SEC needs input on two new forms aimed at investors

Better disclosure sought on fees brokers charge

Your Money

March 07, 2004|By Julie Jason

Attention, mutual fund, variable annuity and 529 plan investors: The Securities and Exchange Commission wants to hear from you.

In an unusual move, the SEC is seeking investor input on two new forms intended to shed light on potential conflicts of interest at the time of sale, according to Susan Wyderko, the agency's director of investor education.

"The forms can help you decide whether the investment is good for you or good for the broker," explained Wyderko.

The last time the SEC did this kind of outreach to investors was in the mid-1990s, when it issued a concept release on disclosure of risk in mutual fund prospectuses.

"We feel it is critical to get the non-lawyer's point of view on these proposed forms to make sure they are helpful to investors," said SEC Commissioner Cynthia A. Glassman.

This time it's easier to be heard. The SEC has launched an online "click to comment" feature at www.sec.gov. Look for "Investor Information" and click on "Comment on Mutual Fund Rule."

The National Association of Securities Dealers and the Investment Company Institute have backed the adoption of enhanced point-of-sale disclosures.

The more important proposal of the two is the point-of-sale form, because it would be delivered to you before any potential damage could be done.

Potential conflicts of interest are laid out in plain sight on the proposed form, which shows you the dollar amount of your purchase, the "sales load," whether you pay it up front (typically Class A shares) or as a back-end load (typically Class B shares), and "distribution or service fees."

Point-of-sale examples for Class A and Class B purchases can be seen in Attachments 4 and 5 after you click the "Proposed Forms?" button in the "Comment" section of the SEC Web site.

As Attachment 4 illustrates, if you invest $8,000 in B shares, your back-end load is $400 in your first year; your brokerage will receive $320 at the time of purchase plus $80 later in the first year.

For context, you need to compare alternatives. Two point-of-sale forms illustrating both A and B shares would help, but the SEC doesn't provide them. The holding period, which can be key to choosing the optimal share class, also is not provided.

Broker compensation would point to another potential conflict, particularly for larger purchases where broker compensation for B shares can be much higher than A shares. Today, you have to ask the broker how much he gets paid. If he is not forthcoming, you should go to another broker.

The next two sections of the form provide "yes" or "no" answers.

A "yes" answer alerts you to special compensation the brokerage firm pays to the broker for making the sale, as happens many times with proprietary products. If the fund's distributor shares revenues with the brokerage, those revenues might encourage the promotion of that product over another, posing a potential conflict.

In addition, you would know if the share class offered pays the broker more than another class.

An astute investor would avoid the purchase if any "yes" answers appear on the form.

Attorney Julie Jason is a money manager and retirement finance author who writes for The Advocate, Stamford, Conn., a Tribune Publishing newspaper. E-mail her at yourmoney@tribune.com.

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