Baker's Mutual Funds Integrity Bill No Piece of Cake
June 30, 2003
Despite a seeming endorsement from the Investment Company Institute, many in the mutual fund industry say the Mutual Funds Integrity and Fee Transparency Act of 2003, proposed by House Capital Markets Subcommittee Chairman Richard H. Baker (R-LA), is still severely lacking and way off the mark in many areas.
The bill takes aim at several opaque issues in the mutual fund industry, attempting to shed some light on such questionable tactics as soft-dollar and revenue-sharing arrangements. It also takes aim at corporate governance and the disclosure of the expenses of a portfolio. However, critics claim the bill is just piling on too much, and in some cases meaningless, information for investors to digest.
Louis S. Harvey, president of mutual fund consultant Dalbar of Boston, said the Baker legislation is a move in the right direction, but still fails to encompass the fact that investors need to understand what's being disclosed. "You could put everything but the kitchen sink" in a disclosure statement, he said, adding it would be meaningless if an investor doesn't understand how to read it or the terms used. "As long as we keep playing inside baseball - using material written for people inside the industry - we leave investors in the cold," he said.
Harvey also said he would like to see legislation requiring funds to provide a "pure performance" number, which would expose performance without fees. This would make comparisons between funds easier, he claimed. In the current system, some performance numbers include certain expenses, while others are left out, and this creates a distorted view of the funds' performance. "It makes no sense," he said.
Baker originally looked at the pure performance provision, Harvey said, but it didn't make it into the bill as submitted. And while he expects the ICI to "generally go along with" the Baker bill, he is hopeful the proposal will get modified in the Senate, where "there is a greater concern for the average Joe."
Don Cassidy, a senior analyst with Lipper, agreed that the proposal "sort of missed the boat," but does not think the mutual fund industry will passively accept several provisions of the bill. Cassidy, like several others in the mutual fund world, said he expects the clause calling for disclosure of personal compensation to be the "lightning rod" for criticism from the industry. He also noted that the disclosure of expenses per account will sizably increase expenses for firms and is something the industry will likely fight against.
As for an individual portfolio manager's compensation, Cassidy thinks the exact dollar amount is irrelevant. He said the most important number in the fund is its expense ratio, and it is not necessary to provide investors with bits of that overall number.
Roy Weitz, an industry critic and publisher of FundAlarm.com, has said he expects the industry to "go nuts" over provisions of the bill calling for personalized account statements and the disclosure of portfolio manager compensation. However, the ICI took a more cautious approach initially, pledging the industry's full cooperation with regulators and lawmakers. During testimony before the House Subcommittee on Capital Markets, ICI Chairman Paul Haaga simply asked the Securities and Exchange Commission to further examine the disclosure of portfolio manager compensation, as well as that of transaction costs, revenue-sharing arrangements and brokerage practices.
John Collins, a spokesman for the ICI, said that the association is "open to good ideas" about providing investors with information about compensation. However, he said the ICI is not in favor of disclosing portfolio manager compensation, saying that it may be "a bit more detail than necessary."
Collins suggested that the amount paid to individuals within a team or unit is less important than the overall compensation billed out to an investor. He also said certain information is attainable via a management contract through a statement of additional information. "From that you know the total amount the fund pays under its advisory contract. You just don't know what each employee is paid," he said.
The ICI disagreed with lawmakers on a few other points, ranging from how to disclose expenses, to the qualifications of board members. The ICI said it prefers to report expenses in a fund based on a $10,000 investment, as opposed to an individualized calculation. It also disputed the need for an independent chairman of a fund's board.
Others were concerned about how quickly the bill was proposed. Just one day after the SEC issued a 120-page report addressing a number of these topics, lawmakers introduced the legislation, which ignored many of the suggestions made by regulators.
"I think the whole thrust behind the bill is one that is predictable," Cassidy said. "Whenever there is a problem, Congress decides to investigate and legislate."
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