SEC Proposes New Mutual Fund Investing Rules : Securities: The regulations would make it easier and less risky to invest in tax-exempt money market funds.
The Securities and Exchange Commission on Wednesday proposed new rules designed to make mutual fund investing safer and easier to understand.
Seeking to reduce risks in the booming field of tax-exempt money market funds, the SEC proposed rules limiting how those funds invest their money. Some money market funds have come under scrutiny recently for investing in riskier securities. While the risks pay off in higher yields, they could also could jeopardize these funds’ ability to always hold per-share values at $1. The market for these funds could be shellshocked if a fund is forced to drop its per-share price.
The agency also proposed to give investors in so-called multiple-class funds--those that give investors different fee options--more information about the fees and whether other investors get a better deal. The SEC also proposed rules to help ferret out possible conflicts of interest facing directors of a fund.
The changes--all subject to public comment before taking effect--are necessary because the fund market has undergone a tremendous transformation, said Barry Barbash, director of the SEC division of investment management.
“These are all really important changes,” said Donald Phillips, publisher of Morningstar Mutual Funds, a Chicago-based company that tracks fund performance.
The new rules would establish strict limits on the types and amounts of investments that could be held by a tax-exempt money market fund. Funds investing in securities from multiple states would be barred from having more than 5% of their assets in any one security. Funds investing in securities from a single state could not invest in anything but the highest-quality issues.
Numerous other provisions would require more frequent review of tax-exempt money market fund portfolios and restrict certain complex, and possibly risky, investments.
All the rules would make these funds safer, Phillips said. But some fund managers believe they will depress yields. Money market funds that are not tax-exempt already operate under similar SEC investment guidelines.
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The SEC would also require new disclosures for multiple-class funds and make them easier to start. Some of these funds may allow investors to choose between paying a “load” (sales fee) when they buy fund shares or when they sell them. Others charge different fees to different types of investors. For instance, institutions that are investing large amounts of money often pay lower service fees than small individual investors.
In essence, the new SEC rules would simply clarify the fact that investors have choices when investing in these types of funds and would more clearly note what those choices are.
Another new disclosure rule would give investors additional information to help determine how to vote mutual fund proxies. Fund shareholders currently are allowed to vote on fund directors, appointment of public accountants, changes in investment policies and fund advisers. But few people vote, partly because most fund proxy statements don’t clearly show how some changes could affect investors, the SEC contends.
The SEC proposes to change that by eliminating the need for funds to disclose certain arcane information, such as extensive discussions of brokerage arrangements. But it would boost disclosure requirements about directors and fees.
Specifically, if management proposed a change that would affect the fund’s fee structure, it would have to include a chart that would clearly delineate where fees are and where they would go under the proposal.
The SEC also wants funds to disclose more about the pay of directors, who often serve on several boards of funds within a single fund family. The rules would require disclosure not only of how much directors are paid, but also how much the entire fund family pays. At Fidelity Investments, for example, directors serve on the boards of all Fidelity’s 210 funds, said Robert Pozen, the company’s general counsel.
All proposals must be put out for public comment before they become law. Assuming there are no major changes or snags, the earliest they could go into effect would be sometime next spring.
