New Mutual Fund Rules Will Clarify Expenses, Holdings
The
Securities and Exchange Commission
on Wednesday approved new rules to help clarify what investors are buying and how much they are paying for it when they purchase a mutual fund.
The new rules will require fund companies to spell out twice a year what a fund company is collecting from investors for the service of managing a portfolio. While such costs were previously disclosed in fund prospectuses, the new format is intended to be more straightforward: A fund must state the dollar amount of what it charges on a $1,000 investment, as well as those charges' effect on that investment assuming a 5% return.
Moreover, funds will now be required to disclose their portfolio holdings to the SEC on a quarterly basis, a controversial regulation that some funds argued will dilute their competitive advantage. (Money market funds are exempt.) Funds must also distribute charts or tables that show the distribution of fund portfolios, "intended to illustrate, in a concise and user-friendly format, the allocation of a fund's investments across asset classes," according to an SEC release.
The agency proposed the new rules in early 2003, months before the mutual fund industry plunged into scandal and recrimination last autumn.
The SEC also said it will seek comment for a rule that would bar a controversial practice in the mutual fund industry in which funds companies direct the lucrative business of brokering their stock trades to dealers who agree to distribute their funds' shares.
While directed brokerage was a subject of debate for many years, it resurfaced during the fall scandal when
Alliance Capital
agreed to lower its fees as part of a settlement with New York State Attorney General Elliott Spitzer.
The Investment Company Institute, the largest mutual fund lobby group, called the directed brokerage proposal "a welcome development and a beneficial reform because it would eliminate a significant potential conflict of interest."In a statement, ICI presidnet Matthew Fink said the change would "eliminate questions about whether fund managers' trading decisions are affected by considerations other than shareholders' best interests." He said the proposal "is a reform milestone that will benefit fund investors and strengthen the operating integrity of mutual funds."
The SEC will invite formal comment on the proposed rule change when it is published in the Federal Register.