Fall Votes Are Expected on Mutual Fund Rules

The Securities and Exchange Commission may vote by October on whether to require mutual funds to disclose more about their performance in fund advertising, an SEC official said Monday.

A second proposal to make funds disclose more about the fees they charge and reveal their portfolios each quarter may be approved a month later, said Paul Roye, director of the SEC’s division of investment management.

“On the advertising rule proposal, we’re trying to finalize a version for the commission and we’re looking at late September or early October,” Roye said.

The SEC is working to improve the information that funds release to the public after some activist investors complained that fund companies hyped their performance during the dot-com boom of the late 1990s and failed to adequately show the expenses that investors pay.

Republican Reps. Michael Oxley of Ohio and Richard Baker of Louisiana have urged the agency to consider rules to help investors learn more about fund fees, strategies and management.

Under the proposed advertising rule, mutual fund ads would have to tell investors how to access current performance and expense information. Many funds now emphasize their most impressive historical performance figures, some of which may be years old. Fund companies that use dated figures would have to display the time period more prominently.

The ad proposal also would give funds more flexibility in marketing their portfolios. The measure would eliminate a requirement that limits ad content to what is contained in a fund’s prospectus.

The disclosure rule, as proposed, would force mutual funds to file complete portfolios of holdings every quarter with the SEC and to make the information available on the Internet. The reports would be due within 60 days of the end of the quarter.

Some activist investors say the reports would provide useful information to shareholders who are trying to maintain diversification in their fund portfolios.

The rule also would require mutual funds to publish actual fees paid by investors on a hypothetical $10,000 investment over the last six months.

In a move that could save fund companies on mailing and printing costs, they would be allowed to cut back on certain other disclosures.

Roye declined to comment on whether the final rules would differ from the proposals. The Investment Company Institute, a mutual fund trade group has endorsed the proposals in their initial form.

“Both rules are good for shareholders,” ICI spokesman John Collins said.

Vanguard Group, the second-largest U.S. mutual fund company, supports the rules, spokeswoman Rebecca Cohen said.

The SEC’s plan to allow funds to reveal their portfolios two months after each quarter balances the needs of shareholders and fund companies, Cohen said. Many mutual fund managers favor the 60-day delay because it allows them to guard their investment strategies from competitors.

Oxley and Baker have asked the SEC to mandate that funds tell investors the estimated fees for operating expenses per $1,000 invested, not $10,000, as the SEC proposed.

Mercer Bullard, a University of Mississippi law professor and an investor advocate who pushed the proposal for improved disclosure, said $10,000 is a more realistic reflection of fund accounts.

The House Financial Services Committee, which Oxley chairs, last month approved a bill to require greater disclosure of mutual fund fees and limit conflicts of interest of fund managers.

The committee has given the SEC until Oct. 1 to report on its progress in addressing mutual fund disclosure issues.