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Reg Rigmarole Crippling Fund Firms

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Mutual fund officials told Congress last month that fund firms are drowning in the deluge of SEC rules they’ve come under in the last year and a half. Paul Schott Stevens, president of the Investment Company Institute, told the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises on May 10 that the cost of complying with the SEC rules is proving to be overbearing for fund firms, and that “the SEC must conduct a more informed and rigorous analysis of the relative costs and benefits of its regulatory requirements” in future rulemakings.

One example of inadequate cost/benefit analysis by the SEC is the Commission’s recent voluntary redemption fee ruling, Stevens said. He said the rule “requires all funds, even those that do not impose redemption fees, to enter into written contracts with each and every ‘intermediary’ with which they do business.” The word “intermediary” is broadly defined under the rule, he noted. “To comply with this requirement, funds will have to first identify the universe of their ‘intermediaries’ and then either modify any existing agreements or enter into new agreements containing the terms required by the rule,” Stevens said. “The SEC failed to appreciate the enormity of this task.”

Stevens also balked at the SEC’s point-of-sale disclosure proposal, which would require brokers to disclose not only distribution costs, but all fund fees and expenses. NASD wants to take the disclosure even further, he said, by adding information about fund investment strategies, risks, and performance. “Disclosing the quantum of information at the point of sale is wholly inconsistent with the model by which brokers sell mutual funds–as well as competing financial products that will not be subject to similar requirements,” Stevens told Congress. He said brokers would likely have to provide the information to clients in paper form. Since the majority of investors don’t conduct business with their brokers in person, this type of disclosure will “stymie a large percentage of fund transactions or delay them for days, or simply predispose brokers and their clients to invest in some other manner.”

Meyer Eisenberg, acting director of the SEC’s Division of Investment Management, told Congress the same day that he expects the point-of-sale proposal to be completed by the end of 2005. (For a further look at Eisenberg’s testimony before Congress, see cover story beginning on page 56.)


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