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Portfolio > Mutual Funds

Fund Reform Bill Is Just First Step: Baker

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NU Online News Service, Nov. 20, 2003, 10:40 a.m. EST ? Washington

Mutual fund reform legislation approved overwhelmingly by the House of Representatives represents only the first step toward the goal of protecting mutual fund investors, a cosponsor of the legislation says.

“This bill is a substantive first step toward reinforcing bedrock ethical principles of the marketplace and restoring investor confidence, but there is still more work to be done, particularly in light of growing support for greater independence of fund boards and chairmen,” says Rep. Richard Baker (R-La.).

Baker, who chairs the House Financial Services Subcommittee on Capital Markets, says he will work with the Senate to develop the strongest possible reform bill.

Baker’s legislation, H.R. 2420, which was passed by a 418-2 vote, would mandate increased disclosure and transparency of mutual fund costs and reform mutual fund governance.

Under the legislation, mutual funds would have to disclose estimated operating expenses based on a hypothetical $1,000 investment, disclose soft dollar arrangements and revenue sharing agreements, and explain portfolio turnover rates in a way that makes it easier for investors to compare funds.

Mutual funds also would have to disclose policies and procedures on proxy voting, the structure of portfolio manager compensation and any holdings fund managers have in the funds they manage.

As for corporate governance, H.R. 2420 would require that two-thirds of all board directors be independent.

In addition, the legislation would bar the same person from managing both mutual funds and hedge funds.

H.R. 2420 also would bar trades that take place after 4 p.m. Eastern time, albeit with some protections to assure that people living in other time zones are not placed at a disadvantage.

Mutual fund legislation also is pending in the Senate. Sens. Daniel K. Akaka, D-Ha., Peter Fitzgerald, R-Ill. and Joe Lieberman, D-Conn., recently introduced S. 1822, called the Mutual Fund Transparency Act.

Under S. 1822, funds would have to disclose broker compensation directly to investors instead of simply providing a prospectus. In addition, brokerage commissions would be counted as an expense so that investors can compare expense ratios.

In addition, 75% of mutual fund board members would have to be independent under the legislation. Finally, portfolio managers would have to disclose their compensation.

The Senate is expected to hold hearings on S. 1822 next year.

Matthew Fink, president of the Investment Company Institute, Washington, says ICI supports three measures that would address recent revelations of misconduct by some mutual funds.

First, Fink says, the SEC should require all mutual fund transactions to be received by the fund itself by 4 p.m. Second, he says, the SEC should require long-term mutual funds to impose a 2% redemption fee on sales of any shares within five days of their purchase.

Third, Fink says, it should be made clear that short-term trading in fund shares by fund personnel is illegal.


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