States Step Up Pressure for Fund Disclosures

Top investment officials from California, New York and North Carolina on Thursday vowed to use “the power of the purse” -- billions of dollars in pension funds -- to compel mutual funds to disclose more information about their operations, including how much their customers pay in fees.

California Treasurer Phil Angelides, joined by New York Comptroller Alan Hevesi and North Carolina Treasurer Richard Moore at a news conference in New York, unveiled what he described as “mutual fund protection principles.”

They are asking fund firms to provide detailed information on the fees they charge investors, potential managerial conflicts of interest and trading expenses. Firms that don’t comply could be banned from doing business with major market players, like the giant pension funds for California’s teachers and public employees. The two funds have combined assets of about $250 billion, much of it invested by mutual fund companies.

“We hope that by setting out good, strong standards about what it takes to do business with us, that it will ripple across the marketplace,” Angelides said.

The principles are part of an effort by states to influence changes in Wall Street practices that have been the regulatory bailiwick of federal agencies like the Securities and Exchange Commission and outfits such as the National Assn. of Securities Dealers.

In an effort to gain maximum attention for their pitch, the three state officials rolled out a powerful cheerleader, New York Atty. Gen. Eliot Spitzer. In September, Spitzer unveiled the first results of his probe into mutual fund trading practices that sparked the worst scandal in the fund industry’s modern history.

Since then, other state officials -- including in California -- and the SEC have launched probes. Dozens of funds have been touched by the scandal and more than 60 fund executives have been ousted as a result of the investigations.

The treasurers’ proposal “is the best way to use money and equity power to drive reform,” Spitzer said.

Angelides said he would ask the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the ScholarShare Investment Board to approve the principles.

Fund industry representatives and corporate governance advocates agreed that the most controversial of the principles is one that would require fund companies to provide their customers with a detailed, annual breakdown of the management fees and other charges deducted from their accounts.

Currently, the funds give customers only hypothetical fee scenarios that require them to calculate for themselves how much they pay in fees each year.

“By doing the calculations for people, you’re making them more aware of what exactly they are paying, and you make the market more responsive,” said Eric Zitzewitz, an expert on mutual funds at Stanford University’s business school.

But an effort by a small group of individual states to jawbone companies into itemizing costs to shareholders could turn into a technical nightmare, said Chris Wloszczyna, a spokesman for the Investment Company Institute, the fund industry’s Washington-based trade association.

“It’s not practical for every customer in every case,” he said. What’s more, decisions about reporting expenses need to be made on the federal level “so that investors in all states can be confident of the integrity and trust of the mutual fund industry.”

State pension funds are mutual fund customers, not regulators, said Henry Hopkins, chief legal counsel at fund company T. Rowe Price Group Inc. in Baltimore. “This almost goes to the point of chaos where every big shareholder comes in and says ‘I want you to do something.’ That’s why we have a national securities regulator.”

National regulation doesn’t preclude California and other deep-pocketed states from lobbying fund providers and federal regulators for changes, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “They represent a substantial amount of capital,” he said, “and their views need to be taken seriously.”

Also Thursday, Rep. Richard H. Baker (R-La.) said Congress should enact a law to require more mutual fund fee disclosures and give more power to independent fund directors, even though securities regulators are proposing similar changes.