SEC Seeks Action on Fund Discounts
Tension between market regulators and the mutual fund industry mounted Thursday as the Securities and Exchange Commission called for action on possible overcharging of fund investors and headed for a showdown with the industry next week over proposed disclosure rules.
With $6.6 trillion in assets, mutual funds are being questioned by the SEC and other regulators about discounts known as “breakpoints” that some large fund investors may have been denied, as well as on a range of regulatory issues.
On Capitol Hill, powerful Republicans in recent days have spotlighted mutual funds. Rep. Michael G. Oxley (R-Ohio), chairman of the House Financial Services Committee, said Thursday that he applauded the SEC for creating a securities task force to examine breakpoint fee calculations and disclosures. Oxley and Rep. Richard H. Baker (R-La.) have asked for a study on mutual fund fees, disclosure and transparency from the General Accounting Office.
The heightened scrutiny follows scandals last year at Enron Corp. and elsewhere that barely touched the fund industry, despite its central role as the main link between America’s middle-class investors and Wall Street.
But with heavy losses hitting millions of stock fund investors amid a three-year bear market, industry consultant Geoff Bobroff said, “The fund industry, which has had a very good relationship with both Congress and the regulators, is not having its way at the moment.”
The SEC said it has asked several financial industry groups to form a task force to look into whether fund investors have gotten breakpoint fee discounts they were entitled to for investing large amounts in some funds.
John Collins, spokesman for the Investment Company Institute, an industry group that represents about 9,000 mutual funds, said the group plans to take part in the task force.
Breakpoints are dollar-amount thresholds at which a mutual fund purchase becomes large enough to qualify for a fee discount. They are not standardized in the industry, but the discounts are commonly offered on a graduated basis to investors making large purchases of front-loaded funds. They often kick in at levels starting at $50,000 or $100,000.
NASD issued an alert to investors on its Web site Wednesday, offering to help them determine if they paid excessive fees when purchasing front-end load funds. Last week, a spokeswoman for NASD, formerly the National Assn. of Securities Dealers, said offending firms could face fines or be forced to pay restitution to investors.
In the meantime, Chairman Harvey L. Pitt and fellow commissioners have proposed new mutual fund regulations. The SEC is scheduled to vote Wednesday on whether to require funds to disclose publicly how they cast proxy votes.
