Mutual Fund Monday - Beverly Goodman
SEC Wants Investors to Understand Funds Better
Beverly Goodman
12/16/02 - 07:07 AM EST
The
Securities and Exchange Commission wasted no time last week as it
moved ahead with new disclosure rules for the $6.2 trillion mutual fund
industry a day after the White House announced that William Donaldson would
succeed departing SEC chairman Harvey Pitt.
Pitt, who resigned in November after a series of political missteps, had
already touted the new disclosure rules as a boon for individual investors.
The changes the SEC proposed are aimed at helping mutual fund investors get
more detailed -- and immediate -- information as to the portfolio's makeup.
The proposal has five parts -- three of which aren't terribly
controversial, one will elicit nothing but a big yawn and the other has the
fund industry very skeptical.
The three core proposals are designed to help individual fund investors
understand and process the information that the fund companies send out in
their annual and semiannual reports.
For instance, funds would have to directly send investors a semiannual
report that lists their most significant holdings. But not only will that
summary of the top holdings be required, the additional information also has to look pretty. The proposal states that the fund companies must
provide charts and graphs of the holdings, labeled with identifiable
categories, such as industry sector, credit quality or maturity date.
Another piece of the proposal requires mutual funds to disclose shareholder
fees in dollar amounts rather than a fixed percentage of fund assets. That's
an important distinction from what's currently in place -- the new expense
projections will calculate the dollars an investor paid to get a certain
level of performance. That's a far better measure for individuals to measure
how much they're paying for management.
The proposed rule change that has the mutual fund industry kicking up a bit
of a fuss is an increase in the frequency that funds would have to report their
holdings to the SEC. The proposal would require funds to disclose their
complete portfolio holdings to the SEC quarterly -- currently they have to
do so just twice a year. The funds would have 60 days after the end of the
quarter to submit the reports.
"We still have some concerns about the increased frequency of the portfolio
holdings," says Chris Wloszczyna (pronounced Wazena), a spokesperson for the
Investment Company Institute, the lobbying arm of the fund industry.
The primary concern is that traders, such as arbitrageurs, hedge funds, day
traders and other opportunists, could use that information to trade against
the fund -- which would cut into a fund's ability to get in or out of a
stock at the best price.
"We're not clear that the benefits of mandating the additional disclosure
would outweigh the harm that could be caused," Wloszczyna says. "But we'll
look into it."
Quarterly reporting with a 60-day grace period may not sound like much of an
opportunity for front-running, but most funds -- especially the larger ones
-- do take quite a long time to build up and wind down positions.
Pitt has downplayed that notion, saying that more than 70% of funds already
report quarterly holdings to databases, such as Morningstar's.
And just in case you're wondering, the big "so what" element of the
proposal simply mandates that shareholder reports include the manager's
assessment (in the form of a letter or column) of the fund's performance.
While virtually all funds include a statement from the manager in their
annual and semiannual shareholder reports, this proposal simply codifies
that practice.
The public will have 30 days to comment on the proposals before the SEC
decides whether to adopt or change them.
