Overwhelming House Vote For Mutual Fund Reform

By

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, says a co-sponsor of the legislation.

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

Bakers legislation, H.R. 2420, 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 facilitates comparisons by investors.

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

H.R. 2420 also requires that two-thirds of all board directors be independent.

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

H.R. 2420 also bars 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 disadvantaged.

In the Senate, Daniel K. Akaka, D-Hawaii, Peter Fitzgerald, R-Ill., and Joe Lieberman, D-Conn., recently introduced S. 1822, the Mutual Fund Transparency Act.

Under S. 1822, funds would have to disclose broker compensation directly to investors, instead of simply providing a prospectus. Also, brokerage commissions would be counted as an expense so that investors could 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 any sales of 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.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.