

There are eight other locations in prospectuses and shareholder reports that contain fee information as well, Stam said. For example, Item 6 - Management, Organization and Capital Structure - tells shareholders the percentage of the fund's net assets paid to the adviser as its fee for the past fiscal year, she said. Item 8 - Distribution Arrangements - describes sales loads, including deferred sales loads. And Item 16 - Brokerage Practices - tells shareholders what brokerage fees the fund paid in the last three years.

The statement of operations also lists the amounts paid by a fund for all services and other expenses, Stam said.

However, neither Stam nor the other panelists suggested that mutual fund companies should consolidate all of this cost information.

"Mutual fund fee disclosure is more readily available and easier to understand than the fee disclosure of any comparable financial product," Hopkins said. However, Stam said that mutual fund companies could do a better job of drawing attention to costs.

"People could find it more useful if we told them they should care," she said.

The panelists cited a number of efforts the industry has made recently to better educate investors about costs.

In the few weeks since the SEC introduced a mutual fund cost calculator on its website (MFMN, 4/12/99), many mutual fund companies have created links to it or have even created calculators of their own, Savage said.

The NASD, a self-regulatory organization, sent out a letter last December to its members telling them they may not advertise a fund as a no-load without also noting that other charges apply, Savage said. Furthermore, the NASD said it would not permit advertisements of load funds without a similar acknowledgement that other charges may apply, because investors may incorrectly assume that a load fund incurs a one-time fee, Savage said.

Hopkins said recent Investment Company Institute studies have shown that bond, money market and equity mutual fund fees have declined sharply since 1980 (MFMN, 2/22/99, 11/13/98).

T. Rowe Price has made a conscious effort to reduce fees and take advantage of economies of scale as the firm's assets have grown, Hopkins said. In 1998 alone, the firm cut back on its fees by nearly $40 million through the firm's "Group Fee."

"The Group Fee component of the T. Row Price management fee was implemented in 1987 as a means of sharing with investors the assumed economies of scale," Hopkins said. As a result, "aggregate expense ratios for T. Rowe Price funds declined between 1996 and 1998 by 3.6 basis points ... with 45 funds experiencing declines and only three funds experiencing increases," he said.

Quarterly fee reports would be "overkill," and difficult to provide, he said. "It may sound very simple and a good idea, but it's fraught with operational issues when you have to consider redemptions and reinvested assets. Let's not get unduly carried away with the issue of cost."

Providing quarterly fee reports might prompt investors to compare funds by their fee structure instead of by their returns, Stam said.

"This is a more important analysis of what fund to buy," she said.

The proponents of quarterly fee reports are looking for "shock value and nothing else," Haaga said.