The regulatory microscope is zeroing in on mutual funds and hedge funds. Richard Baker (R-LA), chairman of the House Financial Services Capital Market Subcommittee, recently urged Securities and Exchange Commission Chairman William Donaldson to investigate mutual fund fees. And Baker and Michael G. Oxley (R-OH), chairman of the House Financial Services Committee, plan to hold hearings designed to determine whether hedge funds are appropriate for retail investors.
At a March 12 hearing on mutual fund fees held by Baker, John Bogle, founder of Vanguard, testified that mutual funds are overcharging investors. “Over the years, the mutual fund industry has changed in many ways that have ill-served investors,” he told the committee. “With substantially rising expense ratios and portfolio turnover, the gap between equity fund returns and stock market returns has doubled.” Bogle said that despite the mutual fund industry’s huge growth in assets ($56 billion in 1978 to $6.4 trillion in 2002) and the industry’s “huge economies of scale,” the expense ratios of the average mutual fund during the same period have skyrocketed from 0.91% to 1.36%, a 49% increase. Bogle’s comments were enough to prompt Baker to urge the SEC to further investigate mutual fund fees, as well as the diligence of fund directors and trading costs. Baker expects to get regulatory or legislative remedies from Donaldson by June 11.
As for hedge funds, of particular concern to Baker and Oxley are funds of funds that offer lower minimum investments to smaller investors. Donaldson, too, plans to hold a hedge funds roundtable at the SEC on May 14 and 15 to discuss the structure, operation and compliance activities of hedge funds; marketing issues; investor protection issues; the current regulatory scheme; and whether more regulation is needed.
And with the help of newly passed legislation, the SEC will get expedited authority to hire more essential personnel: accountants and compliance examiners. In late March, Rep. Oxley’s committee approved HR 658, The Accountant, Compliance, and Enforcement Staffing Act. The bill, which was introduced by Oxley and Baker in February, “will enable us to deliver on the promise of more secure and transparent capital markets held out in Sarbanes-Oxley,” Oxley said in approving the legislation. The bill, he said, eliminates the “red tape, which is preventing the hiring of the accountant and compliance staff needed to supervise our publicly traded companies and avoid another Enron or Global Crossing.”