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SEC Proposes Quarterly Portfolio Disclosure


In a move that has been condemned by the mutual fund industry, The Securities and Exchange Commission last week endorsed a proposal that would force complexes to disclose their portfolio holdings four times each year. Funds currently have to disclose the information twice a year.

The commission also put forward a bevy of measures that are designed to help shareholders understand the contents of their portfolios and tell them exactly how much their funds cost.

On Wednesday, the commission voted to publish the proposals and give the public 30 days to respond.

Outgoing chairman Harvey Pitt voted in favor of the measures, as did three other commissioners. Commissioner Cynthia Glassman was not present.

The SEC said that its bid to get funds to disclose their portfolio holdings more often is intended to help investors determine whether their funds are following their investment objectives. The information would be available to the public via the SEC Web site, www.sec.gov.

The Investment Company Institute has decried the proposal, saying that providing more frequent information about portfolios will allow arbitrageurs and market timers to trade against funds. In addition, ICI spokesman Chris Wloszczyna said that shareholders pay a management fee partly to compensate funds for their market research. But frequently publishing portfolio contents on the SEC's Web site would allow anyone to access the fruits of that research for free, he said.

"The industry supports those innovations that improve the quality of information to shareholders, not the quantity of information," Wloszczyna said.

In addition, the SEC may also allow fund companies to include a summary portfolio schedule in reports to shareholders, again in the interest of helping investors understand what a portfolio holds and how its assets are allocated.

"Investors can tailor the information flow to their own needs," said Paul Roye, the SEC's director of investment management, during a press conference last week. The shortened disclosure statement would include a fund's 50 largest holdings and each investment that exceeds 1% of a fund's net asset value. Complexes would still have to file a full schedule of their portfolios with the SEC and make the complete schedule available to shareholders upon request and free of charge.

Still, an SEC official said during last week's press conference that the abbreviated portfolio disclosure could save fund companies millions in costs because they can slash printing and mailing expenses.

The commission also proposed that funds provide portfolio holdings to shareholders in a graphic or table format. Roye said the graphical presentation could break down data by industry sectors, geographical regions or other factors.

The commission is also thinking of exempting money market funds from having to disclose their portfolio schedules to shareholders, provided those funds give the SEC a complete schedule of holdings. In addition, a money market fund's portfolio holdings would have to be available to shareholders upon request, the SEC said. Such reports are currently issued by money market funds 60 days after a semi-annual reporting period, and by then much of the information can be stale because a fund has already divested many of the interests that are listed in the report, Roye said.

"The actual portfolio [report] has limited utility for investors," he said. The commission will also consider changing the delay period from 60 days, Roye added, but he declined to disclose what that delay period might be changed to. "That is a detail that the commission has to consider at this point," he said.

Funds may also have to disclose in shareholder reports expenses that investors must pay during a reporting period. Roye said that funds currently provide investors with an expense ratio, but under the proposed rule funds would provide investors with a dollar figure for costs that is based on a consistent rate of return. The figure would be provided in terms of costs associated with a $10,000 investment in a fund that yields a 5% rate of return each year. The SEC has dictated the 5% figure so that investors can accurately compare one fund's expenses with another.

Lastly, the SEC may mandate that funds include what the SEC calls a "Management's Discussion of Performance" in its annual reports to shareholders.

May Quibble Some More

The ICI has endorsed these remaining proposals, with the caveat that it has not yet reviewed last week's measures in full, and may quibble with certain nuances. "On the surface, we're not opposed" to the remaining measures, Wloszczyna said.

Still, in 1998 the trade group sent a letter to Barry Barbash, then the SEC's director of the division of investment management, recommending many of the measures that the SEC put forward last week.

Fund companies, meanwhile, were largely reticent regarding the measures. Fidelity Investments and TIAA-CREF, two of the most outspoken firms when it comes to fund regulation, declined to comment. But Stephen Canter, the CEO of Dreyfus Corp., said during a press conference last week that he hoped the industry would not have to disclose its portfolio holdings more than twice each year.

The Vanguard Group said in a statement that it supports all of the proposals "in concept." The firm said that allowing funds to file abbreviated disclosure statements while making full disclosure reports available to shareholders "satisfies the need of some investors who desire access to quarterly holdings without burdening fellow shareholders with the undue costs associated with delivering lengthy portfolio holding listings."

SEC spokesman Herb Perone said that the public has 30 days to comment on the proposals and, after the commission reviews those comments, staff will augment the proposals as necessary and return them to the commission for approval. "How quickly that will happen will depend on the volume and complexity of the comments and the priority that the proposal would have," Perone said.