Senate Panel Chides Fund Industry

Members of Congress on Tuesday blasted mutual fund companies for hidden fees and murky disclosures, as a push for legislative reform continues to gather strength amid ongoing revelations of abuse in an industry once viewed as free of scandal.

New York Atty. Gen. Eliot Spitzer, who last fall exposed trading practices that have shaken public trust in mutual funds, said excessive fees remained a problem. Spitzer contends that Putnam Investments and Alliance Capital Management until recently imposed a much heavier cost burden on individual shareholders than on deep-pocket, institutional investors.

The hearing of a Senate Governmental Affairs subcommittee suggested that although revelations of abusive trading strategies had grabbed headlines, the more mundane matter of obscure fees was emerging as a major financial issue on Capitol Hill and was likely to be part of legislative reform efforts.

“The mutual fund industry is indeed the world’s largest skimming operation,” said Sen. Peter Fitzgerald (R-Ill.), chairman of the panel, comparing the scandal-plagued industry to “a $7-trillion trough” exploited by fund managers, brokers and other insiders.

Spitzer used his Senate appearance as an opportunity to answer complaints that he had drifted beyond his proper role in mandating fee cuts as a condition of mutual fund settlements. SEC officials have maintained that improvements in how the industry was governed should lead to lower, competitive fees.

“Some accuse me of engaging in rate setting. That’s wrong,” Spitzer said. “Requiring mutual funds to return to investors money that should never have been taken from them is not rate setting.”

As an example, Spitzer said Putnam’s individual investors paid 40% more in advisory fees than their institutional investor counterparts in 2002, a difference that cost shareholders $290 million. At Alliance Capital Management, he said, individuals paid double the rate of fees borne by institutions, saddling them with $200 million more in costs than they otherwise would have faced.

“The bad news is that the industry and many of its apologists are still opposing true reform in the area that most directly impacts investors -- advisory fees,” Spitzer said. He maintained that individual mutual fund investors overall would save $10 billion a year if they paid the same level of fees as institutional investors.

Matthew P. Fink, president of the Investment Company Institute, issued a rebuttal to Spitzer’s comments, saying the New York attorney general “continues to base his conclusions on a grossly flawed methodology which has been proven incorrect.”

Tuesday’s hearing was the latest sign that interest in legislative reform of mutual funds may be growing in Congress. House members in November passed a mutual fund reform bill that focused heavily on fee disclosure. But until recently, the Senate has been more aloof to such legislation.

Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) recently announced that mutual fund issues were a top priority for his panel this year.

“The committee would intend to consider any necessary regulatory or legislative reforms,” a news release from the panel said.

Fitzgerald on Tuesday said he would introduce reform legislation in the near future, including provisions “that make it easier for investors to decipher the fees they are being charged and to compare fees between funds.”

Although much of the SEC’s approach to mutual fund reform has entailed greater requirements of disclosure, some in Congress are calling for outright bans of certain practices, such as hidden financial incentives that funds pay brokers to push particular funds.

“Why shouldn’t we just ban the action rather than say that disclosure is good enough?” Sen. Carl Levin (D-Mich.) asked Tuesday.

“I tend to agree with you,” Fitzgerald responded moments later.