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SEC sees more mutual fund disclosures
June 20, 2007 / 1:52 AM / 10 years ago

SEC sees more mutual fund disclosures

WASHINGTON (Reuters) - The chairman of the U.S. Securities and Exchange Commission said on Tuesday that there is opportunity to give mutual fund investors clearer information so that they know how much they are really paying in marketing, advertising and distribution fees.

“We want to make sure that while some fees are upfront such as front-end sales loads, other fees that behave similarly aren’t disguised,” SEC Chairman Christopher Cox said after a hosting a daylong round-table on mutual fund fees.

His comments come as the agency reviews how 401(k) savings plans, which many American use for their retirement savings, can provide clearer information to investors and whether mutual funds should stop charging distribution fees.

Lawmakers have been scrutinizing retirement savings plans holding hearings on whether the government should require clearer disclosures of fees.

Securities experts agreed that more could be done to make mutual funds more transparent but differed on how to do so.

“We are in favor of disclosure, but it is not necessarily more information... it could be simpler presentations,” said Barbara Roper, director of investor protection at Consumer Federation of America.

Richard Phillips, a partner at the law firm Kirkpatrick & Lockhart Preston Gates Ellis, suggested a “unified fee.”

“In terms of effective communication, simple is better,” he said. “A unified fee is much simpler. For a great mass of investors it would be better understood and more susceptible for competitive comparison.”

But Don Phillips, managing director at mutual fund research firm Morningstar Inc. argued against such a move.

Instead, he suggested that mutual fund expenses be divided into three categories: portfolio management costs, client services and administrative.

The SEC’s round-table on mutual funds was targeted at mutual funds with 12b-1 plans that which allow the fund to charge distribution fees to shareholders.

The 12b-1 rule was adopted in 1980 after a period when mutual funds had been experiencing significant net redemptions. It was designed to stimulate fund growth, promote a more stable fund asset base and create economies of scale that would reduce shareholder expense.

But the use of 12b-1 fees has deviated from their original purpose of covering a fund’s advertising and distribution costs and is now often used as a substitute for initial commission or sales fees or to pay administrative expenses, according to Cox.

Fee proponents, such as smaller mutual fund companies, said it has helped level the playing field.

“It really gives smaller mutual fund companies a fighting chance against the big guys,” said Mellody Hobson, president of Ariel Capital Management. “It’s not a small task for us on a daily basis.”

Cox would not provide a time frame for when the agency would unveil proposed rules except to say “we’ll take this one step at a time...We will probably propose something within a few months.”

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