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Disclosure Stance Seen as Industry Threat

WASHINGTON D.C. - The prevailing industry stance that more frequent disclosure of fund holdings would only confuse investors is hurting the industry's reputation, according to several analysts and industry executives who spoke at a conference here last week on fund disclosure.

"It seems to me that there is an underlying assumption that stock investors have rights and are capable of intelligent interpretation of information, but fund investors need to be protected and can't be trusted to use information wisely," said Don Phillips, CEO of Morningstar of Chicago. Phillips spoke at the conference,"Towards Truth in Mutual Fund Investing Syposium" sponsored by Fund Democracy, a fund activist group in Chevy Chase, Md. The symposium addressed fund disclosure and included a panel with Paul Roye, director of the SEC's division of investment management.

The industry in general tends to take a patronizing attitude towards fund investors, which, if not checked, will hurt the industry's reputation, said Phillips.

"[SEC Chairman Arthur Levitt is] saying the right thing to get more information to people, but when it turns to fund issues, it seems to me that he falls into almost patronizing platitudes about fund investing," said Phillips.

Phillips said he took exception to comments made by Levitt this past summer. Levitt said investors do not need or want detailed portfolio disclosure and should be satisfied basing their investment decisions on a fund's past track record, Phillips said.

"I think the real problem out there is people buy funds exactly the way that Chairman Levitt suggests," Phillips said. "The problem is people go out and buy good funds, but they assemble bad portfolios."

Roye, also speaking at the conference, said Phillips' comments were unfounded.

"That is absolutely untrue," he said. "The chairman is committed to investor protection, there is no question about that." One of Levitt's legacies will be his efforts in the area of investor education, Roye said.

Phillips and several of the other panelists want increased portfolio disclosure to serve their own needs, but those needs are not necessarily in line with those of the average investor, Roye said.

"I agree that there is a group of investors that want more information," he said. "But, there is also a group of investors that are inundated with information and say that we give too much. ...To say that this is something we don't care about is untrue."

Greater portfolio disclosure would make it easier for financial advisors to manage their clients' money, said Harold R. Evensky, chairman of the International Certified Financial Planner Council of Denver.

"My interest in this is helping my clients," he said. "This is a global problem ... Advisors need to know the balance of their clients' portfolios."

The industry should examine the issue more closely because many people's retirement savings held in 401(k) plans could be put in funds that hold a certain percentage of securities that are not suitable to that particular investor, Evensky said.

The panelists' demands for greater portfolio disclosure have been echoed by many consumer groups in petitions filed with the SEC. Those groups include the National Association of Investors Corporation of Madison Heights, Mich., which filed a petition with the SEC Oct. 9. The groups want funds to post their portfolios on the Internet monthly with a 60-day lag in the reporting to prevent front running, according to the petition.

"The average mutual fund turns over its portfolio every year," wrote Kenneth S. Janke, president and CEO of the investors' corporation in its petition. "A snapshot of a fund's portfolio holdings every six months is inadequate to provide investors with the information they need to determine how their funds are actually investing their money, so that they can assess whether fund investments are consistent with the risks that they have chosen to assume."

Another benefit of increased portfolio disclosure would be greater transparency in how a fund is run by its portfolio manager, said H. Davis Nadig, executive vice president and co-founder of of San Francisco.

"We believe this is a fund investors' right," he said. "Investment management is a business of trust and more disclosure would improve that trust. ... We as an industry can get ahead of this issue if the industry can get behind this and we can work in concert with shareholders. I would love to see the industry get behind this faster than the regulatory forces."

But the industry as a whole has not embraced consumer groups' demands for greater portfolio disclosure, he said. One of the reasons funds do not want to reveal what their portfolios are holding is that it would allow investors to scrutinize a portfolio manager's moves, Nadig said.

"It's hard because you live in a fishbowl as an investment manager, which you should be," he said.

Another reason funds do not want to reveal their holdings on a regular basis is so that they can more easily hide a managers' mistakes and illegal strategies like portfolio pumping, he said.

The Investment Company Institute, the principal industry trade group, issued a letter July 7, stating that increasing portfolio disclosure carries certain risks.

"Requiring more frequent reporting of a fund's portfolio holdings carries the risk of encouraging short-term trading," said Matthew Fink, president of the ICI. "Perhaps even more important is the prospect that long-term shareholders could be harmed by short-term speculators who could easily front-run a fund for their own personal advantage."

The ICI wants to improve portfolio disclosure by providing graphics that would illustrate the relative weight of a fund's holdings.

The SEC supports simplifying shareholder reports and prospectuses, but does not have the authority to mandate that funds increase their portfolio disclosure more than semi-annually, Roye said.