Oct. 1–With inquiries and improprieties engulfing the mutual fund industry, Securities and Exchange Commission Chairman William Donaldson yesterday appeared on Capitol Hill and outlined initiativesdesigned to ensure that investors are treated fairly and kept well informed.
The move comes one month after New York Attorney General Eliot Spitzer initiated a probe into four mutual fund families’ questionable — and in one case, illegal — “market timing” activity.
This type of trading is among the abuses the SEC intends to target. Long a thorn in the industry’s side, market timing often involves the swift buying or selling of shares by investors to take advantage of stale prices, which critics say harms long-term shareholders.
Possible reforms may include requiring funds to have written policies to address short-term trading and better disclosure regarding market timing procedures, Donaldson said in testimony before the Senate Committee on Banking, Housing and Urban Affairs.
In hopes of increasing investor awareness of fees and conflicts of interests between fund managers and brokers, the SEC is also proposing that funds disclose in their shareholder reports the dollar amount of fund expenses paid on a pre-set investment amount. The cost would be calculated based on the fund’s recent actual return and an assumed return of 5 percent. Funds would have to reveal their portfolio holdings quarterly rather than semi-annually.
Shareholder confirmation statements would also be radically overhauled to give investors a clearer idea of the incentives and conflicts that brokers have when they sell funds. The revised statements would include information about broker incentives to sell in-house funds and revenue-sharing agreements, where funds pay brokers to give their products top billing.
Funds would have to provide more information about director nominees, maintain compliance policies designed to prevent violations of federal securities laws and name a compliance officer to oversee them. The agency plans to draft a rule to ensure that investors get the proper “breakpoint” discounts on large orders. Any rule changes would have to be adopted by the SEC.
Donaldson’s comments came on the same day as Alliance Capital Management announced it was suspending two employees because of market timing. The firm, which was not named in Spitzer’s complaint, said an internal investigation revealed “conflicts of interest in connection with certain market timing transactions.”
One employee is a portfolio manager of the AllianceBernstein Technology Fund and the other is an executive involved in selling hedge fund products. The company did not return calls seeking comment.
Industry observers offered a mixed review of Donaldson’s comments. The mutual fund industry may have a better idea now of how the SEC plans to deal with the market timing problem once its review of the issue is completed, said Barry Barbash, partner with Sherman & Sterling and former director of the agency’s division of investment management.
But others felt the measures would be of little use. “Unfortunately, this sounds like it falls far short of what’s needed,” said Gary Gensler, co-author of “The Great Mutual Fund Trap.”
—–
To see more of Newsday, or to subscribe to the newspaper, go to http://www.newsday.com
(c) 2003, Newsday, Melville, N.Y. Distributed by Knight Ridder/Tribune Business News.
