June 23, 2003
Industry Supports Much Of Mutual Fund Disclosure Bill
As the House Subcommittee on Capital Markets met last Wednesday for a hearing on the Mutual Funds Integrity and Fee Transparency Act, the Investment Company Institute threw its support behind many provisions of the bill.
However, the ICI did not offer a position on portfolio manager compensation, portfolio transaction costs, revenue-sharing agreements, or fund brokerage practices, only calling on the Securities and Exchange Commission to investigate them further. The ICI also opposed appointing an independent director chairman of the board.
ICI Chairman Paul Haaga testified that the industry would be willing to provide investors with dollar amounts of the fees that they pay, but rather than give investors individualized reports, he suggested that funds show fees based on a $10,000 investment. Haaga noted that by providing consistent figures, investors would be able to compare fees across various funds.
The General Accounting Office released a report to Congress two days ahead of the hearing calling for individualized fee statements. In its report, the GAO noted that telling investors how much they are paying in exact dollars is a standard practice in other financial service sectors.
"Currently, mutual funds disclose information about the fees and expenses that each investor pays on their mutual fund shares as percentages of fund assets," the GAO report notes. "Most other financial services disclose the actual costs to the purchaser in dollar terms."
Without elaborating on how, the ICI chairman told Congress that soft dollars should be investigated. "We believe this is one of the most important issues addressed by the bill," Haaga said. "We believe it is now time for a review of the rules governing soft dollars."
The GAO report asked the Securities and Exchange Commission to look into, and disclose, whether soft dollars encourage fund companies to trade shares more frequently than they normally would, or with brokerages that charge higher fees, thereby increasing shareholder costs. Furthermore, some fund companies might use soft dollars to reduce their own expenses, the GAO said.
Haaga also testified that the mutual fund industry supports the Sarbanes-Oxley standards for audit committees, and agrees that these standards should also apply to funds. Further, the industry concurs that people with business relationships with management or who are related to officers or board members of a fund should not be allowed to serve as independent directors, Haaga said.
Haaga disagreed, however, with the bill's requirement that the chairman of the board be an independent director. Independent directors regularly meet in executive sessions, he said. "Not only is it unnecessary, but having an independent chairman could actually result in a less effective board," he said.
Equity Funds Attract Net
$8.2 Billion in May: Lipper
In spite of the continued market rally in May, equity mutual funds attracted $8.2 billion in the month, down from the $14 billion in April, Lipper reported last week. It was the first time in a year that that equity funds had three straight months of inflows, and the types of equity funds that investors preferred were conservative, namely income, balanced and convertible securities funds.
Bond funds continued to attract a fair amount of money, taking in $9.4 billion. But money market funds lost a whopping $15.9 billion. Overall, for all types of mutual funds, the industry netted $1.7 billion during the month.
As to why the enthusiasm for equity funds waned, Lipper analysts theorized that April's inflows were so strong due to the end of the war, thereby going through a so-called "relief rally."
"If you could bottle dividends right now, they would be flying off the shelf," said Lipper Senior Research Analyst Don Cassidy.
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