Move to more disclosure will benefit fund investors

Your Funds

Dollars & Sense

October 06, 2002|By CHARLES JAFFE

PORTFOLIO disclosure isn't on the table yet, but it will be after the Securities and Exchange Commission passes its current proposal to require mutual funds to disclose proxy votes.

For the fund industry, which has fought against making additional disclosures to investors, it's a shocking outcome that probably can't be derailed.

Take a look at the proxy proposal, the market environment and the attitude at the SEC, and it's clear that fund investors are about to dance a wonderful disclosure two-step. It's portfolio transparency that investors have wanted from fund companies for years. Now, it could be just months away.

To see why, you have to start with the proxy proposal.

The SEC proposed Sept. 19 that funds be required to disclose their proxy voting policies and procedures - something that firms such as Fidelity and Vanguard recently put onto their Web sites - as well as their actual votes.

Proxy disclosure never should have required SEC action. Funds represent their owners in proxy votes; as I've said for years, firms should have made this information public to investors simply because it was the right thing to do.

But fund management had a litany of reasons to do the wrong thing. Most were bogus. (Management would claim, for example, that proxy votes might tip a manager's hand, an odd assertion considering that managers don't sit on proxy-voting committees for most large fund families.)

The one true downside to proxy disclosure is its potential to politicize management, so that a firm squares off with public interest groups depending on how it votes (indeed, the AFL-CIO was one of the groups pushing for disclosure).

The reason most fund executives never thought the SEC would require disclosure, however, was different: Proxy details don't tell an investor anything that makes for better investment decisions.

It may help someone decide that a fund is living up to sociopolitical expectations or trying to push smart management policies on the companies it owns, but it is not the same as showing investors management fees. Few investors are likely to even look at the data, yet estimates are that it could cost fund firms as much as $160 million combined to provide it.

Voice those negatives all you want - as critics of proxy disclosure will do over the SEC's 60-day comment period - and you still are left with one inescapable conclusion: The SEC isn't listening to the arguments, because in a market as flooded with turmoil as this one, transparency is more important than anything.

Barry Barbash of Shearman and Sterling in Washington, the former head of the SEC's Division of Investment Management (which oversees funds), compares the situation to a MasterCard commercial.

"The SEC has gotten to the point where it is thinking `Cost of disclosure: Millions. Getting to see how your fund is being run: Priceless,'" Barbash said.

Clearly, any firm suggesting in a market spooked by scandal that more disclosure is bad will be shouted down by critics. So few, if any, fund companies will speak up.

Which leads directly to the next wave in disclosure, namely more regular portfolio updates.

SEC Chairman Harvey Pitt indicated in a recent speech that he wants to review the issue. All of the logic being used to advance the proxy vote issue - that the integrity of funds is increased with greater transparency and more information - holds for portfolio disclosures, too.

With more regular disclosure a given, the real question is just how big an improvement the SEC intends to make from its current twice-a-year standard.

With Pitt desperately wanting to show that he's a man of the people - and possessed of a backbone - don't be stunned if the SEC presses for disclosure as often as monthly. Folks in the industry are so fearful of that kind of requirement (not to mention the bad press that would come from leading a fight against it) that they most likely would go for a more reasonable standard without much of a fight. Expect a compromise that leads to a quarterly disclosure with a 60-day lag, so that the Sept. 30 holdings are released Dec. 1, for example.

The SEC could well push for the portfolio disclosures before year's end, meaning that investors might actually see the data - allowing for lengthy debates and counter-proposals - by this time next year.

In the end, increased portfolio-holdings releases will help investors, allowing firms such as Lipper and Morningstar to come up with more meaningful and accurate fund measures, overlap indicators and more.

Further, it will allow the SEC to give investors what they want: more control over their funds.

Charles A. Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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