A Useful New Rule On Mutual Fund Expenses

Theres been a volley of proposals and rules coming out of the U.S. Securities and Exchange Commission in response to trading and market timing scandals. While most have some element of overkill, the rules that make the most sense are those adopted recently that require mutual funds to disclose enhanced information on expenses, portfolio investments and performance.

To anyone who has ever slogged through a mutual fund prospectus or report, the rule that will prove most useful is one aimed at furthering transparency. Under the new rule, mutual funds will have to disclose expenses borne by shareholders in terms of costs in dollars associated with a $1,000 investment, based on the funds actual expenses for the reporting period.

Funds will also have to disclose the cost in dollars associated with a $1,000 investment, based on the funds actual expense ratio for the period and an assumed return of 5%.

Matthew P. Fink, president of the Investment Company Institute, the fund trade group that strongly supported these disclosures, hit the nail on the head when he said, “Every 6 months, fund shareholders will receive an understandable analysis of their funds annual fees and expenses.

“Much like the unit price label for groceries at the supermarket, the new disclosures provide an investor-friendly way to compare and understand the impact of mutual fund fees on specific investments on an ongoing basis,” Fink said.

Of course, there is abundant anecdotal evidence that consumers look at unit price labels and ignore them. But at least they have the option, and thats whats important in the SECs new rule.


Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 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.