SEC Proposals Would Give Investors More Info

For more than six decades, mutual funds have operated under a set of laws designed to ensure fair play, partly by making certain that investors are given sufficient facts to make informed decisions.

But mindful that even good mousetraps can be improved, federal regulators are contemplating several new rules that would result in disclosure of even more information to consumers.

And rather than complain about additional burdens, many industry officials support some of these proposals.

They see more disclosure as an effective way to deal with the possibility that millions of fund investors don’t really understand what they own, especially now that banks and their customers have arrived on the scene in a big way.

Several of these topics were discussed at a conference in Phoenix last week sponsored by the Federal Bar Assn. and Commerce Clearing House Inc. The event brought together 1,400 attorneys, accountants and mutual fund administrators.

SEC Chairman Arthur Levitt got the ball rolling with a keynote speech that urged each fund’s board of directors to stay “alert, informed and involved” on behalf of shareholders.

Acknowledging that his own agency’s inspection program has been hard-pressed to keep up with the fund industry’s rapid growth, Levitt affirmed that the independent directors in particular are on the “front lines of investor protection.”

Several of the possible regulatory changes would involve directors.

For instance, the SEC’s staff has recommended that the number of independent directors--those not working for the management company--be increased to at least 50% of a fund’s board, from a current minimum 40%. Another proposal would give the independent directors, as opposed to the entire board, authority to terminate the management company’s contract to run a fund.

Both of these changes would require congressional action.

Another SEC staff idea, which the SEC’s commissioners can approve on their own, would require greater disclosure of the compensation earned by the independent directors.

There is some concern that the independence of these officials could be undermined as they earn increasing pay, even if it reflects greater responsibilities.

A separate proposal, which the commission can also enact, would require more disclosure of wrap-fee accounts. With a typical wrap-fee program, investors hire a broker and a money manager. The manager puts together a diversified portfolio of stocks for the investor, while the broker monitors the manager and services the investor. The customer pays a single annual fee of perhaps 2% to 3% that covers all fees and commissions.

This single-fee arrangement removes the danger that the broker might overtrade the account to generate commissions. Still, the fees in many cases have been criticized as too steep.

The SEC staff proposal would force wrap-account sponsors to describe their fees and other account basics in greater detail. This requirement would also extend to banks and mutual fund companies that offer wrap programs using an assortment of funds rather than stocks.

“In addition to requiring a separate brochure in a new format, the proposal would require new types of information to be disclosed,” according to Cathy G. O’Kelly, a partner in the Chicago law firm Vedder, Price, Kaufman & Kammholz.

Another disclosure-oriented proposal that awaits SEC approval would allow fund companies to sell shares to investors without having to first supply them with a full prospectus--the lengthy legal document that provides information about a fund.

Instead, key facts taken from the prospectus could be summarized in an advertisement, and investors could purchase simply by clipping an attached coupon and sending in a check.

Critics say this process would make it too easy for uninformed people to invest, but supporters contend that shareholders would still receive a full prospectus with their first confirmation statement.

And more to the point, the “summary prospectus” contained in the ad would crystallize key points better than full prospectuses do, they argue.

“The surest path to consumer understanding is through simple, concise disclosure,” said Matt Fink, president of the Investment Company Institute, a Washington-based fund group that supports the plan. Wording of the ads would still be regulated.

And besides the proposals discussed above, there are other regulatory issues on the table of interest to fund shareholders, including:

* A plan that would force tax-free money-market funds to upgrade their holdings.

* A simmering dispute between the SEC and the Office of the Comptroller of the Currency over which agency should regulate banks entering the fund business.

* A proposal to raise the fees paid by registered investment advisers to help pay for more SEC inspections.

* A plan to start a self-regulating organization for mutual funds, like the one the brokerage industry already has.

How these proposals might affect shareholders is still under debate.

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Have brokers been sleeping?

It’s easy to reach that conclusion by looking at the 1994 list of “forgotten” mutual funds--strong performers with small asset bases--compiled by Morningstar Inc. of Chicago.

Four of the five are brokerage-sold products, even though no-load funds are assumed to have a tougher time making a name for themselves.

Smallest of the group is Franklin Balance Sheet Investment (maximum 1.5% load; (800) 342-5236), a growth portfolio that counts just $40 million in assets.

The other commission products are Connecticut Mutual Growth (5% load; (800) 234-5606), GAM International (5% load; (800) 426-4685) and Seligman Communications & Information (4.75% load; (800) 221-2783). Evergreen Value Timing ((800) 235-0064) checks in as the sole commission-free portfolio.

The Seligman fund is the largest of the five at $110 million in assets.

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Baltimore-based T. Rowe Price Associates has unveiled the 1994 edition of its “Retirees Financial Guide.” The free package ((800) 638-5660) features a discussion of topics of concern to seniors and includes a workbook for estimating your post-retirement finances.

Regulation Gap

The staff of the Securities and Exchange Commission in recent years has suggested some changes that would increase both the power and public scrutiny of mutual fund directors. Independent directors--those not affiliated with a fund’s management company--are key players entrusted with protecting shareholders and preventing scandal. Their role has grown in recent years because the SEC has failed to keep pace with fund-industry expansion due to budget constraints.

Number of funds (1982-1992): +133%

Fund assets (1982-1992): +344%

Number of SEC fund regulators (1982-1992): +74%

Note: Totals include closed-end funds, unit investment trusts.