SEC moving to reduce conflicts at mutual funds

Steering of trades to brokers is targeted

February 12, 2004|By Andrew Countryman | Andrew Countryman,CHICAGO TRIBUNE

CHICAGO - Federal regulators took steps yesterday to reduce conflicts of interest at mutual funds and to improve the information given to investors.

Furthering its effort to respond to scandals that have roiled the industry, the Securities and Exchange Commission voted to propose rules to prohibit mutual fund firms from steering their trades to brokerages as compensation for selling funds.

Commissioners also proposed rules requiring disclosure, in dollars, of costs to investors per $1,000 invested. The rules also would require funds to disclose their holdings quarterly, rather than twice a year.

A separate proposal would provide investors more information about how fund boards assess advisers' fees and performance, including comparisons with fees charged to institutional investors. The industry is under attack from Congress and prosecutors for what they deem inappropriate or excessive fees charged to investors. Some have complained that fund practices have inherent conflicts of interest and that pension plans pay far lower fees than do regular investors. The industry disputes that.

Critics say the SEC has not done enough to lower fees, and bills pending in Congress would go much further, but commissioners said their proposals would offer significant help to fund customers.

"I believe that the investor is a big winner today and has received substantial amounts of sunlight in which to guide investment decisions," said Commissioner Roel Campos.

Perhaps the most significant step is the proposal to ban the steering of trading to brokers as compensation for selling funds, known as directed brokerage. Such a ban is included in a bill unveiled this week by Sen. Peter Fitzgerald, an Illinois Republican, and it is supported by the fund industry's main trade group, the Investment Company Institute.

SEC Chairman William H. Donaldson said the practice "presents opportunities for abuse that are identical to those that arise when the fund pays the broker or dealer directly. In fact, the practice is even more troubling, because its impact is hidden from investors."

Some suggested that simple disclosure of the costs would be sufficient, but Commissioner Harvey Goldschmid said that is not sufficient.

"I'm convinced that directed brokerage is a serious problem," Goldschmid said. "No matter how you look at it, I just don't see the redeeming virtue."

The proposal for fee disclosure mirrors several in Congress that would require giving investors a report on costs in dollars, rather than in percentages.

The plan would require disclosure of dollar costs of actual expenses per $1,000, based on the expense ratio and an assumed annual 5 percent return.

"I think it is a simple truth that the majority of investors do not appreciate fully the impact that fees have on their investments," said Commissioner Paul Atkins.

The Investment Company Institute hailed the step. Its president, Matthew Fink, said that of the reform plans the SEC has proposed, it is the one "that will be most visible and useful to millions of fund investors."

The plan also would require funds to file a list of holdings quarterly with the SEC but would allow a summary schedule of the 50 largest holdings in semiannual reports to investors.

The proposal for increased disclosure of fund directors' assessment of adviser fees was made as regulators and legislators advocate several ideas to push fund directors to reduce costs. The proposal would require funds to explain why they approved their advisory contracts and key issues in the decision. They would have to discuss the quality of the advisers' services and whether their profits are appropriate.

Donaldson said that because most funds are established by their advisers, which select directors, there is "an inherent conflict of interest and potential for abuse and overreaching."

The proposals will be open to for public comment for two months before the SEC takes a final vote on them.

The Chicago Tribune is a Tribune Publishing newspaper.

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