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The Fund Fee Bill is In the Mail' Mutual Fund Summit Focuses on Fees, Hidden Costs

OXFORD, Miss. -- The mutual fund fee bill is in the mail. And it should spell out, in hard dollars and cents, all the hidden costs of mutual funds, including 12b-1 fees. And these total costs can be so significant that in some cases they are several times greater than the fund's stated expense ratio.

That was the consensus from the majority of panelists on The Mutual Fund Summit here a week ago, which attracted 11 lawmakers, regulators and industry leaders, including Investment Company Institute Chairman Paul Haaga and SEC Director of the Division of Investment Management Paul Roye. The event took place just a day after the Zero Alpha Group released a report showing that brokerage commissions average 27 basis points (see related story, page 5.)

The SEC is going to propose the dollars-and-cents rule next month, Roye said, also laying out a number of new proposals that the Commission has slated for upcoming months and weeks (see chart). Charges against negligent fund directors, a total ban on directed brokerage agreements, quarterly disclosure of portfolios and a complete justification of fund fees by fund chairmen in annual reports, are just a few of the important measures on the slate.

SEC Commissioner Harvey J. Goldschmid said after the meeting that the Commission will propose barring 12b-1 fees altogether, although during the panel discussion, Roye said the fees have proven a much better alternative to broker-sold funds for investors than the front-end costs of 8% or more that existed before 12b-1's were introduced in 1980 (see MME 1/26/04, 1/5/04).

The debate over mutual fund fees has become almost as heated as the debate over taxes, said summit panelist Don Phillips, managing director of Morningstar. "But at least with taxes, you get a bill," Phillips said.

"If everyone's charging an unreasonable amount, they all look reasonable," added Barbara Roper, director of investor protection, Consumer Federation of America, in calling for more meaningful fee transparency.

House Financial Services Senior Counsel Linda Dallas Rich and Vanguard founder Jack Bogle were also among the 11 speakers who gathered in the Deep South. The meeting was held under the auspices of Fund Democracy founder and President Mercer Bullard, a professor of law at the University of Mississippi.

And while the ongoing debates being spawned from the mutual fund scandal over fund transparency, fees, selling practices and trading abuses are resulting in a host of unprecedented new regulations for the industry, Roye stressed that the SEC is not interested in throwing a slew of additional information at investors. Rather, the SEC wants to be sure that investors understand the fee, performance and holding information that fund companies give to them, Roye said.

Roper concurred that this is the right way to go, particularly since mutual funds are a type of product that "competes to be sold. It doesn't compete to be bought." She characterized this as "a large part of the industry's problem."

Taking Stabs at One Another

Haaga thanked Bullard for gathering the august group of his co-panelists, noting how the group, regulators and industry leaders alike, rarely meet but often take stabs at one another in the press, a comment that inspired laughs from the packed audience of professors, law students and members of the national press. Bullard himself is scheduled to testify before Congress on the scandal in March.

Perhaps the reason Bullard had such success in attracting the 11 headliners, besides the fact he was formerly assistant chief counsel at the SEC, was this mixture of tensions in the room. Also speaking on the panel were: Barry Barbash, former SEC director of the division of investment management and now a partner with Shearman & Sterling in Washington; Craig Tyle, general counsel at the ICI; John W. Rogers, Jr., chairman and CEO of Ariel Capital Management; and Erik R. Sirri, associate professor of finance at Babson College.

But common among all of the panelists, Bullard noted, is the aspiration for "America's favorite retirement vehicle, a great institution, a great industry, to provide the best service it can for America's investors."

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