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Week In Review


Capital Markets Committee Wants Mutual Fund Taxes Deferred

The Committee on Capital Markets Regulation released a report by Harvard Law School Professor John C. Coates recommending that mutual fund investors who hold less than 2% of a fund's shares not be taxed on capital gains until they sell those shares. The current tax scheme puts U.S. funds at a competitive disadvantage, Coates said. While the mutual fund industry in the U.S. is the world's largest, its growth rate lags behind domestic and foreign competitors, the professor said.

In addition, Coates wants investors to be able to realize capital losses in the same way they realize capital gains and to be able to invest in foreign funds without incurring additional U.S. taxes.

Committee President Hal S. Scott, also a professor at Harvard, said, "Compared to E.U. counterparts, U.S. mutual funds are taxed less favorably and regulated less intelligently. The 70-year-old structure of U.S. regulation, unlike the more modernized E.U. system, makes the success of U.S. mutual funds dependent on the resources, responsiveness and flexibility of an underfunded, under-resourced and outdated Securities and Exchange Commission."

Schwab in Big Sales Push With Lower Fees

While competitors are roiled by the market turmoil and the market faces lower returns for some time to come, Charles Schwab is proactively cutting fees, lowering investment minimums and offering popular exchange-traded funds to gain market share, Barron's reports. And the firm says the strategy is already paying off, with investors defecting from Fidelity and Vanguard.

Chairman Charles Schwab said he expects low returns for some time, along with higher inflation and tight credit due to government borrowing. Given this highly competitive environment, the firm is doing whatever it can to appeal to cost-conscious, risk-averse investors.

Whereas Vanguard requires a $3,000 minimum to invest in the Vanguard 500 Index Fund and charges 15 basis points, Schwab cut the fee on its Schwab S&P 500 Index Fund to nine basis points and lowered the minimum to $100. Randy Merk, president of investment management services at Schwab, called the move "a call to action to get back into the market."

"We're seeing a nice little pop," Merk said. "We've seen exactly what we're hoping to see. We've seen transfers from Vanguard and Fidelity based on price and minimum investment."

In addition, Schwab has filed to offer its own suite of ETFs, which Chairman Schwab calls "a major beginning for us."

Certainly, the moves come on top of a solid 2008 at Schwab, thanks to its own money market funds, which took in $113 billion-more than Citigroup, Morgan Stanley, Merrill Lynch, E*Trade and TD Ameritrade combined. That inflow was critical, for with $242 billion in assets under management, Schwab is now the nation's 13th largest fund complex.

17% of 401(k) Sponsors To Seek Out Index Funds

Employers are increasingly looking to add index funds, exchange-traded funds or other low-cost selections to their 401(k) plans, according to a survey by Hewitt Associates. Seventeen percent said they are likely to replace at least one of their actively managed funds with an index fund this year, up from 8% who said so a year ago.

This could mark a big change for the 401(k) industry, which currently has 90% of its $1.5 trillion in assets in actively managed funds. Of course, this won't change overnight, but sponsors' appetite for low-cost funds is unquestionably growing. And this is despite the revenue-sharing payments by some actively managed funds to plan sponsors as an incentive for including them on the platform.

Regulators are taking a hard look at 401(k) fees, and there is a bill in the House that would require administrators to clearly disclose fees. This could encourage more plans to include lower-cost funds, said Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee, which sponsored the bill. Defined contribution plans "should not just be the happy hunting grounds for fees and commissions," Miller said.

Citing Strong Sales, MFS Plans to Add Salespeople

MFS Investment Management said it will add analysts, relationship management executives and salespeople to its staff, as a result of strong sales this year.

Investment management areas the firm is targeting include new equity research analysts stationed in emerging markets, as well as specialists in quantitative analysis and tactical asset allocation. Within distribution, MFS will be expanding in relationship management, dealer relations and sales to support the firm's expanding retail and institutional sales.

"MFS is a major contributor to the Sun Life Financial group of companies," said Kevin Dougherty, president of Sun Life Global Investments. "MFS has built unique global research and distribution platforms that align the firm very strongly with clients. Its excellent historical investment performance is a result of its distinctive team-approach to managing money." In addition, Dougherty said, the firm will spend $50 million to expand the firm's infrastructure.