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SEC Approves Ethics Codes for the Fund Industry

The measure and two others are part of the agency's sweeping reform plan.
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Securities and Exchange Commission's

efforts to reform the mutual fund industry moved forward Wednesday as the agency ordered fund companies to adopt ethics codes and describe their policies for giving high-volume investors sales discounts.

The commission voted to require increased disclosure of breakpoint discounts, which are given when investment levels reach a certain volume. In a 4-0 decision, with Commissioner Cynthia Glassman absent, the agency said a mutual fund must describe its breakpoint arrangements in its prospectus and also say whether it details those on its Web site.

"This is an issue where we're talking about 90 million consumers," said Commissioner Roel Campos. "We should certainly encourage them to get that information up on their Web sites."

Funds have to describe their methods for valuing accounts to determine whether a shareholder can get a breakpoint discount, and also notify investors they may need to provide more information to the fund or a financial intermediary to receive the discount.

"While it is incumbent upon funds and brokers to give investors the breakpoint discounts they are promised, an investor who understands breakpoint opportunities is unlikely to remain silent in the face of an overcharge," SEC Chairman William Donaldson said. The SEC posts information on breakpoint discounts at

The commission also voted in favor of requiring registered investment advisers to adopt codes of ethics that set standards of conduct for advisers and portfolio managers, and which would require them to disclose trades in funds they manage.

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"It is extremely troubling that so much of the conduct that led to the scandals in the mutual fund industry was, at its core, a breach of the fiduciary relationship between investment advisers and their advised funds," Donaldson said.

The code would require anyone with access to a fund to get clearance for any trades in initial public offerings and limited offerings with a designated compliance officer and also mandates that anyone who learns of any ethics violations report them to a chief compliance officer.

"It is said that 'opportunity may only knock once, but temptation leans on the doorbell,'" Donaldson said. "We have no choice but to rely on the advisory firms themselves to step into the breach ? establishing a culture where the highest standards of behavior are practiced and where that doorbell is never answered."

The commission also approved a rule to prevent issuers from preventing the transfer of shares to a registered transfer agent, for example, the Depository Trust Company, in an effort to avoid having their securities from being processed through the national clearance and settlement system. In essence, if an issuer wants to keep intermediaries from transferring stock, it also will have to forbid its own agents from doing the same.

Donaldson said issuers' concerns about "naked short selling," which prompted these evasions, will be addressed by a separate rule now under consideration, as well as by measures the SEC is pursing in a joint effort with the

National Association of Securities Dealers


The SEC reforms are welcome, but much remains to be done, particularly on the issues of the use of soft dollars and other investor fees, said Kunal Kapoor, head of mutual fund research at Morningstar.

"I would rather see clear disclosure of what the fees are and where they're going," he said. "These fees have taken on a life of their own."