Spitzer, pension executives seek disclosure of fund fees, costs, pay

3 states' officials say data could save buyers billions

January 16, 2004|By BLOOMBERG NEWS

NEW YORK - New York Attorney General Eliot Spitzer and pension executives from three states called on mutual fund companies yesterday to disclose their fees, trading costs and fund managers' compensation, saying the proposed changes would increase competition and help investors save billions of dollars a year.

The officials included California Treasurer Phil Angelides and New York Comptroller Alan Hevesi, who called for New York Stock Exchange Chairman Richard A. Grasso's resignation days before he did so Sept. 17, and by North Carolina Treasurer Richard Moore. The state officials, who said they would urge other states' pension boards as well as 401(k) retirement funds to adopt the measures, help oversee a combined $405 billion in assets.

"We are not acting as regulators," Moore said at a news conference in New York. "We are solely acting as large participants who are going to demand a higher level of service if you want our business."

Since September, state and federal regulators have accused more than 10 companies of illegal trading, which has shaken Americans' confidence in the $7.2 trillion mutual fund industry. Investigations have led to the ouster of more than 60 executives, including the heads of Putnam Investments, the sixth-largest fund firm, and Pilgrim Baxter & Associates Ltd.

Spitzer has repeatedly alleged that mutual fund holders pay management fees that are about twice as much as institutional investors'.

The state officials said yesterday that companies should break out the fees they charge pension funds and 401(k) plans, trading costs as well as fund-management teams' identities, compensation and holdings. Moore said the changes would be voluntary and keep further regulation at bay.

Sense of fairness

"We have to lobby for a structural sense that there is fairness in this system," Hevesi said.

Last month, Spitzer settled allegations with Alliance Capital Management Holding LP, which agreed to cut fees by about $350 million, or 20 percent, over five years. The Securities and Exchange Commission has said there "is no legitimate basis" to set fees in that case.

Spitzer said the initiative announced yesterday would use the power of the marketplace to bring about his goal of lower costs.

"This, today, is competition," Spitzer said. "It is purchasers going back to suppliers and saying, `If you don't match us, you don't get our business.'"

Spitzer has said that, despite the rift, the Alliance settlement may be a model for other agreements. Companies including Invesco Funds Group of Denver and Boston-based MFS Investment Management are in talks with regulators.

"We have a philosophical difference [with the SEC] about how one can best address the fee situation," Spitzer told reporters Tuesday.

On Wednesday, the SEC announced sweeping proposals, including the placement of independent chairmen on fund boards, to stamp out illegal trading in an industry that's responsible for overseeing the investments of about 95 million Americans.

More independence

The state treasurers' demands echoed some of the SEC's proposed reforms. Among other similarities, they want three-quarters of fund trustees to be independent of the mutual fund companies where they serve.

Spitzer said investors' ability to compare fees would enable them to save "billions of dollars" a year.

In November, Moore said companies that help manage retirement funds for North Carolina workers may be fired unless they adhere to fund guidelines. The proposals, posted on his Web site, include requirements that two-thirds of fund directors must be independent of the management company and that funds must disclose the pay of portfolio managers in their annual reports.

Moore's also calling on funds to disclose so-called soft-dollar payments, or commissions that investment managers pay brokers in exchange for research and other services.

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